Risk factors 298 Financial glossary 317 General information 324 2 Report of the Executive Board
We have continued to invest in our distribution network to make the services we provide to our corporate and retail customers as easy to use as possible and to allow our customers to choose when and how they do business with us.
Positive changes Sustainability is an important pillar of our strategy. As a global financial services provider, we have an impact on all economic sectors. We see it as our responsibility to use our influence to establish positive social and environmental change. For example, we work closely with our customers to develop and promote new and sustainable products and services. We are not only involved in development but we also finance and invest in sustainable products and projects. We adhere to environmental, ethical and social principles when investing for our customers and ourselves.
OUR PROFILE ING is a global financial institution of Dutch origin, currently offering banking, investments, life insurance and retirement services to meet the needs of a broad customer base. Going forward, we will concentrate on our position as a strong European bank with attractive home market positions in Northern Europe and growth options in Central and Eastern Europe and Asia, while creating an optimal base for independent futures for our insurance operations (including investment management).
BaNkING ING’s banking operations are divided into two main activities: Retail Banking and Commercial Banking.
** Full-year underlying net result adjusted for the after-tax allocated cost of Group core debt injected as equity into Insurance divided by average IFRS-EU equity.
* Operating result is underlying result before tax excluding gains/losses and impairments, revaluations and market and other impacts.
Net result from discontinued operations (2) 1,109 216 100 82 89
Underlying net result in EUR million 2011 2010 % change 2009
Divestments, discontinued operations and special items 2,091 –382 –1,702 9ING Group Annual Report 2011
United States 48 Netherlands 26 United Kingdom 18 Belgium 2 Luxembourg 2 Switzerland 1 Other 3 Total 100
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 coupon reset date, 13 May 2011, ING exercised its option for early repurchase of EUR 2 billion of the remaining core Tier 1 securities. The total payment in May 2011 amounted to EUR 3 billion and included a 50% repurchase premium. ING has funded this repurchase from retained earnings.
(1) Still valid on 12 March 2012, the date of this Annual Report. (2) Standard & Poor’s and Fitch ratings for ING Group and long-term ratings for ING Bank carry a stable outlook, while the long-term outlook for ING Insurance is negative.
ImPortant dates In 2012* Publication results 1Q 2012 Wednesday, 9 May 2012, 7:30 a.m.
Major changes in the external environment had an impact on ING in 2011, the most significant being the deepening of the sovereign debt crisis in the eurozone which created an extremely challenging economic and financial market environment in the second half of 2011. Consequently, international capital and money markets were not functioning as normal. This had repercussions, especially in Europe where funding for governments and financial institutions dried up in certain markets.
The financial sector was also subjected to further regulatory reform during the year. Although we support in principle the regulatory reforms, we have concerns with both the massive volume of new regulation and the lack of coordination throughout the European Union (EU) and at the international level. ING favours a harmonised approach to new financial regulation in the EU, both with regard to drafting and transposition into national laws. This would minimise interference with the vital role banks have in supporting the real economy. One of our primary concerns, therefore, is the increasing number of national initiatives being taken by different member states on matters that should, for reasons of maintaining a level playing field and enhancing the Single Market, be dealt with at the European level. Examples are the introduction of national bank levies, different interpretations and timing of Basel III rules and liquidity standards. Banks based in countries moving ahead of international regulation could be placed at a competitive disadvantage.
EUROPEAN SOVEREIGN DEBT CRISIS AFFECTED CREDIT AND EQUITY MARKETS IN 2011 For the eurozone countries in particular, 2011 was a year of two very different halves. In the first half there were still signs of continuing economic recovery; but in the second half the eurozone’s sovereign debt crisis which had slowly emerged in 2010, deepened and had a negative knock-on effect on the economy. 2011 was for a large part marked by the inability of public authorities and institutions to solve the crisis.
ECONOMIES IN EUROPE AND BEYOND SUFFERED A NEGATIVE TURNAROUND As a result of the European debt crisis, macroeconomic conditions started to deteriorate in the second half of 2011. Eurozone consumer and producer confidence declined sharply, international trade stopped growing, companies’ willingness to invest fell and employment perspectives started to deteriorate markedly.
Banking recorded an underlying result before tax of EUR 4,740 million in 2011, a 17.4% decrease compared with 2010. This decrease was mainly driven by EUR 783 million more adverse market impacts in 2011, of which EUR 588 million was impairments on Greek government bonds. Insurance reported an underlying result before tax of EUR 314 million, which was up EUR 1,386 million compared with the EUR 1,072 million loss in 2010. Both years were heavily impacted by markets and other impacts, i.e., EUR –1,547 million in 2011 versus EUR –2,567 million in 2010.
IMPORTANT CHANGES IN REGULATION AND SUPERVISION During 2011 important steps were taken in the European and international regulatory reform programmes that had been set up in the wake of the 2008/2009 financial crisis.
Dutch intervention law A new draft legislative proposal on crisis management would, if enacted, grant new powers to the DNB and the Minister of Finance to intervene in situations where an institution faces financial difficulties or where there is a serious and immediate risk to the stability of the financial system caused by an institution in difficulty.
In addition to the EU-wide stress test in summer 2011, the EBA performed an additional capital exercise in December 2011. The objective of the capital exercise was to create an exceptional and temporary capital buffer to address current market concerns over sovereign risk and other residual credit risks related to the current difficult market environment. Following the completion of the capital exercise, which the EBA conducted in close cooperation with the Dutch central bank (De Nederlandsche Bank, DNB), it was determined that ING Bank met the 9% core Tier 1 ratio.
Another important element of internationally agreed policy measures is the obligation for banks to set up recovery and resolution plans. In the recovery plans, which are drafted in close coordination with the main supervisor, banks have to draw up plans for the restoration of their financial situation in the event of a significant deterioration. An important element of these plans is risk mitigating measures with respect to capital and liquidity. In addition, clear governance principles have to be established. ING is in the process of finalising its recovery plan which it currently plans to update annually.
ALIGNMENT OF REMUNERATION POLICIES WITH CRD III Since the start of the crisis in 2008, ING has been continually reviewing and amending its remuneration policies in response to the ongoing review of the financial system and related public debate, as well as in line with applicable regulatory developments. In 2010, the European Commission issued the Capital Requirements Directive III (CRD III), which contained specific requirements in relation to the remuneration of those who have a material impact on the company’s risk profile, the so-called Identified Staff. From 1 January 2011, the directive had to be implemented into national law.
ING’S APPEAL AGAINST THE EC DECISION In January 2010, ING filed an appeal with the General Court of the European Union against specific elements of the European
> Financial position strengthened despite difficult market conditions > Group restructuring on track > Portfolio streamlined as more divestments were made > Further progress on building stronger banking and insurance/investment management businesses > Earning trust remains a top priority 2011 saw a marked deterioration in the debt and equity markets amid a slowdown of the macroeconomic environment and a deepening of the sovereign debt crisis in Europe. ING Group continued to take a prudent approach to risk, increasing hedging to preserve capital and selectively reducing exposure to southern Europe. In this challenging environment ING’s earnings remained resilient, and our strong funding position enabled us to continue to increase lending to support our customers in these uncertain times.
RESTRUCTURING AND STREAMLINING THE PORTFOLIO The restructuring of the Group is on track, based on our work towards the separation of the banking and insurance/investment management activities and the execution of divestments.
As ING continued to prepare for the restructuring of its insurance/ investment management businesses, important steps were made in 2011 to realign the legal structure and governance of the insurance/ investment management operations. Regulatory approvals were nearing completion at the end of 2011 to create one new holding company for the European and Asian insurance and investment management activities, called ING Insurance Eurasia, under ING Verzekeringen N.V. We also created a management board for ING Insurance Eurasia. These represent ‘no regrets’ steps to allow for strategic flexibility on execution of the divestments of the European and the Asian insurance and investment management businesses. The announcement of a stand-alone future for the European insurance/investment management businesses does not affect governance. The US insurance and investment management operations are expected to continue to be part of a separate, already existing legal entity (ING America Insurance Holdings). We believe that this change in the legal structure will allow ING Group to optimise the capital structure of the separate entities and go further with the disentanglement process in order to be able to move quickly towards the IPO(s) or other options when market conditions become favourable.
Divestment of ING Direct USA ING Group and the Dutch State reached an agreement on an IABF in 2009 in order to achieve a full risk transfer on 80% of the portfolio of Alt-A mortgage securities at ING Direct USA and Insurance Americas. In connection with the sale of ING Direct USA the structure of the IABF was adjusted.
The 20% of the Alt-A portfolio not covered by the IABF will remain on the balance sheet of ING Direct USA and will be transferred to Capital One as part of the sale of ING Direct USA. In order to ensure continued alignment between the interests of ING and the Dutch State with regard to the Alt-A portfolio, ING will provide a counter guarantee to the Dutch State covering 25% of the 80% part of the Dutch State. This guarantee will cover realised cash losses if these exceed the 35.5% that is implied by the market value of the portfolio at the time the divestment of ING Direct USA was announced. This adjustment will therefore lower the risk exposure for the Dutch State. The potential capital and P&L impact of the alignment for ING Bank is expected to be limited.
Furthermore, we reached an agreement in 2011 to sell our Latin American pensions, life insurance and investment management operations to Grupo de Inversiones Suramericana (GrupoSura) for approximately EUR 2.6 billion, thereby marking the first major step in the divestment of the insurance and investment management activities.
ING’s approach in both its banking and its insurance/investment management businesses is built on sound business ethics and good corporate citizenship in order to ensure customer loyalty, employee engagement, and ultimately to deliver satisfactory returns for our shareholders. As part of this approach, we have embedded social, ethical and environmental criteria into our financing and investment policies and business ambitions. We aim to ensure that our strategic
For more details on the non-financial achievements of ING Group, please see the ‘Sustainability’ chapter in this Annual Report.
BEING GOOD AT WHAT WE DO PRODUCTS AND SERVICES We strive to meet the growing demand for environmentally and socially responsible products in addition to generating a good return. To make sure that the sustainable assets we manage continue to grow, we create more awareness about green and social products. We also look at developing new products and services that meet the expectations and needs of customers.
In our Dutch home market in particular, we offer products like green car loans, a green savings product, a mortgage with a philanthropic component (linked to microfinance funding) and different advisory services.
ING US scores top marks on Corporate Equality Index In December 2011, the Human Rights Campaign Foundation awarded ING in the US a 100% score on its 2012 Corporate Equality Index (CEI) for the sixth year running. The Index assesses 850 American companies on their efforts at achieving lesbian, gay, bisexual and transgender (LGBT) equality in the workplace. While the firms are annually rated on 40 specific policies and practices, the assessment for 2012 was made on the basis of additional new stringent criteria on transgender health benefits.
Global Challenge 2011 hits a record The ING Chances for Children Global Challenge 2011 clocked up a record number of 42,757 volunteering hours, up by nearly 10,000 from the previous year. The United Nations’ Universal Children’s Day on 20 November marked the motivational point for staff and management throughout ING to volunteer their time and energy in support of children’s projects. A total of 24,433 ING employees pooled their efforts in support of children – up from 20,541 the previous year and equal to an impressive 25% of the company’s global workforce. A total of EUR 538,350 was raised for projects aimed at children’s education and welfare projects. The myriad of activities ranged from a charity bazaar in South Korea to promoting reading at local schools in Peru and the Netherlands, and from collecting books for a children’s book bank in Hungary to baking pies in France and selling wine and chocolates in Belgium.
Equator Principles Number of projects reviewed 55 74 Sustainable assets under management (in EUR million) 1,683 2,120 Customer satisfaction index (2) 69.3% 69.1% Economic value (3) (in EUR million) Total assets 1,279,188 1,247,005 Shareholders’ equity 46,663 40,904 Total income from continuing operations 55,794 54,105 Result before tax from continuing operations 6,109 3,928 Net result from continuing and discontinued operations 5,766 2,810 Personnel expenses: salaries 5,307 5,457 Personnel expenses: other 2,249 2,235 Employee engagement index (4) 66% 69% Diversity (5) Percentage of women in the international management council 16.2% 14.9% ING Chances for Children Number of children provided with access to education 118,101 125,175 Green energy MWh of electricity purchased by ING that is derived from renewable resources 310,933 332,843 Dow Jones Sustainability Index (6) 72 72 FTSE4Good Index Included Included
(1) The audit firm Ernst & Young has audited the KPIs for reasonable assurance. (2) For the Bank business (excluding ING Direct), satisfaction scores are based on the American Customer Satisfaction Index (ACSI), which is adapted for the financial market and is based on a combination of questions related to overall satisfaction, customer delight and being an ideal provider. This score is not weighted by market. In 2011 the survey was carried out within Retail Banking in the Netherlands, Belgium, Poland, Romania, Turkey and India. In 2011, the Insurance business replaced the customer satisfaction index with the Net Promoter Score system. No ACSI survey was carried out for ING Insurance/IM and therefore no comparative figures are available.
(5) We have calculated the diversity figures in 2011 as a weighted average relating to the total members of the Management Council (Insurance US Management Council, Insurance EurAsia Management Council and Bank Management Council).
ING’s Group Capital Management department (Capital Management) is responsible for ensuring sufficient capitalisation of ING Group entities at all times in order to manage the risk associated with ING’s business activities. This involves the management, planning and allocation of capital within ING Group. ING’s Corporate Treasury is part of Capital Management. It executes capital market transactions, term (capital) funding and risk management transactions. Capital Management monitors and plans capital adequacy on a consolidated basis at three levels: ING Group, ING Insurance and ING Bank. Capital Management takes into account the metrics and requirements of regulators (EU Solvency, Tier 1 and BIS ratios and limits for hybrid capital), rating agencies (leverage ratios, Adjusted Equity) and internal models such as the economic capital models. It also makes sure that ING will be able to comply with new regulatory capital requirements coming from Basel III and Solvency II.
The strategic planning process takes into account both available capital and the requirements from the different parts of the Group in many different jurisdictions each with their own specific requirements. Capital Management continuously monitors and analyses ING’s capital position, taking into consideration the potential impact of changes in the regulatory environment and assessments of ING’s capital targets in comparison with the rest of the industry. The department also advises the Executive Board and Supervisory Board on ING’s dividend policy.
A more detailed section in the annual accounts provides insight into the capital management practices and the development of the capital position of ING Group and its various business lines in 2011.
Risk Management plays an important role in performance evaluation and determining remuneration under the Capital Requirements Directive (CRD) III Framework, which was issued by the European Commission in 2010. This role extends both to the setting of risk-specific performance targets across the organisation as well as the assessment of the performance of senior management in this respect, and is considered essential for the alignment of compensation with the interest of all stakeholders. Risk management’s involvement ensures that compensation outcomes are symmetric with risk outcomes.
2011 was marked by the sovereign debt crisis in Europe, with downgrades of several countries due to deteriorated deficits and the assistance packages given to Greece, Ireland and Portugal. In the course of the year ING responded to these developments by reducing its sovereign and financial institutions exposures to eurozone countries with the biggest political and economic uncertainties. Throughout the credit and liquidity crisis, ING Bank has maintained its liquidity position within conservative internal targets.
> Group HR to gradually reduce its role; HR functions Bank and Insurance/IM to assume own responsibility > HR Bank to continue supporting organisation in creating One Bank > HR Insurance assisting the businesses in shaping a stand-alone future
Following the split, Group HR has continued to work on the further disentanglement of the various HR systems. Group HR also reviewed, renegotiated and disentangled all global HR vendor contracts. The objective is that all Bank and Insurance/IM HR systems work on a stand-alone basis, once the formal split materialises. Examples include the splitting of HR systems in talent management, performance management and headcount reporting, which became operational on 1 January 2012.
At Insurance, HR Insurance/IM EurAsia set up a Talent Council programme in Central and Rest of Europe, involving talents across the regions to find solutions for strategic business challenges and in Asia, the ING Insurance Asia University was launched. Within this environment, employees are encouraged to be innovative, to learn and to explore.
Insurance US made a number of significant changes at the most senior leadership levels and HR Insurance US worked closely with 26 ING Group Annual Report 2011
LEADERSHIP DEVELOPMENT AND TRAINING In 2011, both Bank and Insurance/IM EurAsia developed their own specific leadership profile. This will be used for recruitment, development, promotion, assessment and performance appraisal purposes.
From a policy perspective, International Mobility remains a Group responsibility. Both Insurance/IM and Bank now have their own operational HR capability to support the exchange of international staff (‘expats’) to and from business units and regions. In 2011, Group HR put much effort into ensuring that expats were assigned to either Bank or Insurance/IM, as in the future it will no longer be possible to assign expats across the Bank and Insurance/IM.
PERFORMANCE AND REMUNERATION Group HR has centrally governed and coordinated the overall performance management process (setting objectives, mid-year review and performance appraisals) for all members in senior management positions, adhering to the requirements of the Capital Requirements Directive III (CRD III) framework. Executing the performance management process, however, was undertaken by the ‘stand-alone’ entities (i.e. Bank, Insurance/IM EurAsia and Insurance/IM US).
Total underlying income 15,854 16,816 Underlying operating expenses 9,447 9,336 Underlying additions to loan loss provisions 1,667 1,742 Underlying result before tax 4,740 5,738 Interest margin 1.41% 1.42% Underlying cost/income ratio 59.6% 55.5% Underlying cost/income ratio (excl. market impacts) 55.4% 53.7% Net production client balances (EUR billion) 45 49 Underlying risk costs in bp of average RWA 52 53 Risk-weighted assets (year-end, EUR billion, adjusted for divestments) 330 319 Underlying Return on Equity based on IFRS equity 10.0% 12.9% Underlying Return on Equity based on 10% core Tier 1** 10.9% 13.1% Employees (FTEs, year-end, adjusted for divestments) 70,580 70,073 * Underlying numbers are derived from IFRS-EU, excluding the impact of divestments and special items.
Where We operate* ING Bank builds on its international network from its Northern European home markets, capitalising on its leadership position in gathering savings, multi-channel distribution, simple propositions, cost leadership and marketing.
Commercial Banking has an international network in 40 countries, with key positions in Structured Finance and Financial Markets
ING Direct is active in Canada * ING completed the divestment of ING Direct USA on 17 February 2012.
ING’s capital position also met the new EBA capital target. By the end of June 2012, European banks must meet a 9% threshold for their core Tier 1 ratio under the EBA definition which includes valuing sovereign bond holdings at market rates. ING Bank already met the 9% requirement in 2011. ING is well prepared to meet the new capital requirements proposed by Basel III and also has focus on the liquidity requirements to be met from 2013.
In 2011, ING Bank realised a number of divestments. With the sale of ING Direct USA, ING met one of the principal restructuring requirements of the European Commission. With the divestment of ING Car Lease, ING continued to sharpen the focus on its core banking franchise. The divestment of ING Real Estate Investment Management, completed in October, fits with ING’s strategic objectives of reducing exposure to real estate, simplifying the company and further strengthening the capital base. WestlandUtrecht Bank is now run as a separate entity and is being prepared for sale. (See also chapter ‘Strategy’).
ING’s large retail deposit base is a significant source of funding. It is among the largest in Europe and underlines that ING has a good funding position compared to other banks. Thanks to our strong funding position, we have increased lending to our customers even in uncertain times. The fact that we continued to provide customers with credit and products underlines our focus on customer centricity and will help build trusting relationships.
ING’s net inflow of funds entrusted in 2011 was EUR 18.8 billion compared to EUR 25.1 billion in 2010. The net production of lending in 2011 was equal to 2010: EUR 25.6 billion of which EUR 19.7 billion in mortgages (net inflow/production is adjusted for foreign-exchange impacts and divestments).
An example of progress made in the area of operational excellence, was the integration of the commercial banking business in Germany with ING-DiBa, the direct retail banking business in Germany. The creation of the One Bank in Germany will optimise the banking businesses and customer services by making more efficient use of capital and liquidity. Another example was the launch of a new initiative by ING Direct France which allows customers to open savings accounts through an online-only process.
For Commercial Banking, we will continue to build on our existing strengths, such as our leading positions in the Benelux and in Structured Finance and Financial Markets, and our extensive international network in Central and Eastern Europe and beyond. Our intention is to sustain and further develop these pillars of our Commercial Banking franchise in order to support growth initiatives elsewhere.
Strong position in a changing competitive environment > Resilient results in difficult economic conditions > Superior customer service a key long-term ambition > Product improvement continues, using NPS feedback
Total underlying income decreased 3.8% to EUR 4,146 million in 2011. This decrease was mainly due to a 5.3% decline in interest result, owing to increased competition for savings putting pressure on margins.
Despite the difficult economic environment – coupled with repositioning by long-established competitors – Retail NL focused on serving its customers, remained a strong capital generator and continued to fulfil its role of financing retail customers and small and medium-sized businesses. The key to its success is maintaining a fine balance between delivering added value to customers, being a robust bank, and meeting many new regulatory requirements (including liquidity and solvency requirements).
Retail NL’s results were resilient. Its average mortgage market share was 16% (22% including WestlandUtrecht Bank), with full-year net production in residential mortgages falling to EUR 3.6 billion compared with EUR 5.5 billion in 2010. This was due to a considerable decline in demand on the overall residential mortgage market, as well as ING’s policy to selectively grow this lending class while maintaining pricing discipline. Funds entrusted were up, at EUR 106 billion at year-end.
The aim is to create long-term value for all stakeholder groups: customers, employees, business relations and suppliers, society at large and shareholders. The Dutch businesses continued to focus strongly on customer suitability. Our Customer Suitability programme, launched in 2010, emphasises the importance of transparency, easy-to-understand products and services, and providing the right products and services to fit customers’ needs at every stage of their relationship with us.
Operational excellence All business units focus on operational excellence to ensure the timely, efficient and flawless execution of customer service. A key development in 2011 was the introduction of ‘Customer Service Through Delivery Guarantees’, the aim of which is to reduce the time it takes to act on customers’ requests. To this end,
Customer centricity Retail NL continued building a customer-centric organisation by searching for ways to best meet customers’ needs, and investments were made to improve service. ING is the leading internet bank in the Netherlands measured by number of customers using an online bank account (> 4 million), channel usage (70% via the internet) and sales (40% of net present value). ING is the only bank in the top 10 of Google search. It is now also active on Facebook, using this social network to engage in dialogue and knowledge sharing with customers.
Retail NL introduced a mobile banking app for retail customers, with both payments and savings functionalities. By year-end, the app had been downloaded more than half a million times and it had over 367,000 active users. Online product and service offerings now account for 60% of sales transactions, clearly illustrating the success of our ‘direct if possible, advice when needed’ approach. Our ambition is to further increase this percentage by gradually introducing new mobile offerings. Another online, non-commercial initiative is Villa Pecunia – a website for, and by, students on which they can exchange ideas, have discussions and share ‘savings’ tips.
ING continued to improve customer focus by implementing results from earlier satisfaction measurements among customers. The product offering in the Rentepuntenwinkel (customer loyalty programme) was adjusted, following direct feedback from customers. Client panels and user tests have been consulted to build, test and improve the new ‘Mijn ING’ website.
Retail BE continued to improve operations and services, and went ahead with its branch transformation programme, which places greater emphasis on direct banking. The ‘direct if possible, advice when needed’ business model is paying off, as the Bank changes from being a purely branch-based bank to a multi-channel bank.
Despite fierce competition and a stagnating market for regulated savings, Retail BE increased total savings to EUR 36.2 billion at year-end, driven mainly by the savings product Orange Book.
Retail BE’s market share of mortgages was 11.9% (portfolio) and 12.6% (production) at year-end. Net production amounted to EUR 3.0 billion (2010: EUR 2.8 billion).
The Bank also launched a new ing.be website in May, allowing customers to buy simple products. Savings products sold over the internet increased from 21.2% of total sales in 2010 to 28.1% in 2011. Current accounts and cards sold over the internet rose from 31.8% in 2010 to 38.6% in 2011.
As part of its drive towards greater customer centricity, ING Luxembourg launched an online product called Orange Account early in the year, which was successfully received. More than 1,700 people signed up for the account (27% of all new retail customers acquired in 2011), mainly through a digital marketing campaign using Google’s advertising network and social networks in Luxembourg and neighbouring regions.
In Spain, ING Direct is already well known for its direct banking operations, but to broaden its reach and to establish closer contact with customers, it opened 21 branches in 2011, including a flagship branch in Barcelona, bringing the total number of branches to 27 at the end of 2011, which includes four ING Direct cafes. They form an important part of ING Direct’s growth strategy to become a complete retail bank and provide many cross-buying opportunities. ING Direct in Spain entered the life insurance market, launching two new products in February 2011 – a basic cover and extra cover product. The expanded branch presence in Spain is part of ING Bank’s strategy of converging its retail and direct banking operations.
ING Direct was recognised with awards in 2011 in the areas of customer centricity, product innovation and marketing. Most notably, ING-DiBa received awards for its website, investment options and customer service. It was also named ‘Online Broker of the Year’ by financial magazine Börse-Online for the seventh consecutive year and ‘Most Preferred Bank’ by finance magazine Euro for the fifth year in row. ING Direct Italy won an award for financial innovation in the Funds category awarded by AiFin, the Italian association for financial innovation. ING Direct Spain won multiple awards for their online advertising campaigns.
Operational excellence All of ING’s business units focus on timely, efficient and flawless execution of customer services. Making banking easier for customers through innovation in distribution is an important aim of the business.
ING Direct France launched an initiative allowing customers to open savings accounts through a 100% online process – responding to consumer wishes and enhancing efficiency. ING Direct Canada was awarded ‘Best Mid-Sized Contact Center’ by Contact Center World North America. The Canadian team won based on customer satisfaction scores, call response times and training programmes. In Australia, ING Direct’s ‘Simply Orange’ quality programme resulted in process improvement tools for all employees. Ideas for improvements came from customer ‘front-line’ workers.
In the important mobile banking space, all ING Direct business units launched either applications or m-sites (ING-DiBa in Germany and ING Direct Italy) which allow users to carry out everyday banking transactions from their mobile phones and tablet devices. ING Direct in France produced an award-winning mobile phone application which was developed in part by crowd sourcing. This application was then successfully used as a basis for developing mobile phone applications in four other ING Retail Banking units.
In the internet channel, advances were made in functionality and accessibility with ING Direct Canada introducing a web-chat application to better assist site visitors with finding relevant information and Italy launching a renewed website with a more client-centric focus.
A number of ING Direct business units produced compelling content aimed at empowering consumers and helping them to manage their household finances. ING Direct France’s Monnaie Time partnership with Yahoo, the Finanzversteher portal of ING-DiBa Germany, and the Voce Arancio blog of ING Direct Italy are all examples of client-centric initiatives to educate clients and non-clients alike about personal financial matters.
Operating expenses were up 1.6% driven by the increased client activity. The addition to loan loss provisions rose to EUR 97 million, or 42 basis points of average risk-weighted assets, compared with EUR 61 million, or 28 basis points of average risk-weighted assets, in 2010. Risk costs increased mainly in Turkey due to business growth, while the level in 2010 was low due to 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. In all three countries, retail banking is an integrated part of the domestic bank, which serves retail and commercial banking customers, and offers a wide range of services.
ING Bank Slaski in Poland aims to be ‘the most internet bank’. In 2011, its website www.ingbank.pl, was ranked the most user-friendly bank website in Poland by experts from banking website Money.pl.
Customer Centricity ING’s retail banks are working towards their aim of becoming the preferred bank in their respective countries, and so therefore customer satisfaction is very important. Throughout 2011, ING Bank Turkey and ING Bank Slaski in Poland used the NPS methodology. The Net Promoter Score (NPS) at ING Bank Slaski improved from 22% at the beginning of the programme in the second quarter to 27% at year end, indicating that more people were happy with ING’s service.
RETAIL ASIA FINANCIAL DEVELOPMENTS Retail Asia’s underlying result before tax declined to EUR 72 million in 2011 from EUR 80 million in 2010. This decline was mainly the result of lower income, primarily as a result of unfavourable currency movements. Excluding currency impacts, underlying income was up, driven by ING Vysya Bank, where higher interest results were coupled with increased fee income and higher other income. Net production in lending was EUR 1.2 billion in 2011, while the net inflow of funds entrusted was EUR 0.5 billion. The increased profit contribution from ING Bank’s share in the result of TMB in Thailand and higher dividends from Bank of Beijing were offset by higher funding costs resulting in an overall decline of the interest result.
Bank of Beijing (BoB) – in which ING has the largest single shareholding (16.07%) – is the largest city commercial bank in China. ING provides principally risk management and retail banking expertise to BoB. Several years ago, the Beijing municipal government recognised ING’s work in assisting the bank with its risk management by awarding the company ‘The Great Wall Friendship’ award.
ING Vysya Bank continued to improve customer usability. A new consumer finance system (mortgages, vehicle finance) was launched which resulted in a faster turnaround time in processing customer applications.
The year presented many challenges, but we have adapted our business model to ensure continued success. We have continued to divest non-core businesses (e.g. ING Car Lease) and adjust our core platforms where necessary, maintaining tight control over costs and risks and with a continued discipline over capital allocation and returns. As a result, the Commercial Banking franchise remained robust and strengthened its position in the market.
FINANCIAL DEVELOPMENTS The underlying result before tax of Commercial Banking decreased 8.9% to EUR 2,020 million from EUR 2,217 million in 2010. ING Real Estate recorded a profit before tax of EUR 34 million compared with a loss of EUR 109 million in 2010. The underlying result before tax of Commercial Banking excluding Real Estate dropped 14.6% to EUR 1,986 million.
The decrease in the underlying result before tax of Commercial Banking excluding Real Estate was largely attributable to Financial Markets, whose result declined by EUR 420 million to EUR 499 million in 2011, partly caused by EUR 225 million of impairments on Greek government bonds. Excluding these impairments, underlying result of Financial Markets declined by EUR 195 million (or –21.2%), following adverse market circumstances as well as the winding down of the proprietary trading book in the US.
Commercial Banking excl. ING Real Estate 4,494 4,820 – General Lending & PCM 1,121 1,159 – Structured Finance 1,601 1,440 – Leasing & Factoring 320 310 – Financial Markets 1,290 1,700 – Other Products 162 211 ING Real Estate 529 529 Total Commercial Banking 5,023 5,350
In SF, the record level of non-interest revenue reflected fees on structuring new transactions, as the business helped many clients to refinance in the first half of the year.
Other steps were also taken to optimise our balance sheet, including the structural transfer of assets from more funding constrained entities to those where liquidity is available. Approximately EUR 3.5 billion of such transfers were made in 2011, with a significant amount already planned for 2012.
BuSineSS deVelOPMentS ING Commercial Banking supports the banking needs of our corporate and institutional clients and is an integral part of ING’s One Bank ambition and strategy, originating high-quality assets that earn attractive returns in which to invest both Retail and Commercial Bank customer deposits.
We aim to be a trusted adviser for the long-term, by providing solutions to clients’ financial challenges and flawlessly executing the services we offer. By fulfilling our clients’ needs, we have become one of Europe’s leading commercial banks in our core markets and an important partner for clients internationally.
PAYMENTS AND CASh MANAgEMENT Payments and Cash Management (PCM) is one of our most important product lines. Alongside General Lending, we consider it a pre-requisite for customer acquisition and retention. During 2011, ING re-defined its PCM strategy. Our ambition is to gain a leading position in the European market and we have launched a multi-year investment programme to this end. In the coming years, we will significantly improve our payments offering to support these goals.
Financial Markets was able to demonstrate its strength in various areas in 2011: • Corporate investment grade bonds (Benelux): 8th by value and 4th by deal volume.
• Europe sovereign investment grade bonds: 8th by value and 6th by deal volume.
The focus of our Leasing business will continue to be on providing a full service to all customer segments in ING’s home markets, while the Factoring business which is unaffected by the review remains positioned as a core growth product within our tradefocused Transaction Services activities.
FINANCIAL MArkETS Financial Markets (FM) is the global business unit that manages ING’s financial markets trading and non-trading activities. FM is managed along three business lines: ALCO manages the interest rates exposures arising from the traditional banking activities, Strategic Trading Platform incorporates the primary proprietary risk taking units and Clients and Products is the primary customer facilitation business line.
We have strengthened our position as a market leader for payments processing in the Netherlands and made steady progress towards becoming a top-tier payments bank in Belgium.
LEASINg AND FACTOrINg Leasing and Factoring (L&F) provides financial and operating leasing services for a wide range of equipment as well as receivables financing and other factoring solutions for Commercial Banking clients.
The key development during 2011 has been the transformation of the former independent corporate structure of the L&F product lines into two separate product businesses integrated within Commercial Banking.
During 2011 Real Estate Finance (REF) maintained the quality of its credit portfolio at a satisfying level, despite the challenging market circumstances. The volume of new transactions in Europe fell in 2011 as part of our strategy to reduce exposure to real estate in general, while investors continued their focus on core assets. The US businesses closed numerous restructurings, thereby optimising the portfolio, while the Asian and Australian businesses faced increased competition from regional players.
LegaL reStrUCtUrIng and goVernanCe In preparing for the future, Insurance/IM took steps to realign the legal structure and governance of its operations. Regulatory approvals were received to create a new holding company for the European and Asian insurance and investment management activities, called ING Insurance Eurasia, a subsidiary of ING Verzekeringen N.V. The US insurance and investment management operations will continue to be part of a separate, already existing legal entity (ING America Insurance Holdings).
WHere We oPerate* ING Insurance/IM has a strong position as a provider of life insurance, retirement and asset management services and is well positioned to capitalise on socio-economic trends.
#3 in US Retirement Services Major foreign Life insurer in Asia
#1 Life insurer in the Netherlands and leading Life insurer in Belgium and Luxembourg
ConCLUSIonS and aMBItIonS The main priorities for the insurance and investment management businesses are improving performance and optimising returns and value. In 2011, the businesses made good progress on these priorities. Going forward, ING Insurance/IM will continue to focus on its customers and distributors by providing exemplary products and service, as it restructures in preparation for a stand-alone future.
The first phase of the transformation of Nationale-Nederlanden, the One programme, was a major business activity in 2011 and also in the previous year. As part of the One programme, NN, RVS and ING Verzekeren Retail (formerly Postbank Verzekeren) were combined into one customer-focused organisation under the Nationale-Nederlanden brand to simplify the business and to reduce costs. As a result of the integration, NN now consists of four key business units: NN Retail (retail clients), NN SME (small and medium-sized enterprises), NN Corporate Clients (corporate clients) and NN Services (the Closed Book business).
In the Netherlands, NN received a bank licence from the Dutch Central Bank and introduced three new tax-favourable bank products for pension savings (banksparen). Consumers are increasingly looking for simple, flexible and low-cost savings products and NN’s move into the banksparen field is in recognition of this shift in consumer preferences. The move was made possible by changes to tax rulings several years ago which gave bank-based long-term savings products the same fiscal advantages as insurance-based products. Both NN and ING Bank now offer pensions-related bank savings products but they focus on different target groups: ING Bank concentrates on the direct market and NN on the advisor market.
NN issued new distribution contracts to intermediaries and by year end had made solid progress in receiving acceptances. The new contracts were part of the implementation of NN’s multi-channel distribution strategy, which involved the integration of Dutch insurance companies RVS and IVR under the NN brand, and which aims to provide customers with more choice on how and where they buy products.
Customer driven ING Life Luxembourg now gives policyholders access to their policy details on ING Bank Luxembourg’s website. In the Netherlands, NN launched an internet tool for intermediaries (insurance agents and brokers) to assist them in generating advertising literature specifically tailored to particular types of clients.
While intermediaries such as brokers and financial advisers remain very important, there will be an increased focus on the customer through the introduction of simpler products, such as banksparen products.
> Growth through increased focus on life insurance > Push to expand multi-channel distribution > Cost control remains priority
All ING’s insurance businesses in the region shared best practices and continued to work on improving processes and IT, especially with regard to the region’s priority to achieve growth, further improve the customer experience and broaden the distribution base. This resulted in, among other initiatives, improved portals in Romania with new functionality for customers and agents in the portfolio overview; electronic claims registration over the internet; electronic applications for changes to agent contracts in the Czech Republic; more efficient processes for welcome calls; and SMS and email progressively replacing letters and paper in some customer services in Spain.
Insurance US continued to make steady progress on its key objectives: improving business performance, focusing on customers and distribution partners and preparing to become an independent, stand-alone operation. Despite flat equity markets and record low interest rates presenting significant challenges for the business, ING US delivered strong overall operating results from its core retirement and insurance businesses.
Insurance US also continued to de-risk its investment portfolio by shedding EUR 1.5 billion of subprime RMBS and CMBS exposure and reducing super senior CDS exposure by 67% in 2011. This was accomplished while Insurance US increased its risk-based capital ratio from 426% to approximately 488% during the year.
BUSINESS DEVELOPMENTS In 2011, the business concentrated on tightening and focusing its business strategy, strengthening the capital position, containing expenses, and developing products and services to help individual and institutional customers accumulate and protect their wealth. Insurance US is a market leader in providing retirement and life insurance services and products.
A programme was launched which allows employees to instantly enroll in their employer’s DC plan using a hand-held or tablet device. Strong initial results demonstrate the effectiveness of this innovative enrolment strategy.
The life insurance business focuses on competitive product manufacturing, effective distribution and efficient operations. ING has a comprehensive portfolio of retail life insurance product solutions, complemented by its institutional group life business. In the retail market, it manufactures a range of products from low-cost term insurance for the middle income market through to high-end universal life products for the affluent markets. The business has a strong multi-channel sales team with the capacity to reach almost all licensed life insurance agents 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 ING’s Individual Life business to generate significant scale and to become a major writer of permanent life insurance.
More than six million Americans own an individual life insurance policy or are covered by one or more employee benefits offered through one of ING’s companies in the US.
The operating result increased by 17.4%, primarily driven by higher fees and premium-based revenue and a higher technical margin.
BUSINESS DEVELOPMENTS Asia, excluding Japan, continued to report favourable economic growth throughout 2011. This growth translated into life insurance premium growth in most Asian markets, although premium growth in India and China was held back by regulatory changes affecting unit linked insurance products and bancassurance arrangements. Going forward, we believe that low life insurance penetration and 53ING Group Annual Report 2011
rising per capita income will continue to favour life premium growth in emerging Asian markets.
In April 2011, ING, together with its strategic partners, Public Bank Berhad (PBB) and Public Islamic Bank Berhad (PIBB), launched a joint venture in Malaysia called ING Public Takaful Ehsan Berhad, which will develop Takaful insurance products. Takaful is life insurance that is compliant with Islamic law. The early product focus will be on mortgage insurance products, medical and investment-linked products. The establishment of this Takaful joint venture will enable ING Malaysia to consolidate its existing market position and benefit from growth in Takaful by leveraging its existing domestic infrastructure and the bancassurance relationship with PBB.
dditional inform ation > Assets under management (AuM) of EUR 321.7 billion > 72% of AuM above three-year benchmark > Measures implemented to align with the divestment of Insurance/Investment Management
ING IM announced the divestments of ING IM Philippines at the end of 2010, and ING IM Australia in June 2011. The sale of ING IM Philippines was closed in March 2011 and the sale of ING IM Australia was completed in October 2011. These transactions were in support of ING’s objective to manage its capital and portfolio of businesses in preparation for the divestment of the insurance and investment management business.
In 2011, the percentage of ING IM’s funds which have 3 stars or more from Morningstar fund ratings agency (in Europe and the US) improved to 73%, higher than the industry average of 68%.
ING IM has one of the longest EMD track records in the industry, managing EMD Hard Currency since 1993, EMD Local Currency since 1998 and EMD Corporate since 2003. In the second half of 2011, ING launched the ING Patrimonial Emerging Markets Debt Opportunities fund. This fund of funds structure provides access to a strategic but flexible mix of emerging market debt.
ING IM EUROPE In the first half of the year, ING IM Europe won a mandate to provide an integrated client solution package to a major Dutch insurance company. This solution provides strategic asset allocation, risk monitoring and balance sheet analysis taking into account Solvency I and II requirements for life and non-life insurers. This solution is an asset management platform developed by ING IM Europe for tackling the challenges posted by the Solvency II directive for insurance companies.
ING IM US has organisationally realigned back into ING US while preserving strong commercial partnerships with ING IM in Europe and Asia. As part of the separation of ING IM into two businesses, IM US’s Senior Loan platform team will open a London office. US based Pomona Capital will open offices in Hong Kong and Australia, while the US-run sections of the Emerging Market Equity and Emerging Market Debt investment teams will come under the direction of ING IM in Europe and Asia. Several late-year deals, finalised by the US-based Mortgage Investment Fund, sourced out of Asia, proved that the different parts of the organisation continued to work closely together during the separation process.
On 12 January 2012, ING announced an update on the restructuring of the insurance and investment management businesses. Due to the uncertain economic outlook and volatile markets, especially in Europe, ING has decided to review other strategic options for its Asian Insurance and Investment Management businesses. Within ING IM, ING IM Europe, ING IM Asia/Pacific and ING IM US will continue to operate in partnership to ensure continued commercial collaboration and cross-selling arrangements among the regional ING IM businesses.
The Supervisory Board and the Executive Board met for eight regular meetings and one additional meeting in 2011. The strategy, the progress in executing the Restructuring Plan of the European Commission as well as the impact of the sovereign debt crisis in the eurozone for the bank and the insurance/investment management (IM) operations were important topics on the agenda. The Committees of the Supervisory Board discussed a range of subjects on which the Supervisory Board received information, the main ones being the quarterly results, risk management, corporate governance, the adjustments to the remuneration policy and human resources.
Also in January, the Supervisory Board held its annual full-day meeting on ING’s strategy including the further execution of the EC restructuring plan, as well as the medium-term plan (MTP) and related risks. The medium-term plan addresses the plans and the financial and non-financial targets for the bank and the insurance businesses and for the Group as a whole. The Supervisory Board discussed the strategic ambitions for ING Bank, ING Insurance/IM and ING Group while taking into account the regulatory changes, the economic developments, the emerging sovereign debt crisis in the eurozone, the execution of the EC restructuring plan and the intended repayment to the Dutch State. The Supervisory Board approved the medium-term plans and the proposed strategic directions for ING Bank, ING Insurance/IM as well as for ING Group.
The 4Q 2010 and the 2010 annual figures were discussed in February, including the related reports from the external auditors and the assessment of the Executive Board of the adequacy and effectiveness of ING’s risk management and control systems. The Supervisory Board was informed that the operational separation of ING Bank and Insurance/IM was completed and various measures had been taken in preparation for the two IPOs. The Supervisory Board was also updated on potential divestment options, discussed the intended repayment to the Dutch State in May 2011 and supported a proposal not to make funds available for indexation for the pension fund. The draft agenda of the annual General Meeting was discussed and approved, including the proposal to amend the Articles of Association of ING Groep N.V. and the publication on the application of the Dutch Banking Code. The investor feedback on ING’s performance over 2010 was presented to the Supervisory Board.
The successive quarterly figures of 2011 were discussed in May, August and November, respectively. The Annual Accounts and the SOX 404 sign-off were approved in March. The 2011 General Meeting was evaluated in May.
dditional inform ation new candidates for the Supervisory Board in November and approved the remuneration framework for ING Group as well as the format for the 2011 Supervisory Board self assessment. An external consultant advised on the self-assessment procedure and drafted the various questionnaires as well as the report based on the outcome of the questionnaires. The assessment of the Supervisory Board, its committees and its members was conducted in December 2011 through questionnaires and bilateral meetings between the chairman and each Supervisory Board member. The self assessment resulted in action points concerning the meeting documents, the structure and organisation of the meetings, contacts with senior management and HR topics.
In November, a proposal for evaluation of the performance of the external auditor Ernst & Young was discussed. The results of this evaluation were discussed in the February 2012 Audit Committee meeting.
Directly following the Audit Committee meetings, the members of the Audit Committee met with the internal and external auditors to confirm that all relevant topics were discussed in the Audit Committee meeting.
Nomination Committee meetings The Nomination Committee met four times in 2011, with one absentee once, to discuss the future composition of the Supervisory Board as well as the succession planning of the Executive Board and the Management Boards. The Nomination Committee discussed various appointments in the Management Boards Banking and Insurance as well as the nomination of a candidate for the Executive preparation for the IPOs and the divestment intentions. The Supervisory Board approved the amended Group decision structure in which the empowerment of the boards of Insurance EurAsia and Insurance US was reflected. A presentation was given on the developments within ING Real Estate in the second half of 2010 and the expected developments for the first half of 2011.
The Supervisory Board has nominated three candidates for appointment at the 2012 General Meeting: Yvonne van Rooy, Jan Holsboer and Robert Reibestein. For the proposed appointments approval has been obtained from DNB.
COMPOSITION OF THE EXECUTIVE BOARD AND THE MANAGEMENT BOARDS As of 1 October 2011, Eric Boyer de la Giroday retired from the Management Board Banking as vice-chairman. Koos Timmermans succeeded him as vice-chairman Management Board Banking and stepped down from his roles as chief risk officer and member of the Executive Board of ING Group and as member of the Management Board Insurance as of 1 October 2011. Koos Timmermans was succeeded by Wilfred Nagel, who was appointed chief risk officer and member of the Management Board Banking and Management Board Insurance per 5 October 2011. The Supervisory Board also nominated Wilfred Nagel as member of the Executive Board and chief risk officer of ING Group for decision at the annual General Meeting in May 2012. Until that moment, Patrick Flynn (CFO of ING Group) has assumed the responsibility for Risk at ING Group level.
This section, including the parts of this Annual Report incorporated by reference, together with the separate publication ‘ING’s implementation of the Dutch Corporate Governance Code’ dated April 2010, on the website of the Company (www.ing.com), also serves as the ‘corporate governance statement’ referred to in section 2a of the Decree with respect to the contents of the annual report (Besluit tot vaststelling van nadere voorschriften omtrent de inhoud van het jaarverslag).1
DUTCH INSURERS’ CODE The Insurers’ Code is applicable to the Dutch subsidiaries of ING Insurance Eurasia N.V. pursuing insurance business and not to ING Group, ING Verzekeringen N.V. or ING Insurance Eurasia N.V. The Insurers’ Code can be downloaded from the website of the Dutch Association of Insurers (www.verzekeraars.nl). However, insurance companies that are part of a group (‘concern’) can decide to apply all or parts of the Insurers’ Code at group level. ING Insurance Eurasia N.V. voluntarily adheres to the corporate governance related principles of the Insurers’ Code. ING Insurance Eurasia N.V.’s remuneration policy for its Management Board and Senior Management is in agreement with these principles. The remaining principles of the Insurers’ Code are applied by the subsidiaries of ING Insurance Eurasia N.V. The application of the Insurers’ Code principles is described in the publication ‘Application of the Insurers’ Code by ING Insurance Eurasia’ available on the website of the Company (www.ing.com).
The position of the ING Trust Office and ING Group’s depositaryreceipts structure was evaluated by the Executive Board and the Supervisory Board in 2010. 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 outcome of the aforementioned evaluation was discussed in the 2010 annual General Meeting.
Approval by the General Meeting would be required for any share issues exceeding these limits.
• The articles of association of ING Group (‘Articles of Association’) provide that there are no quorum requirements to hold a general meeting, although certain shareholder actions and certain resolutions may require a quorum.
shares is subject to prior approval of the Executive Board. The Articles of Association and the trust conditions for registered shares in the share capital of ING Group (‘Trust Conditions’) do not restrict the transfer of depositary receipts for shares. ING Group is not aware of the existence of any agreement pursuant to which the transfer of ordinary shares or depositary receipts for such shares is restricted.
SHAREHOLDERS’ STRUCTURE Pursuant to the Dutch Financial Supervision Act (Wet op het financieel toezicht), any person who, directly or indirectly, acquires or disposes of an interest in the voting rights and/or the capital of ING Group as a result of which acquisition or disposal the percentage of his voting rights or capital interest, whether through ownership of shares, depositary receipts, American depositary shares, options or warrants, reaches, exceeds or falls below 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% or 95%, is required to notify in writing the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten) immediately after the acquisition or disposal of the triggering interest in ING Group’s share capital.
EXECUTIVE BOARD APPOINTMENT AND DISMISSAL Members of the Executive Board are appointed by the General Meeting from a binding list to be drawn up by the Supervisory Board. The list will be rendered non-binding if a resolution of the General Meeting to that effect is 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 Executive Board must comply with the expertise and reliability requirements set out in the Dutch Financial Supervision Act.
VOTING INSTRUCTIONS OF HOLDERS OF DEPOSITARY RECEIPTS TO ING TRUST OFFICE Holders of depositary receipts not attending a general meeting are entitled to give binding instructions to ING Trust Office, concerning ING Trust Office’s exercise of the voting rights attached to the ordinary shares. ING Trust Office will follow such instructions for such number of ordinary shares equal to the number of depositary receipts for shares held by the relevant holder of depositary receipts.
PROXY VOTING FACILITIES ING Group is a participant in the Shareholder Communication Channel (Stichting Communicatiekanaal aandeelhouders), through which participating holders of depositary receipts can give voting instructions to ING Trust Office. ING Group provides a similar proxy voting facility to international institutional investors. In addition, ING Group solicits proxies from its ADS holders in line with common practice in the US.
PATRICK G. FLYNN, CHIEF FINANCIAL OFFICER (Born 1960, Irish nationality, male; appointed in 2009, term expires in 2013) Patrick Flynn is a Chartered Accountant and a member of the Association of Corporate Treasurers in the UK. He also holds a bachelor’s degree in Business Studies from Trinity College Dublin. He was appointed a member of the Executive Board of ING Group on 27 April 2009. From 2007 to 2009, he was the chief financial officer of HSBC Insurance Holdings Ltd. Patrick Flynn is responsible for ING’s finance departments.
Pursuant to current Dutch law, this list is to mention 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 requirements of the Executive Board Profile.
TRANSACTIONS INVOLVING ACTUAL OR POTENTIAL CONFLICTS OF INTEREST In accordance with the Corporate Governance Code, transactions with members of the Executive Board in which there are significant conflicting interests will be disclosed in the Annual Report. In deviation of the Corporate Governance Code however, this does not apply if (i) disclosure would be against the law; (ii) the confidential, share-price sensitive or competition-sensitive character of the transaction prevents disclosure; and/or (iii) the information is 67ING Group Annual Report 2011
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 87).
Sjoerd van Keulen and Joost Kuiper are considered by the Supervisory Board as financial experts due to their broad experience in the banking and insurance business and the Dutch financial sector while Aman Mehta has gathered his experience by serving as chief executive officer of Hong Kong & Shanghai Banking Corporation (HSBC) in Hong Kong.
REMUNERATION AND SHARE OWNERSHIP The remuneration of the members of the Supervisory Board is determined by the General Meeting and is not dependent on the results of ING Group. Details of the remuneration are provided in 70 ING Group Annual Report 2011
PIET C. KLAVER (Born 1945, Dutch nationality, male; appointed in 2006, term expires in 2014) Former chairman of the Executive Board of SHV Holdings N.V. Other business activities: chairman of the Supervisory Board of PostNL N.V. (listed company). Chairman of the Supervisory Board of each of Koninklijke Dekker B.V., Credit Yard Group B.V., Dura Vermeer Groep N.V. and Blokker Holding B.V. Vice-chairman of the Supervisory Board of SHV Holdings N.V. Member of the Board of the African Parks Foundation.
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 will be succeeded after the year-end audit 2011. The rotation of other partners involved with the audit of the financial statements of ING is subject to applicable independence legislation.
The Audit Committee also sets the maximum annual amount that may be spent for pre-approved services. Throughout the year, the external auditor and ING monitor the amounts paid versus the pre-approved amounts. ING provides the Audit Committee with a full overview of all services provided to ING, including related fees, supported by sufficiently detailed information. This overview is periodically evaluated by the Audit Committee during the year.
OBJECT Pursuant to its articles of association (the ‘Articles of Association’), the object of Stichting ING Aandelen, a foundation organised under the laws of the Netherlands, with its registered seat in Amsterdam (‘ING Trust Office’) is: a. to acquire and administer for the purpose of management registered shares in the capital of ING Groep N.V., a public limited company with its registered office in Amsterdam (‘ING Group’) and any bonus shares which may be distributed thereon or shares acquired as stock dividend or by the exercise of subscription rights and to issue exchangeable depositary receipts for these shares, to exercise voting rights and all other rights attaching to the shares, to exercise subscription rights and to receive dividends and other distributions, including proceeds of liquidation, subject to the obligation to distribute the income to the holders of depositary receipts, save that depositary receipts shall be issued for bonus shares, shares acquired as stock dividend and shares acquired on behalf of holders of depositary receipts by virtue of the exercise of subscription rights; b. to promote the exchange of information between ING Group on the one hand and the holders of depositary receipts and shareholders in ING Group on the other; c. to promote the solicitation of proxies of shareholders other than the foundation itself and of specific proxies and/or voting instructions of holders of depositary receipts, and further to engage in any activity which may be related to the foregoing in the widest sense, whereby all activities which entail commercial risk shall be excluded from the foundation’s object.
MEETING OF HOLDERS OF DEPOSITARY RECEIPTS According to the Trust Conditions, ING Trust Office may consult holders of depositary receipts in a separate meeting if and when it considers this necessary or desirable. In addition, one or more holders of depositary receipts who jointly hold at least 10% of the total number of depositary receipts issued by ING Trust Office, may request the Board in writing, setting out the matters to be considered in detail, to convene a meeting of holders of depositary receipts.
OUTSTANDING DEPOSITARY RECEIPTS On 31 December 2011, the nominal value of administered ordinary shares amounted to EUR 919,266,828.96 for which 3,830,278.454 depositary receipts were issued, each with a nominal value of EUR 0.24. During the reporting year, the net number of depositary receipts increased with 51,427.
In these meetings, among other things, the following topics were discussed: - The activities and performance of ING Group in 2010 on the basis of the press release of 16 February 2011 and the 2010 figures, the activities and performance of ING Group over the first six months of 2011 on the basis of the press release of 4 August 2011 and the activities and performance of ING Group over the first nine months of 2011 on the basis of the press release of 3 November 2011.
- Several items on the agenda of the AGM. - The progress in the restructuring of ING Group.
COSTS In 2011, the costs of the activities of ING Trust Office amounted to EUR 433,787.21 (2010: EUR 503,871.36).
In 2011, the board of ING Continuity Foundation (the ‘Board’) held two meetings, on 22 April and 7 December.
As required by section 5:25c paragraph 2(c) of the Dutch Financial Supervision Act, each of the signatories hereby confirms that to the best of his or her knowledge: • the ING Groep N.V. 2011 Annual Accounts give a true and fair view of the assets, liabilities, financial position and profit or loss of ING Groep N.V. and the enterprises included in the consolidation taken as a whole; • the ING Groep N.V. 2011 Annual Report gives a true and fair view of the position at the balance sheet date, the development and performance of the business during the financial year 2011 of ING Groep N.V. and the enterprises included in the consolidation taken as a whole, together with a description of the principal risks ING Groep N.V. is being confronted with.
ING Group has long-established Business Principles and a strong internal control culture, which all staff must adhere to. SOX 404 activities are organised along the lines of the governance structure, and involve the participation of senior management across ING. Following the SOX 404 process, ING is in the position to publish an unqualified statement which denotes that the Company’s internal control over financial reporting is effective as of 31 December 2011. The SOX 404 statement by the Executive Board is included below, followed by the report of the external auditor.
We have audited ING Groep N.V.’s internal control over financial reporting as of 31 December 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). ING Groep N.V.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of the Executive Board on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
This chapter sets out the remuneration for the Executive Board and the Supervisory Board. The remuneration policy for the Executive Board was adopted by the annual General Meeting (AGM) on 27 April 2010; adjustments to the remuneration policy in line with new regulatory developments were adopted by the AGM on 9 May 2011. In addition, the Remuneration report provides information on the remuneration paid for 2011. Furthermore, information is included on loans and advances to the Executive Board and Supervisory Board members as well as ING depositary receipts for shares held by members of both Boards.
REMUNERATION POLICY FOR THE EXECUTIVE BOARD ADOPTED IN 2010 According to the remuneration policy of the Executive Board as adopted by the AGM on 27 April 2010 and amended by the AGM on 9 May 2011, remuneration of Executive Board members consists of a combination of fixed remuneration (base salary) and variable remuneration (together ‘total direct compensation’), pension arrangements and benefits as described below.
The long-term component, consisting of two equal portions of cash and stock, will be subject to a tiered vesting on the first, second and third anniversary of the grant date (one-third per annum). The entire long-term component is subject to an ex-post performance assessment by the Supervisory Board. The ex-post performance assessment cannot lead to an upward adjustment of the value of the cash deferred portion or the number of deferred shares. Executive Board members are not allowed to sell depositary receipts obtained within a period of five years from the grant date. However, they are allowed to sell part of their depositary receipts at the date of vesting to pay tax over the vested share award.
Increased focus on risk and non-financial performance Variable remuneration is linked to risk and non-financial performance and will take into consideration both individual and company performance criteria. Performance measurement will account for estimated risks and costs of capital. In addition to financial indicators, performance will also be assessed based on non-financial drivers, by means of a number of targets regarding economic, environmental, customer satisfaction and social criteria.
The Supervisory Board regrets that it underestimated the signal that was sent to Dutch society by awarding the Executive Board variable remuneration and is keen on ensuring that remuneration at ING does not become the subject of public debate again. However, while the gesture made by the Executive Board members was appreciated by the public and the Supervisory Board, this does not solve the ongoing dilemmas faced by the Supervisory Board in general and the Remuneration Committee in particular.
(1) It is noted that while the 2010 Annual Report indicated that the Board members would receive a salary increase and variable remuneration, they decided to forego the proposed increase in 2011 as well as the variable remuneration in relation to performance year 2010. The above table outlines the actual situation.
(2) Jan Hommen was appointed to the Executive Board on 27 April 2009. Jan Hommen has been remunerated as of 27 April 2009 in accordance with the ‘new’ remuneration policy adopted by the AGM in 2010. The figure for 2009 reflects a partial year as an Executive Board member and was paid in 2010 after the ‘new’ remuneration policy was adopted.
(3) Patrick Flynn was appointed to the Executive Board on 27 April 2009. The figures for this member reflect remuneration earned in the capacity as Executive Board member. Thus, the figure for 2009 reflects a partial year as an Executive Board member.
It is noted that the total direct compensation levels of the Executive Board, even if variable remuneration had been accepted by the Executive Board, continue to be significantly below the market median. The fact that the Executive Board has only accepted base salary in 2011 (and not variable remuneration) makes the current gap between the market median and ING even more significant.
Long-term incentives awarded in previous years The long-term incentive plan (LTIP) at ING in place until 2010 includes both stock options and performance shares. The ING stock options have a total term of ten years and a vesting period of three years after which they can be exercised for the remaining seven years.
Outstanding as at 31 December 2010 granted in 2011 Exercised in 2011 waived or expired
Performance shares were conditionally granted. The number of ING depositary receipts that would ultimately be granted at the end of a three-year performance period depended on ING’s Total Shareholder Return (TSR) performance over three years (return in the form of capital gains and reinvested dividends that shareholders received in that period) relative to the TSR performance of a predefined peer group.
INg depositary receipts for shares held by members of the Executive Board number of shares 2011 2010 2009
(1) Koos Timmermans stepped down from the Executive Board as per 1 October 2011. The table above shows ING depositary receipts held by Koos Timmermans at 31 December 2011.
(1) Koos Timmermans stepped down from the Executive Board as per 1 October 2011. The table above shows all loans and advances outstanding at 31 December 2011.
REMUNERATION POLICY FOR SENIOR MANAgEMENT As much as possible for a global financial institution of this size, ING aims to take account of all the differences and standards applied within similar financial institutions in the various countries in which it operates. The remuneration of members of the Management Boards and senior management will be in line with the general principles of the amended remuneration structure for the Executive Board, taking into account international and local practices.
For the Management Board EurAsia and senior management in ING’s EurAsia insurance operations, remuneration is in line with the general principles of the new remuneration policy for the Executive Board and the requirements under the Capital Requirements Directive III.
(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 a member of the Supervisory Board.
(8) Godfried van der Lugt retired in January 2011. He did not receive any compensation in relation to 2011.
(10) Jackson Tai retired in January 2011. He did not receive any compensation in relation to 2011. (11) Lodewijk de Waal is a member of the Supervisory Board as of April 2009.
Loans and advances to members of the Supervisory Board amounts in thousands of euros
Investments in associates 6 2,370 3,925 Real estate investments 7 1,670 1,900 Property and equipment 8 2,886 6,132
Debt securities in issue 15 139,861 135,604 Other borrowed funds 16 19,684 22,291 Insurance and investment contracts 17 278,833 271,128 Amounts due to banks 18 72,233 72,852 Customer deposits and other funds on deposit 19 467,547 511,362 Financial liabilities at fair value through profit and loss 20 – trading liabilities 107,682 108,050 – non-trading derivatives 22,165 17,782 – designated as at fair value through profit and loss 13,021 12,707 Liabilities held for sale 11 64,265 424
Addition to loan loss provisions 5 1,670 1,751 2,973 Intangible amortisation and other impairments 44 379 1,070 524
Net result from continuing and discontinued operations (before minority interests) 5,853 2,916 –1,124 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
Earnings per share from discontinued operations 49 Basic earnings per ordinary share from discontinued operations 0.29 0.06 0.04 Diluted earnings per ordinary share from discontinued operations 0.29 0.06 0.04
Net result from continuing operations attributable to: Equityholders of the parent 4,662 2,601 –1,099 Minority interests 82 99 –125
– trading assets 1,754 –14,782 47,963 – non-trading derivatives 1,988 –1,590 864 – other financial assets at fair value through profit and loss 474 832 2,196 – loans and advances to customers –25,085 –16,926 11,552 – other assets –59 2,003 6,948 – amounts due to banks, not payable on demand –6,731 –9,831 –67,410 – customer deposits and other funds on deposit 27,019 21,202 21,073 – trading liabilities –369 9,804 –54,366 – other financial liabilities at fair value through profit and loss –207 1 –5,798 – other liabilities –3,931 –6,806 –10,483
Proceeds from issuance of subordinated loans Repayments of subordinated loans –2,356 Proceeds from borrowed funds and debt securities 428,381 412,804 437,772 Repayments of borrowed funds and debt securities –429,997 –405,120 –425,182 Issuance of ordinary shares 7,276 Repayment of non-voting equity securities –2,000 –5,000 Repurchase premium (1) –1,000 –346 Payments to acquire treasury shares –136 –101 Sales of treasury shares 41 92 118 Dividends paid (2) –684 Net cash flow from financing activities –6,931 7,640 13,853
(1) 2011 includes the repurchase premium paid on the repayment of EUR 2 billion non-voting equity securities. 2009 includes the repurchase premium paid on the repayment of EUR 5 billion non-voting equity securities.
Unrealised revaluations after taxation 2,607 2,607 –4 2,603 Realised gains/losses transferred to profit and loss 86 86 86 Changes in cash flow hedge reserve 475 475 475 Transfer to insurance liabilities/DAC –1,644 –1,644 –1,644 Exchange rate differences 2,867 2,867 –8 2,859 Other revaluations 2 2 –3 –1 Total amount recognised directly in equity 4,393 4,393 –15 4,378
AUTHORISATION OF ANNUAL ACCOUNTS The consolidated annual accounts of ING Groep N.V. (‘ING Group’) for the year ended 31 December 2011 were authorised for issue in accordance with a resolution of the Executive Board on 12 March 2012. The Executive Board may decide to amend the annual accounts as long as these are not adopted by the General Meeting of Shareholders. The General Meeting of Shareholders may decide not to adopt the annual accounts, but may not amend these. ING Groep N.V. is incorporated and domiciled in Amsterdam, the Netherlands. The principal activities of ING Group are described in the section ‘ING at a glance’ in section 1.
The following standards, interpretations and amendments to standards and interpretations became effective for ING Group in 2011: • Amendment to IAS 32 ‘Classification of Rights Issues’; • 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’; and • 2010 Annual Improvements to IFRS.
Reference is made to the ‘Risk management’ section for a sensitivity analysis of net result and shareholders’ equity to insurance, interest rate, equity, foreign currency and real estate risks. These sensitivities are based on changes in assumptions that management considers reasonably likely at the balance sheet date.
FAIR VALUES OF REAL ESTATE Real estate investments are reported at fair value. The fair value of real estate investments is based on regular appraisals by independent qualified valuers. The fair values are established using valuation methods such as: comparable market transactions, capitalisation of income methods or discounted cash flow calculations. The underlying assumption used in the valuation is that the properties are let or sold to third parties based on the actual letting status. The discounted cash flow analyses and capitalisation of income method are based on
calculations of the future rental income in accordance with the terms in existing leases and estimations of the rental values for new leases when leases expire and incentives like rental free periods. The cash flows are discounted using market based interest rates that reflect appropriately the risk characteristics of real estate.
Available-for-sale financial assets Available-for-sale financial assets include available-for-sale debt securities and available-for-sale equity securities. Available-for-sale financial assets are initially recognised at fair value plus transaction costs. For available-for-sale debt securities, the difference between cost and redemption value is amortised. Interest income is recognised using the effective interest method. Available-for-sale financial assets are subsequently measured at fair value. Interest income from debt securities classified as available-for-sale is recognised in Interest income banking operations and Investment income in the profit and loss account using the effective interest method. Dividend income from equity instruments classified as available-for-sale is generally recognised in Investment income in the profit and loss account when the dividend has been declared. Unrealised gains and losses arising from changes in the fair value are recognised in equity. When the securities are disposed of, the related accumulated fair value adjustments are included in the profit and loss account as Investment income. For impairments of available-for-sale financial assets reference is made to the section ‘Impairments of other financial assets’. Investments in prepayment sensitive securities such as Interest-Only and Principal-Only strips are generally classified as available-for-sale.
ING Group applies fair value hedge accounting to portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve out’ of IFRS-EU. The EU ‘carve-out’ macro hedging enables a group of derivatives (or proportions) to be viewed in combination and jointly designated as the hedging instrument and removes some of the limitations in fair value hedge accounting relating to hedging core deposits and under-hedging strategies. Under the IFRS-EU ‘carve-out’, hedge accounting may be applied to core deposits and ineffectiveness only arises when the revised estimate of the amount of cash flows in scheduled time buckets falls below the designated amount of that bucket.
ING Group applies fair value hedge accounting for portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve-out’ to its retail operations. The net exposures of retail funding (savings and current accounts) and retail lending (mortgages) are hedged. The hedging activities are designated under a portfolio fair value hedge on the mortgages. Changes in the fair value of the derivatives are recognised in the profit and loss account, together with the fair value adjustment on the mortgages (hedged items) insofar as attributable to interest rate risk (the hedged risk).
OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES Financial assets and financial liabilities are offset, and the net amount reported, in the balance sheet when the Group has a current legally enforceable right to set off the recognised amounts and intends to either settle on a net basis or to realise the asset and settle the liability simultaneously. Offsetting is applied to certain interest rate swaps for which the services of a central clearing house are used. Furthermore, offsetting is also applied to certain current accounts for which the product features and internal procedures allow net presentation under IFRS-EU.
The Group does not consider events that may be expected to occur in the future as objective evidence, and consequently they are not used as a basis for concluding that a financial asset or group of assets is impaired.
In determining the impairment, expected future cash flows are estimated on the basis of the contractual cash flows of the assets in the portfolio and historical loss experience for assets with credit risk characteristics similar to those in the portfolio. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. Losses expected as a result of future events, no matter how likely, are not recognised.
When a loan is uncollectible, it is written off against the related loan loss provision. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off are recognised in 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 carrying value.
For traditional life insurance contracts, certain types of flexible life insurance contracts, and non-life contracts, DAC is amortised over the premium payment period in proportion to the premium revenue recognised.
FINANCIAL LIABILITIES Financial liabilities at amortised cost Financial liabilities at amortised cost include the following sub-categories: preference shares, other borrowed funds, debt securities in issue, subordinated loans, amounts due to banks and customer deposits and other funds on deposit.
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 recognised in the profit and loss account over employees’ remaining working lives. The corridor was reset to nil at the date of transition to IFRS-EU.
INCOME RECOGNITION Gross premium income Premiums from life insurance policies are recognised as income when due from the policyholder. For non-life insurance policies, gross premium income is recognised on a pro-rata basis over the term of the related policy coverage. Receipts under investment contracts are not recognised as gross premium income.
As at 31 December 2011, Amounts due from banks included receivables with regard to securities which have been acquired in reverse repurchase transactions amounting to EUR 2,925 million (2010: EUR 4,621 million) and receivables related to finance lease contracts amounting to EUR 76 million (2010: EUR 82 million).
As at 31 December 2011, the balance sheet value included debt securities which were lent or sold in repurchase transactions amounting to nil (2010: nil) and EUR 2,267 million (2010: EUR 1,381 million), respectively.
The increase in trading derivatives and other non-trading derivatives for which no hedge accounting is applied is mainly due to changes in fair value resulting from changes in market interest rates. The increase is substantially mitigated by a similar increase in Trading derivates and Other non-trading derivatives (liabilities) as disclosed in Note 20 ‘Financial liabilities at fair value through profit and loss’.
As at 31 December 2011, the balance sheet value included equity securities which were lent or sold in repurchase transactions amounting to EUR 591 million (2010: EUR 69 million) and nil (2010: nil), respectively. As at 31 December 2011, the balance sheet value included debt securities which were lent or sold in repurchase transactions amounting to EUR 47 million (2010: EUR 65 million) and EUR 1,752 million (2010: EUR 667 million), respectively.
Available-for-sale investments 199,234 212,793 Held-to-maturity investments 8,868 11,693 Loans and advances to customers 29,117 34,251 Due from banks 7,321 8,122 Available-for-sale investments and Assets at amortised cost 244,540 266,859
Trading assets 18,251 27,979 Investments for risk of policyholders 9,612 8,944 Designated as at fair value through profit and loss 2,967 3,672 Financial assets at fair value through profit and loss 30,830 40,595
In 2011, changes in debt securities (banking operations) include the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 11 ‘Assets and liabilities held for sale’.
Greece, Italy, Ireland, Portugal and Spain – Government bonds and Unsecured Financial institutions’ bonds (1)
On 21 July 2011 a Private Sector Initiative to support Greece was announced. This initiative involves a voluntary exchange of existing Greek government bonds together with a Buyback Facility. Based on this initiative, ING Group impaired its Greek government bonds maturing up to 2020 in the second quarter of 2011 (Bank: EUR 187 million, Insurance: EUR 123 million). The decrease in market value in the third quarter of 2011 of these impaired bonds was recognised as re-impairment (Bank: EUR 90 million, Insurance: EUR 70 million). Due to the outcome of the EC meeting on 26 October 2011, the Greek government bonds maturing from 2020 were impaired in the third quarter of 2011 (Bank: EUR 177 million, Insurance: EUR 130 million). ING Group impaired all its Greek Government bonds to market value at 31 December 2011. This resulted in a re-impairment in the fourth quarter of 2011 of EUR 200 million (Bank: EUR 133 million, Insurance: EUR 67 million), bringing the total impairments on Greek government bonds to EUR 978 million (Bank: EUR 588 million, Insurance: EUR 390 million). The total Greek government bond portfolio has now been written down by approximately 80%.
In 2011 ING Insurance recognised a total impairment of EUR 189 million on subordinated debt from Irish banks.
Reference is made to Note 34 ‘Fair value of financial assets and liabilities’ for disclosure by fair value hierarchy and Note 37 ‘Investment income’ for impairments on available-for-sale debt securities.
Impact on the financial years after reclassification: Carrying value as at 31 December 6,734 14,419 633 Fair value as at 31 December 6,524 13,250 648 Unrealised fair value losses recognised in shareholders’ equity (before tax) as at 31 December –307 –446 –8 Effect on shareholders’ equity (before tax) if reclassification had not been made –210 –1,169 15 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) 127 390 28 Recognised impairments (before tax) nil nil nil Recognised provision for credit losses (before tax) nil nil nil
Investments in connection with the insurance operations with a combined carrying value of nil (2010: EUR 6 million) did not produce any income for the year ended 31 December 2011.
Loans guaranteed by credit institutions 379 308 8,260 8,356 8,639 8,664
Loans guaranteed by credit institutions 4 1 5 22 9 23
CBRE Retail Property Fund Iberica LP 29 147 1,666 1,146 96 65 CBRE Lionbrook Property Partnership LP 27 102 604 225 50 17 CBRE Property Fund Central Europe LP 25 90 897 536 87 4 ING Real Estate Asia Retail Fund 26 87 868 512 81 37
CBRE DRES Master Fund II C.V. (1) 13 63 612 143 22 18 CBRE Nordic Property Fund FGR (1) 15 61 940 543 81 59
CBRE Retail Property Partnership Southern Europe C.V. (1) 21 52 1,001 759 48 67
In 2011, share of results of EUR 241 million (2010: EUR 314 million) and impairments of EUR 20 million (2010: EUR 3 million) are presented in the profit and loss account in Share of result from associates for EUR 221 million (2010: EUR 311 million).
Revaluation surplus Opening balance 528 531 Revaluation in year –28 –3 Released in year –2 Closing balance 498 528
Changes in the composition of the group –11 –4 –29 –7 –40 –11 Disposals –16 –12 –24 –41 –40 –53 Depreciation –176 –167 –236 –262 –412 –429 Impairments –1 –1 –1 –1 Exchange rate differences –6 12 –14 20 –20 32 Other changes 5 12 –40 –33 –35 –21
Gross carrying amount as at 31 December 1,659 1,707 2,620 2,642 4,279 4,349 Accumulated depreciation as at 31 December –1,295 –1,330 –1,638 –1,583 –2,933 –2,913 Accumulated impairments as at 31 December –1 –1 –1 –1 Net carrying value as at 31 December 363 376 982 1,059 1,345 1,435
In 2011, Changes in the composition of the group comprises the sale of ING Car Lease. Reference is made to Note 30 ‘Companies acquired and companies disposed’.
Transfer and other changes relates mainly to the transfer of cars under operating lease to Other assets due to the expiration of the lease contract.
Amortisation and unlocking –244 –113 –391 –358 –87 –118 –722 –589 Impairments –32 –540 –49 –31 –1 –82 –571 Effect of unrealised revaluations in equity –250 –286 –250 –286 Changes in the composition of the group –43 –680 11 –5 –49 –126 –19 –854 –57
Amortisation of software and other intangible assets is included in the profit and loss account in Other operating expenses and Intangible amortisation and other impairments. Amortisation of VOBA is included in Underwriting expenditure.
Allocation of Goodwill to reporting units Goodwill is allocated to reporting units as follows: Goodwill allocation to reporting units
Cash and balances with central banks 4,980 28 Amounts due from banks 314 Financial assets at fair value through profit and loss 3 16 Available-for-sale investments 22,605 144 Loans and advances to customers 444 Reinsurance contracts 31,805 244 Investments in associates 43 Property and equipment 75 12 Intangible assets 166 15 Deferred acquisition costs 43 Other assets 2,091 136
The total amount of borrowing costs relating to Property development and obtained from foreclosures, capitalised in 2011 is EUR 7 million (2010: EUR 18 million).
Property under development 400 821 Property developed 1,055 1,024 Property obtained from foreclosures 129 308
The following equity components cannot be freely distributed: Revaluation reserve, Share of associates reserve (included in Other reserves), Currency translation reserve and the part of the Other reserves that relates to the former Stichting Regio Bank and the former Stichting Vakbondsspaarbank SPN.
Share premium Changes in Share premium are disclosed in the Consolidated statement of changes in equity of ING Group.
Depositary receipts for ordinary shares held by ING Group (Treasury shares) As at 31 December 2011, 49.3 million (2010: 51.3 million; 2009: 47.0 million) depositary receipts for ordinary shares ING Groep N.V. with a par value of EUR 0.24 were held by ING Groep N.V. or its subsidiaries. These depositary receipts for ordinary shares were purchased to hedge option rights granted to the Executive Board members and other employees. In December 2010 ING Groep N.V. announced that it will no longer rebalance its hedge portfolio. This decision is an effort to simplify the management and administration of ING’s various employee share and option programmes. The remaining shares in the hedge portfolio will be used to fund the obligations arising out of exercise and vesting. Once all shares in the hedge portfolio are used ING will fund these obligations by issuing new shares.
Unrealised revaluations after taxation –32 3,401 3,369 Realised gains/losses transferred to profit and loss 86 86 Changes in cash flow hedge reserve 475 475 Transfer to insurance liabilities/DAC –1,644 –1,644
Result for the year –1,006 –1,006 Unrealised revaluations after taxation –273 –5 –278 Changes in treasury shares 129 129 Transfer to share of associates reserve 76 –76 Dividend and repurchase premium –259 –346 –605 Employee stock options and share plans 64 64 Other –1 –1
Rights issue –64 Share-based payments –19 –23 –27 –1,368,381 –2,140,863 –1,058,658
On these non-voting equity securities a coupon was and is payable of the higher of: • EUR 0.85 per security, payable annually in arrears, with a first coupon of EUR 0.425 per security paid on 12 May 2009; • 110% of the dividend paid on each ordinary share over 2009 (payable in 2010); • 120% of the dividend paid on each ordinary share over 2010 (payable in 2011); and • 125% of the dividend paid on each ordinary share over 2011 onwards (payable in 2012 onwards).
In December 2009, ING repaid the first half of the non-voting equity securities (core Tier 1 securities) of EUR 5 billion plus a total premium of EUR 605 million. On 13 May 2011 ING exercised its option for early repayment of EUR 2 billion of the remaining non-voting equity securities (core Tier 1 securities). The total payment in May 2011 amounted to EUR 3 billion and included a 50% repurchase premium. ING funded this repayment from retained earnings. ING has indicated that it is one of its priorities to repay the remaining EUR 3 billion non-voting equity securities (core Tier 1 securities) as soon as possible, but this needs to be done very prudently in light of the current challenging and changing financial and regulatory environment. The terms for the remaining non-voting equity securities, including restrictions on remuneration and corporate governance, remained unchanged. Reference is made to Note 33 ‘Related parties’.
15 DEBT SECURITIES IN ISSUE Debt securities in issue relate to debentures and other issued debt securities with either fixed interest rates or interest rates based on floating interest rate levels, such as certificates of deposit and accepted bills issued by ING Group, except for subordinated items. Debt securities in issue do not include debt securities presented as Financial liabilities at fair value through profit and loss. ING Group does not have debt securities that are issued on terms other than those available in the normal course of business. The maturities of the debt securities are as follows: Debt securities in issue – maturities
More than 1 year but less than 2 years 6,914 7,518 More than 2 years but less than 3 years 10,347 6,925 More than 3 years but less than 4 years 5,943 9,580 More than 4 years but less than 5 years 7,541 5,648 More than 5 years 20,655 10,987 Total fixed rate debt securities 103,708 104,176
More than 1 year but less than 2 years 8,590 4,321 More than 2 years but less than 3 years 3,569 4,552 More than 3 years but less than 4 years 1,207 2,113 More than 4 years but less than 5 years 162 864 More than 5 years 6,754 5,571 Total floating rate debt securities 36,153 31,428
Provision for life insurance for risk of policyholders 109,487 114,603 136 359 109,623 114,962
Other insurance provisions Total provisions for insurance contracts 259,765 253,365 5,870 5,789 265,635 259,154
In 2011, Effect of changes in other assumptions includes EUR 611 million relating to the assumption review for the Insurance US Closed Block Variable Annuity (VA) business. Reference is made to Note 43 ‘Underwriting expenditure’.
In 2011, Other changes with regard to Provision for life insurance for risk of policyholders (net of reinsurance) include the transfers of certain insurance contracts outside ING.
– for prior years –71 –35 –11 –11 –82 –46 – interest accrual of provision 40 46 40 46
18 AMOUNTS DUE TO BANKS Amounts due to banks include non-subordinated debt due to banks, other than amounts in the form of debt securities. As at 31 December 2011, liabilities concerning securities sold in repurchase transactions amounted to EUR 11,145 million (2010: EUR 12,200 million).
In 2011, the decrease in Customer deposits and other funds on deposits is mainly caused by the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 11 ‘Assets and liabilities held for sale’.
Trading liabilities 107,682 108,050 Non-trading derivatives 22,165 17,782 Designated as at fair value through profit and loss 13,021 12,707
The increase in trading derivatives and other non-trading derivatives for which no hedge accounting is applied is mainly due to changes in fair value resulting from changes in market interest rates. The increase is substantially mitigated by a similar increase in Trading derivates and Other non-trading derivatives (assets) as disclosed in Note 3 ‘Financial assets at fair value through profit and loss’.
In 2011, the change in the fair value of financial liabilities designated as at fair value through profit and loss attributable to changes in the credit risk of that liability was EUR 377 million (2010: EUR 179 million) and EUR 595 million (2010: EUR 218 million) on a cumulative basis. This change has been determined as the amount of change in fair value of the financial liability that is not attributable to changes in market conditions that gave rise to market risk (i.e. mainly interest rate risk based on yield curves).
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 13,726 million (2010: EUR 12,438 million).
Deferred tax liabilities 3,679 2,618 Income tax payable 858 1,210 Pension benefits 378 543 Post-employment benefits 179 172 Other staff-related liabilities 1,111 1,248 Other taxation and social security contributions 898 885 Deposits from reinsurers 1,015 1,007 Accrued interest 11,698 13,220 Costs payable 2,400 2,873 Amounts payable to brokers 72 111 Amounts payable to policyholders 2,173 2,130 Reorganisation provision 599 434 Other provisions 638 533 Share-based payment plan liabilities 39 40 Prepayments received under property under development 83 173 Amounts to be settled 5,442 5,553
Pension and post-employment benefits 503 1 68 –12 –10 2 552
Receivables –51 –8 –12 –1 –2 –74 Loans and advances to customers 473 97 213 6 96 885 Unused tax losses carried forward –1,851 –1 305 34 20 195 –1,298
Total unused tax losses carried forward 9,093 9,335 Unused tax losses carried forward not recognised as a deferred tax asset –4,529 –2,862 Unused tax losses carried forward recognised as a deferred tax asset 4,564 6,473
Releases –14 –77 Charges –358 –461 Exchange rate differences 1 6 Other changes 1 –6 Closing balance 599 434
As at 31 December 2011, the provision for reorganisation, of which EUR 457 million relates to termination benefits, relates to Dutch Retail Banking activities as well as other restructuring activities.
Releases –7 –1 –2 –15 –9 –16 Charges –21 –13 –56 –59 –77 –72
Employer’s contribution 4 Participants contributions 2 3 Benefits paid –666 –634 –5 –6 Actuarial gains and losses –455 1,396 –3 2 Past service cost –8 –4 Changes in the composition of the group and other changes 13 –20 –2 –1 Effect of curtailment or settlement –110 –7 Exchange rate differences 78 143 2 4
The actual return on the plan assets amounted to EUR 2,623 million (2010: EUR 1,971 million) and exceeds the expected return on plan assets. This resulted in a large movement with regard to Actuarial gains and losses. The difference is caused by the decreased market interest rate that has an impact on the valuation of the debt securities in the plan assets.
The presented discount rate is the weighted average of the discount rates that are applied in different countries. These rates are based on AA corporate bond yields of the specific countries with durations matching the pension liabilities.
(1) Includes assets on demand. (2) 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. (3) Assets held for sale consist of the assets of the disposal groups classified as held for sale as disclosed in Note 11 ‘Assets and liabilities held for sale’.
Less than 1–3 months 3–12 months 1–5 years years Maturity not applicable Adjustment (2) Total
The accounting treatment of hedge transactions varies according to the nature of the instrument hedged and whether the hedge qualifies under the IFRS-EU hedge accounting rules. Derivatives that qualify for hedge accounting under IFRS-EU are classified and accounted for in accordance with the nature of the instrument hedged and the type of IFRS-EU hedge model that is applicable. The three models applicable under IFRS-EU are: fair value hedge accounting, cash flow hedge accounting and net investment hedge accounting. These are described under the relevant headings below. The company’s detailed accounting policies for these three hedge models are set out in section ‘Principles of valuation and determination of results’.
Accounting ineffectiveness recognised in the profit and loss account for the year ended 31 December 2011 on derivatives and nonderivatives designated under net investment hedge accounting was nil (2010: EUR 5 million).
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 9 billion (2010: EUR 7 billion), Germany of EUR 5 billion (2010: EUR 5 billion) and Canada of nil (2010: EUR 5 billion).
27 CONTINGENT LIABILITIES AND COMMITMENTS In the normal course of business the Group is party to activities whose risks are not reflected in whole or in part in the consolidated financial statements. In response to the needs of its customers, the Group offers financial products related to loans. These products include traditional off-balance sheet credit-related financial instruments.
In October 2011 ING announced that it had completed the sale of REIM’s Asian and European operations to US-based CBRE Group Inc., thereby completing the divestment of ING REIM. The divestment of ING REIM has resulted in an after-tax gain on disposal of approximately EUR 245 million. As a result of the agreement at closing ING continues to have certain contingent income and expenses, however no significant impact on the result on divestment is expected. REIM’s Asian and European operations were previously included in the segment ING Real Estate.
ING Car Lease In September 2011 ING completed the sale of ING Car Lease to BMW Group fleet management division Alphabet for total proceeds of EUR 696 million and a net transaction result of EUR 347 million. ING Car Lease was previously partly included in both the Commercial and Retail Banking segment.
Disposals occured in 2012 ING Direct USA In June 2011 ING announced that it reached an agreement to sell ING Direct USA to Capital One Financial Corporation, a leading US-based financial holding company. In February 2012 ING announced that the transaction closed. Total proceeds of the transaction are approximately USD 9.0 billion (or approximately EUR 6.9 billion), including USD 6.3 billion in cash and USD 2.7 billion in the form of 54.0 million shares in Capital One, based on the share price of USD 49.29 at closing on 16 February 2012. These shares represented a 9.7% stake in Capital One at closing. The transaction has resulted in a positive result after tax of approximately EUR 0.5 billion.
In connection with the divestment of ING Direct USA, ING also completed the adjustment of the agreement with the Dutch State concerning the structure of the Illiquid Assets Back-up Facility (IABF) which was also announced on 16 June 2011. The amendment serves to de-link the IABF from ING Direct USA by putting ING Bank in its place as counterparty for the Dutch State. The IABF is further amended to ensure a continued alignment between ING and the State regarding exposure to the Alt-A portfolio. Only the part of the IABF covering ING Direct USA, currently approximately 85% of the total IABF-portfolio, is adjusted in the amendment. The ING Insurance part of the IABF remains unaltered. Reference is made to Note 33 ‘Related parties’ for details on the original agreement and the amendments made.
Financial assets at fair value through profit and loss 5 10 679 694 Property and equipment 3,275 3,275
In December 2009 ING reached an agreement to sell the non-life insurance operations in Greece for a total consideration of EUR 4 million. The sale was completed in July 2010.
1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
(3) The loss was recognised in 2008. (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.
31 LEGAL PROCEEDINGS ING Group companies are involved in litigation and arbitration proceedings in the Netherlands and in a number of foreign jurisdictions, including the United States, involving claims by and against them which arise in the ordinary course of their businesses, including in connection with their activities as insurers, lenders, employers, investors and taxpayers. In certain of such proceedings, very large or indeterminate amounts are sought, including punitive and other damages. While it is not feasible to predict or determine the ultimate outcome of all pending or threatened legal and regulatory proceedings, the Company’s management is of the opinion that neither it nor any of its subsidiaries is aware of any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware) which may have or have in the recent past had a significant effect on the financial position or profitability of the Company.
In January 2011 the Association of Stockholders (Vereniging van Effectenbezitters, ‘VEB’) has issued a writ alleging that investors were misled by the prospectus that was issued with respect to the September 2007 rights issue of Fortis N.V. (now: Ageas N.V.) against Ageas N.V., the underwriters of such rights issue, including ING Bank, and former directors of Fortis N.V. According to the VEB the prospectus shows substantive incorrect and misleading information. The VEB states that the impact and the risks of the subprime crisis for Fortis and Fortis’ liquidity position have been reflected incorrectly in the prospectus. The VEB requests a declaratory decision stating that the summoned parties have acted wrongfully and are therefore responsible for the damages suffered by the investors in Fortis. The amount of damages of EUR 18 billion has not been substantiated yet. ING will defend itself against this claim; at this time ING is not able to assess the future outcome. Therefore at this moment it is not practicable to provide an estimate of the (potential) financial effect of such action.
As part of the exchange offers disclosed in Note 14 ‘Subordinated loans’ EUR 0.9 billion intercompany debt from ING Bank N.V. to ING Groep N.V. was repaid.
(2) Includes the compensation earned in the capacity as Executive Board member. One Executive Board member stepped down from the Executive Board as per 1 October 2011, therefore his compensation is included till October 2011
Only the part covering ING Direct USA, which currently covers approximately 85% of the total portfolio, is adjusted in the agreement and the guarantee only relates to the portfolio of ING Direct USA. The ING Insurance US and Bancorp part of the IABF remains unaltered.
ING Groep N.V. also has the right to convert all or some of the non-voting equity securities into ordinary shares on the basis of one non-voting equity security for 1.335 ordinary shares or bearer depositary receipts from three years after the issue date onwards, subject to certain conditions. This equates to an exchange price of EUR 7.49. The Dutch State in that case has the right to demand a redemption payment of EUR 10 per non-voting equity security, together with the pro-rata coupon, if due, accrued to such date.
Both repayment and conversion of the securities must be approved by the Dutch Central Bank.
European Commission Restructuring Plan In 2009, ING Groep N.V. submitted a Restructuring Plan to the European Commission as part of the process to receive approval for the government support measures. The European Commission has, by decision of 18 November 2009, formally approved the Restructuring Plan. The main elements of the Restructuring Plan as announced on 26 October 2009 are as follows: • elimination of double leverage and significant reduction of ING’s balance sheet; • divestment of all Insurance and Investment Management activities; • divestment of ING Direct USA; • creation of a new company in the Dutch retail market composed of Interadvies (including Westland Utrecht and the mortgage activities of Nationale-Nederlanden) and the existing consumer lending portfolio of ING Retail in the Netherlands. This business, once separated, needs to be divested; • restriction to be a price leader in any EU country for certain retail and SME banking products and restriction to acquire financial institutions or other businesses that would delay the repayment of the non-voting equity securities. These restrictions will apply for the shorter period of three years or until the non-voting equity securities have been repaid in full to the Dutch State; • an agreement with the Dutch State to alter the repayment terms of 50% of the non-voting equity securities; • repayment of EUR 5 billion of the non-voting equity securities issued in November 2008 to the Dutch State; • additional Illiquid Assets Back-up Facility payments as part of the overall agreement with the European Commission will have to be made to the Dutch State in the form of fee adjustments relating to the Illiquid Assets Back-Up Facility which resulted in a one-off pre-tax charge to ING of EUR 1.3 billion in the fourth quarter of 2009; 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
Credit Guarantee Scheme As part of the measures adopted to protect the financial sector, the Dutch State introduced a EUR 200 billion credit guarantee scheme for the issuance of medium term debt instruments by banks (the Credit Guarantee Scheme). ING Bank N.V. issued government guaranteed debt instruments under this Credit Guarantee Scheme (‘Government Guaranteed Bonds’) as part of its regular medium-term funding operations. The relevant Rules of the Credit Guarantee Scheme promulgate the rules applicable to any issues under the Credit Guarantee Scheme and include information such as scope, denomination, tenor and fees payable by the banks. ING Group pays a fee of 84 basis points over the issued bonds to the Dutch State to participate in the Credit Guarantee Scheme. Reference is made to Note 15 ‘Debt securities in issue’.
– designated as at fair value through profit and loss 13,021 12,707 13,021 12,707
Due to a change in market practices for pricing derivatives, ING Group is in the process of adopting a discounting curve, that reflects the Overnight Indexed Swap (‘OIS’) instead of the previously used term EURIBOR rate. In addition, ING refined its calculation methodology for reflecting credit risk in derivatives and issued liabilities. The impact of both these changes is recorded in the profit and loss account; the overall financial effect in 2011 was not material.
obtained vendor price is deemed the most representative of fair value. The indicative price is not itself used for valuing the security; rather, it is used to select the most appropriate price obtained from independent external sources. As a result, each security in the portfolio is priced based on an external price, without modification by ING Group.
Fair value hierarchy ING Group has categorised its financial instruments that are measured in the balance sheet at fair value into a three level hierarchy based on the priority of the inputs to the valuation. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to valuation techniques based on unobservable inputs. An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide reliable pricing information on an ongoing basis. The fair value hierarchy consists of three levels, depending upon whether fair values were determined based on quoted prices in an active market (Level 1), valuation techniques with observable inputs (Level 2) or valuation techniques that 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
incorporate inputs which are unobservable and which have a more than insignificant impact on the fair value of the instrument (Level 3). Financial assets in Level 3 include for example illiquid debt securities, complex OTC and credit derivatives, certain complex loans (for which current market information about similar assets to use as observable, corroborated data for all significant inputs into a valuation model is not available) and asset backed securities for which there is no active market and a wide dispersion in quoted prices.
Methods applied in determining fair values of financial assets and liabilities 2010 Level 1 Level 2 Level 3 Total
Amounts recognised in the profit and loss account during the year 46 183 113 342
Generally, up to four different pricing services are utilised. Management carefully reviews the prices obtained in conjunction with other information available, including, where relevant, trades in the market, quotes from brokers and internal evaluations. If the dispersion between different prices for the same securities is limited, a hierarchy exists that ensures consistent selection of the most appropriate price If the dispersion between different prices for the same security is significant, additional processes are applied to select the most appropriate price, including an internally developed price validation matrix and a process to challenge the external price source.
Ireland Government bonds 43 43 Financial institutions 44 44 Portugal Government bonds 533 533
Reinsurance assumed gross premiums written 23 23 26 1,031 1,164 1,299 1,054 1,187 1,325
Income from investments in debt securities 5,749 5,592 5,291 5,749 5,592 5,291 Income from loans
Income from investments in debt securities and loans 7,452 7,206 6,617 7,452 7,206 6,617
Realised gains/losses on disposal of debt securities 91 150 –945 68 18 –168 159 168 –1,113 Impairments of available-for-sale debt securities –735 –146 –1,491 –750 –589 –586 –1,485 –735 –2,077 Reversal of impairments of available-for-sale debt securities 74 5 11 2 79 11 2 Realised gains/losses and impairments of debt securities –570 4 –2,436 –677 –560 –752 –1,247 –556 –3,188
Realised gains/losses on disposal of equity securities 39 338 24 446 193 397 485 531 421 Impairments of available-for-sale equity securities –65 –32 –49 –188 –43 –360 –253 –75 –409 Realised gains/losses and impairments of equity securities –26 306 –25 258 150 37 232 456 12
Pacific Antai Life Insurance Company Ltd. 28 Clarion Real Estate Securities 182 ING REIM Asia and Europe 245 ING Car Lease 347 Clarion Partners 39 Other 14
ING Australia and New Zealand 337 ING Canada –38 Annuity and Mortgage business in Chile –23 Other 11
Reference is made to Note 30 ‘Companies acquired and companies disposed’ for more details.
Asset management fees related to the management of investments held for the risk of policyholders of EUR 495 million (2010: EUR 358 million; 2009: EUR 825 million) are included in Commission income.
– other non-trading derivatives –315 –720 –237 1,380 94 –3,728 1,065 –626 –3,965 Net result on non-trading derivatives –1,272 –1,397 –1,560 1,292 16 –3,544 20 –1,381 –5,104
Net operating lease income comprises income of EUR 772 million (2010: EUR 1,000 million; 2009: EUR 967 million) and depreciation of EUR 596 million (2010: EUR 787 million; 2009: EUR 792 million).
Investment result for risk of policyholders 1,246 –10,492 –17,736 Reinsurance recoveries –1,875 –1,721 –1,700
The portion of trading gains and losses for the year ended 31 December 2011 relating to trading securities still held as at 31 December amounted to EUR –66 million (2010: EUR 19 million; 2009: EUR 105 million).
Expenditure from life underwriting Reinsurance and retrocession premiums 1,888 2,008 1,842
Expenditure from non-life underwriting Reinsurance and retrocession premiums 43 65 70
Reinsurance recoveries –9 –9 –6 Change in provision for unearned premiums –26 –26 –2 Change in claims provision 5 44 –23 Costs of acquiring insurance business 269 281 290 Other underwriting expenditure –3 –2 –4
The total amount of commission paid and commission payable with regard to the insurance operations amounted to EUR 2,470 million (2010: EUR 2,424 million; 2009: EUR 2,392 million). This includes the commissions recognised in Costs of acquiring insurance business of EUR 1,884 million (2010: EUR 1,707 million; 2009: EUR 1,758 million) referred to above and commissions recognised in Other underwriting expenditure of EUR 586 million (2010: EUR 717 million; 2009: EUR 634 million). Other underwriting expenditure also includes reinsurance commissions received of EUR 192 million (2010: EUR 192 million; 2009: EUR 255 million).
Past service cost –8 –1 20 –4 –21 –12 –1 –1
In 2011, ING granted two types of share awards, deferred shares and performance shares. The entitlement to the share awards is granted conditionally. If the participant remains in employment for an uninterrupted period between the grant date and the vesting date, the entitlement becomes unconditional. In addition to the employment condition, the performance shares contain a performance condition. The number of ING depositary receipts that would ultimately be granted at the end of a performance period is dependent on ING’s performance over that period.
On 8 September 2010 ING Groep N.V. announced that it sold 3,590,000 (depositary receipts for) ordinary shares of its delta hedge portfolio, which was used to hedge employee options and facilitate employee share programmes. The shares were sold in the open market on 7 and 8 September 2010 at an average price of EUR 7.39 per share.
As per 31 December 2011 the share awards consists of 41,150,790 share awards (2010: 28,592,210; 2009: 10,810,687) relating to equity-settled share-based payment arrangements and 6,872,096 share awards (2010: 6,447,896; 2009: 3,842,986) relating to cashsettled share-based payment arrangements.
The fair value of share awards granted is recognised as an expense under staff expenses and is allocated over the vesting period of the share awards. The fair values of share awards containing a market based performance condition have been determined using a Monte Carlo simulation based valuation model. The model takes into account the risk free interest rate, the current stock prices, expected volatilities and current divided yields of the performance peer group used to determine ING’s Total Shareholder Return (TSR) ranking.
As at 31 December 2011 total unrecognised compensation costs related to share awards amounted to EUR 149 million (2010: EUR 158 million; 2009: EUR 41 million). These costs are expected to be recognised over a weighted average period of 1.5 years (2010: 2.1 years; 2009: 1.8 years).
In 2011, total interest income and total interest expense for items not valued at fair value through profit and loss were EUR 43,085 million (2010: EUR 41,139 million; 2009: EUR 41,688 million) and EUR 21,805 million (2010: EUR 19,212 million; 2009: EUR 22,257 million) respectively. Net interest income of EUR 20,373 million is presented in the following lines in the profit and loss account.
Depreciation of property and equipment 371 382 365 69 78 78 440 460 443
Other operating expenses include lease and sublease payments in respect of operating leases of EUR 155 million (2010: EUR 200 million; 2009: EUR 169 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.
The effective tax rate in 2010 was higher than the weighted average statutory tax. This is caused by an off-setting effect of the writedown of deferred tax assets (mainly in the United States) and the non-deductable expenses which exceeded tax exempt income and prior year adjustments.
Adjustment to prior periods in 2011 relates to final tax assessments and other marginal corrections.
Net result from discontinued operations 109 209 93 Net result from disposal of discontinued operations 995 Total net result from discontinued operations 1,104 209 93 3,783.7 3,781.5 2,686.0
Diluted earnings from discontinued operations 1,104 209 93 3,789.1 3,788.1 2,691.7 0.29 0.06 0.04 50 DIVIDEND PER ORDINARY SHARE In 2011, 2010 and 2009 no dividend was declared, therefore the dividend per ordinary share was nil. 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 2011.
In 2011 the operating segment Insurance Latin America is not included in the segment reporting anymore as its activities classify mainly as discontinued operations. Reference is made to Note 25 ‘Discontinued operations’. Activities reported previously in the segment Insurance Latin America and that are not classified as discontinued operations are now reported in the Corporate Line Insurance. Comparative disclosures are adjusted accordingly.
Retail Netherlands Income from retail and private banking activities in the Netherlands. The main products offered are current and savings accounts, mortgages and other consumer lending in the Netherlands.
Retail Asia Income from retail banking activities in Asia. The main products offered are similar to those in the Netherlands. ING Direct Income from direct retail banking activities. The main products offered are savings accounts and mortgages. Commercial Banking (excluding Real Estate)
Income from wholesale banking activities. A full range of products is offered from cash management to corporate finance.
ING Real Estate Income from real estate activities. Insurance Benelux Income from life insurance, non-life insurance and retirement services in the Benelux. Insurance CRE Income from life insurance, non-life insurance and retirement services in Central and Rest of Europe. Insurance US * Income from life insurance and retirement services in the United States.
Insurance Asia/Pacific Income from life insurance and retirement services in Asia/Pacific. ING IM Income from investment management activities.
Underlying income – Gross premium income 27,198 27,198 – Net interest result – banking operations 13,562 –60 13,502
– Other interest expenses 1,047 –336 711 – Additions to loan loss provision 2,854 2,854
Reconciliation between Underlying and IFRS-EU income, expenses and net result 2009 Income Expenses Net result
d. Insurance activities With regard to insurance activities, ING Group analyses, as of 2011, the underlying result through a margin analysis, which includes the following components: • Operating result; and • Non-operating items.
Both are comprised of various sub-components. The total of operating result and non-operating items (gains/losses and impairments, revaluations and market & other impacts) equals underlying result before tax.
unlocking, VA/FIA Guaranteed Benefit Reserve Unlocking and DAC offset on gains/losses on debt securities.
Gains/losses and impairments –47 –404 –165 2 60 5 –1 –550
Market & other impacts –250 –36 –1,295 –18 52 –1,547 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
Insurance 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
Insurance US Closed Block VA 41,362 38,771 42,477 40,254 39,636 36,562
Treasury bills and other eligible bills included in trading assets 1,471 1,697 2,284 Treasury bills and other eligible bills included in available-for-sale investments 1,140 2,744 898
EQUITY Shareholders’ equity (parent) 33,643 17,189 Non-voting equity securities 5,000 10,000
Amortisation and unlocking –11 –1,789 –12 –1,812 Effect of unrealised revaluations in equity –1,140 –1,140 Transfer to VOBA Changes in the composition of the group –104 58 –231 –277 Exchange rate differences 17 –209 9 –183 Disposal of portfolios 1 1
Provision for non-participating life policy liabilities 69,789 68,489 4,798 4,822 74,587 73,311 Provision for participating life policy liabilities 50,102 55,266 200 217 50,302 55,483 Provision for (deferred) profit sharing and rebates 1,600 147 3 2 1,603 149 Life insurance provisions excluding provisions for risk of policyholders 121,491 123,902 5,001 5,041 126,492 128,943
Provision for life insurance for risk of policyholders 99,299 84,279 374 541 99,673 84,820
Claims incurred but not reported (IBNR) 493 1,345 5 498 1,345
Other insurance provisions Total provisions for insurance contracts 224,224 215,277 5,480 5,797 229,704 221,074
Receivables –61 –72 –5 –11 –149 Loans and advances to customers 560 136 –28 1 45 714 Unused tax losses carried forward –1,653 –951 7 82 7 –2,508
Further details on the Risk Governance and Risk Profile in the three entities, is given in the following sections.
Greece, Italy, Ireland, Portugal and Spain 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 fair value of sovereign debt decreased and those exposures were being monitored more closely. With regard to troubled European countries, ING’s main focus is on Greece, Italy, Ireland, Portugal and Spain as these countries have either applied for support from the European Financial Stability Facility (‘EFSF’) or receive support from the ECB via government bond purchases in the secondary market. Within these countries, ING’s main focus is on exposure to Government bonds and Unsecured Financial institutions’ bonds. Further details are included in Note 4 ‘Investments’.
Off balance (Undrawn committed facilities) 411 1,229 523 140 2,302 4,605
Italy Total Lending exposure is reported in the balance sheet at amortised cost. Cumulative provisions/impairments recognised on lending exposures amount to approximately EUR 113 million. Debt securities – RMBS and Other ABS are largely reported in the balance sheet at amortised cost. Other debt securities are reported in the balance sheet at fair value (available-for-sale). No significant provisions/impairments have been recognised. ING Bank does not have a bank operation in Greece but does serve a limited number of mostly international companies which have their domicile in Greece. Many of these companies are dependant on cash flows that are based outside Greece. ING Insurance Eurasia has direct Greek exposure given the presence of the Greek based insurance entity.
ING Insurance does not have material derivatives exposures in these countries.
ING BANK To ensure measured risk-taking throughout the organisation, ING Bank 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 Bank’s financial strength is safeguarded.
ING Bank uses risk assessment and measurement to guide decision making. As a result, the quality of risk models is important. The governance process for approval of risk models, methods and parameters ensures compliance with business and regulatory requirements, via a clear assignment of responsibility and accountability.
• The Supervisory Board is responsible for supervising the policy of the Management Board Bank, the general course of affairs of the Company and its business (including its financial policies and corporate structure). For the risk management purposes the Supervisory Board is assisted by two sub-committees: – The Audit Committee, which assists the Supervisory Board in reviewing and assessing ING Bank’s major risk exposures and the operation of internal risk management and control systems, as well as policies and procedures regarding compliance with applicable laws and regulations; and
The Chief Risk Officer (CRO) ensures that the boards are well informed and understand ING Bank’s risk position at all times. Every quarter, the CRO reports to the board committees on ING Bank’s risk appetite levels and on ING Bank’s risk profile. In addition the CRO briefs the board committees on developments in internal and external risk related issues and ensures the board committees understand specific risk concepts.
ING BANK RISK PROFILE ING Bank uses risk assessment and risk measurement to guide decision making. As a result, the quality of risk models is important. The governance process for approval of risk models, methods and parameters ensures business and regulatory requirements, via a clear assignment of responsibility and accountability.
Risk types ING Bank 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 Bank’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 Bank or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions; • Operational risk 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; • Compliance risk: is the risk of impairment of ING Bank’s integrity as a result of failure (or perceived failure) to comply with relevant laws, regulations, ING Bank policies and standards as in ING Bank Business Principles; and • Business risk: the exposure to value loss due to fluctuations in volumes, margins and costs, as well as client behaviour risk. These fluctuations can occur because of internal, industry, or wider market factors. It is the risk inherent to strategy decisions and internal efficiency, and as such strategic risk is included in business risk.
Due to the way the risk departments are organised, these metrics are presented at a higher aggregation level than the identified segments in Note 51 ‘Operating Segments’: • Retail Banking Benelux contains Retail Netherlands, Retail Belgium (including Retail Luxemburg); • Retail Banking Direct & International contains Retail Central Europe, Retail Asia and ING Direct; • Commercial Banking corresponds to Commercial Banking (including ING Real Estate); and • Bank Corporate Line coincides with the Corporate Line.
Economic Capital is defined as the amount of capital that a transaction or business unit requires in order to support the economic risks it takes. In general EC is measured as the unexpected loss above the expected loss at a given confidence level. This Economic Capital definition is in line with the net market value (or surplus) definition. The process of EC modelling enables ING Bank to allocate Economic Capital to the business units and support risk-adjusted performance measurement (RAROC). The use of RAROC increases focus on risks versus rewards in the decision making process, and consequently stimulates the use of scarce capital in the most efficient way.
The following fundamental principles and definitions have been established for the model: • ING Bank uses a one-sided confidence level of 99.95% – consistent with ING’s target debt rating (AA) – and a one-year time horizon to calculate EC; • It is assumed that all currently known measurable sources of risk are included; • The best estimate risk assumptions are as objective as possible and based on proper analysis of statistical data. There is one set of best-estimate assumptions for each risk type to be used at ING Bank; • The EC calculation is based on fair value principles. Where complete and efficient markets exist, fair value is equal to market value; • The EC calculations reflect known embedded options and the influence of client behaviour in banking products; • The EC calculations are on a pre-tax basis and do not consider the effect of regulatory accounting and solvency requirements on capital levels; and • The framework does not include any franchise value of the business, discretionary management intervention or future business volumes and margins.
Differences between RC and EC are mainly due to: • The credit risk EC is lower than RC. Economic Capital (EC) is defined as ING’s own methodology for credit risk. It is the amount of capital that is needed at a minimum to cover for Unexpected Losses within a certain confidence level and a certain time horizon; • The market risk Economic Capital is higher than the Regulatory Capital primarily due to the inclusion of the interest rate risk banking books in Economic Capital. The market risk RC includes a stressed VaR charge, while EC does not; the EC figures take the diversification across risk types into account; • The EC figures include Business risk, while RC does not ; and • A 99.95% confidence level is used for EC, while the confidence level is 99.9% for RC. Correcting for the difference in confidence level will lead to an EC figure that is lower than the RC figure.
Governance Credit Risk Management (CRM) is responsible for the measurement and management of credit risk incurred by all ING Bank entities, including country-related risks. CRM is organised along the business lines of ING Bank. The CRM General Manager is functionally responsible for the global network of credit risk staff, and the heads of the credit risk management functions for the business lines report directly to him.
ING Bank’s credit policy is to maintain an internationally diversified loan and bond portfolio, while avoiding large risk concentrations. The emphasis is on managing business developments within the business lines by means of top-down concentration limits for countries, individual borrowers and borrower groups. The aim within the banking sector is to expand relationship-banking activities, while maintaining stringent internal risk/return guidelines and controls.
For the banking operations, ING Bank uses various market pricing and measurement techniques to determine the amount of credit risk on pre-settlement activities. These techniques estimate ING Bank’s potential future exposure on individual and portfolios of trades. Master agreements and collateral agreements are frequently entered into to reduce these credit risks.
Investment risk Investment risk is the credit default and risk rating migration risk that is associated with ING Bank’s investments in bonds, commercial paper, securitisations, and other similar publicly traded securities. Investment risk arises when ING Bank purchases a (synthetic) bond with the intent to hold the bond for a longer period of time (generally through maturity). Bonds that are purchased with the intent to re-sell in a short period of time are considered to be trading risks, which are measured and monitored by the Market Risk Management department. For credit risk purposes, Investment risk is measured at original cost (purchase price) less any prepayments or amortisations and excluding any accrued and unpaid interest or the effects of any impairment.
ING Bank Credit Risk Profile ING Bank’s credit exposure is mainly related to traditional lending to individuals and businesses followed by investments in bonds and other securitised assets. Loans to individuals are mainly mortgage loans secured by residential property. Loans (including guarantees issued) to businesses are often collateralised, but can be unsecured based on internal analysis of the borrowers’ creditworthiness. Bonds in the investment portfolio are generally unsecured. Securitised assets such as Mortgage Backed Securities and Asset Backed Securities are secured by the pro rata portion of the underlying diversified pool of assets (commercial or residential mortgages, car loans and/or other assets) held by the security’s issuer. The last major credit risk source involves pre-settlement exposures which arise from trading activities, including derivatives, repurchase transactions and securities lending/borrowing and foreign exchange transactions.
Risk classes ING Bank portfolio, as % of total outstandings (1)
Risk classes ING Bank portfolio per credit risk type, as % of total outstandings (1)
In line with ING Bank’s de-risking strategy, the portfolio developments in most countries mirrored the developments in the portfolio as a whole. The depreciated Euro versus the Australian, Canadian and the US dollar had an upward effect of the exposure to the Americas and Asia/Pacific and therewith also to the Retail Banking Direct and International and Commercial Banking portfolios. Excluding ING Direct USA, Retail Banking Direct and International showed a marginal increase, mainly as the result of currency effects.
Credit Covers At ING Bank, cover is a term which is defined as any security, lien, mortgage, or collateral interest in an asset or guarantee, indemnification or undertaking received (either by contract and/or by law) that is intended to reduce the losses incurred subsequent to an event of default on an obligation (usually financial in nature) a customer may have towards ING Bank. Within ING Bank, covers are subdivided into two distinct groups, called collateral and promises. Reference is made to credit risk management classification as included in the accounting policies for the consolidated annual accounts for a reconciliation between credit risk outstandings categories and financial assets.
The following tables show the credit risk outstandings and cover values per line of business: Retail Banking (comprising both Benelux, Direct & International) and Commercial Banking. Outstandings for Retail Banking are reported for the most relevant retail product being Residential Mortgages while the remaining outstandings are classified as Other Lending.
Impaired loans and provisions The credit portfolio is under constant review. Generally, all loans with past due financial obligations of more than 90 days are automatically reclassified as impaired. For the wholesale lending portfolios and securities obligations, there are generally reasons for declaring a loan impaired prior to being 90 days past due. These include, but are not limited to, ING Bank’s assessment of the customer’s perceived inability to meet its financial obligations, or the customer filing for bankruptcy or bankruptcy protection. In some cases, a material breach of financial covenants will also trigger a reclassification of a loan to the impaired category. ING Bank identifies as impaired loans those loans for which it is probable, based on current information and events that the principal and interest amounts contractually due will not be collected in accordance with the contractual terms of the loan agreements.
Changes in the composition of the group –3 –3 Write-offs –373 –337 –494 –454 –437 –375 –1,304 –1,166
Credit Covers Problem Assets The table hereunder shows the cover values per credit risk category classified based on Retail and Commercial Banking products. In the ING Bank master scale which ranges from 1 being the best rating to 22 being the worst rating, Problem Assets are the Assets with ratings in the range 18–22. All other are called Performing Assets and are shown in the tables above.
The market risk Economic Capital is higher than the Regulatory Capital primarily due to the inclusion of the interest rate risk banking books in Economic Capital. The market risk Regulatory Capital includes a stressed VaR charge, while Economic Capital does not. The main drivers for the increase in market risk Economic Capital are methodology updates. The increase in market risk Regulatory Capital is due to the new market risk framework Basel 2.5 containing an additional capital charge for Stressed VaR and Incremental Risk.
Limitations VaR as a risk measure has some limitations. VaR uses historical data to forecast future price behaviour. Future price behaviour could differ substantially from past behaviour. Moreover, the use of a one-day holding period (or ten days for regulatory capital calculations) assumes that all positions in the portfolio can be liquidated or hedged in one day. In periods of illiquidity or market events, this assumption may not hold true. Also, the use of 99% confidence level means that VaR does not take into account any losses that occur beyond this confidence level. Parts of these limitations are mitigated by the Basel 2.5 regulation (Stressed VaR and Incremental Risk Charges).
Risk Profile The following chart shows the development of the overnight VaR under a 99% confidence interval and a 1-day horizon. The overnight VaR is presented for the ING Commercial Banking trading portfolio for 2010 and 2011. Several banking books are internally governed by the trading risk process and are therefore excluded from the non-trading risk table and included in the below trading risk graph and table.
The VaR figures in the table above relate to all books under trading governance. In general, the level of the trading VaR was lower in the first half of 2011, continuing the decreasing trend of 2010. Halfway the year, VaR levels increased due to increased market volatility. The equity VaR increased due to the integration of implied correlation and dividend risk, new risk measures added to the VaR framework. The average consolidated VaR over 2011 was lower than over 2010 (average VaR 2011: EUR 19 million and average VaR 2010: EUR 22 million).
Regulatory Capital According to the Dutch regulation, regulatory capital for trading portfolios can be calculated using the standardised approach or an internal model approach. ING Bank received approval from the DNB to use an internal Value-at-Risk (VAR) model to determine the regulatory capital for the market risk in most trading books of ING Bank. Market risk capital of CAD2 trading books is calculated according to the internal VaR model, where diversification is taken into account. On the other hand, market risk capital of CAD1 books is calculated using standardised fixed risk weights. In 2011, capital on all trading books is performed under the Internal Model Approach. Mismatches in FX risk from the banking books are incorporated under the Standardised Approach. Market risk regulatory capital is calculated under the new market risk framework Basel 2.5 containing a capital charge for Stressed VaR and Incremental Risk, as approved by DNB.
Capital Management is responsible for managing the investment of own funds (core capital), more information can be found in the Capital Management section. Capital is invested for longer periods, targeting to maximise return, while keeping it stable at the same time.
In the following sections, the interest rate risks in the banking books are presented. ING Bank uses risk measures based on both an earnings and a value perspective. Earnings Sensitivity (ES) is used to provide the earnings perspective and the Net Present Value (NPV)-atRisk and Basis Point Value (BPV) figures provide the value perspective. Several small banking books are governed by the trading risk process and are therefore excluded from the following banking book risk tables. These are included in the trading risk graph and table in the section ‘Market Risk in Trading Books’.
Earnings Sensitivity banking books (1% instantaneous upward shock to interest rates)
ING Bank 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 827 million (2010: EUR 1,494 million) and equity securities held in the available-for-sale (AFS) portfolio of EUR 2,466 million (2010: EUR 2,741 million). The value of equity securities held in the available-for-sale 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 2011 the revaluation reserve relating to equity securities held in the Available-for-Sale portfolio fluctuated between a month-end low amount of EUR 1,226 million (2010: EUR 1,723 million) and a high amount of EUR 1,706 million (2010: EUR 2,370 million). Investments in associates are measured in accordance with the equity method of accounting and the balance sheet value and therefore not directly linked to equity security prices.
Total capital requirement for equity price risk under the Simple Risk Weight Approach at 31 December 2011 results in EUR 207 million (2010: EUR 310 million).
In total, Real Estate exposure decreased by EUR 1.1 billion mainly as a result of divestments in REIM (EUR –0.7 billion) and Real Estate Development (EUR –0.2 billion).
ING Bank’s real estate exposure not revaluing through P&L has not been affected much. This is because divestments and impairments in Real Estate Development (EUR –450 million) were compensated by the inclusion of assets in the REIM portfolio previously revalued through P&L.
• Maintaining a funds transfer pricing mechanism in which ING Bank’s cost of liquidity is adequately reflected both under a going concern and a contingency perspective.
Tactical liquidity risk Liquidity risk which is resulting from short-term cash and collateral positions is managed in the risk framework from a tactical liquidity risk perspective. The day-to-day management of the overall short-term liquidity risk of ING Bank is delegated to Financial Markets Amsterdam, while regional and local Financial Markets departments manage liquidity in their respective regions and locations. Within Financial Markets, the focus is on the daily and intraday cash and collateral positions and the policy is to manage and sufficiently spread day-to-day funding requirements.
Contingency liquidity risk Contingency liquidity risk specifically relates to the organisation and planning for liquidity management in time of stress. Within ING Bank, for contingency purposes, a specific crisis team – consisting of key Board Members, representatives from Staff 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.
The ORM function consists of functional departments for Operational risks (including policies, systems, SOX testing, capital allocation and reporting), for Information (Technology) risks and for Security & Investigations.
The operational risk appetite within ING Bank is defined as the acceptable and authorised maximum level of risk, in each of the operational risk areas that must be adhered to in order for ING Bank to achieve its business plan within approved budgets. This risk appetite is quarterly monitored through the Non-Financial Risk Dashboard which reports the key non-financial risk exposures.
Main developments in 2011 The AMA (Advance Measurement Approach) 2.0 program will elevate operational risk management to best practice levels by 2012. The AMA 2.0 program will enable the business to influence its capital charge through sound Operational Risk management: • Business managers as the clear owners of their operational risks and their capital charge; • More accurate and relevant risk data and insights available for operational risk management; • Capital model more reflective of ING Bank risk profile to incentivise business to keep operational risks under control; • More weighting to internal data sources in the capital model, which includes a set of business driven scenarios, risk assessments, audit data and internal loss information; and • Major business decisions supported by accurate capital numbers that align to the Non-Financial Risk Dashboard (NFRD).
ING Bank believes that fully embedded Compliance Risk Management Controls preserves and enhances the trust of its customers, staff and shareholders. Being trusted is essential to building sustainable businesses. ING Bank’s Business Principles set the foundation for the high ethical standards ING Bank expects of all our business activities. ING Bank’s Business Principles require all staff at every level to conduct themselves, not only in compliance with laws and regulations, but also by acting with integrity, being open and clear, respectful, and responsible.
ING Bank separates Compliance Risk into four conduct-related integrity risk areas: client conduct, personal conduct, organisational conduct as well as financial conduct. ING Bank 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.
Compliance Risk Management Framework The Framework consists of three key components: 1. The Compliance Risk Management process The process has five key activities carried out in accordance with the requirements of the Framework: A. Identification of Compliance Risk Obligations; B. Risk Assessment; C. Compliance Risk Mitigation (includes Training and Education); D. Compliance Risk Monitoring (includes Action Tracking); and E. Compliance Risk Reporting (includes Internal Events Reporting and Response).
• Gifts, Entertainment and Anti-Bribery Policy – ING Bank issued a revised Gifts, Entertainment and Anti-Bribery Policy to align with the changing regulatory landscape in respect of anti-bribery which provides for severe penalties in case of bribery offences and with new extra-territorial anti-bribery legislation, such as the UK Bribery Act.
The Management Board Insurance Eurasia consists of 6 members, including the members of the ING Group Executive Board, and is responsible for managing risks associated with the insurance activities in Europe and Asia. The Board ING America Holdings consists of 7 members, including the members of the ING Group Executive Board, and is responsible for managing risks associated with the insurance activities in the United States (ING Insurance US). Risks associated with certain ING Insurance activities that will not be disposed of through the divestments of the Latin American, Asian, European and US business (“Insurance Investments”) are directly managed by the Executive Board.
capital adequacy framework. Solvency II is intended to be based on economic, risk-based and market-consistent principles whereby capital requirements across Europe are directly dependent on an insurer’s assets and liabilities. However, some of the proposed measures currently under discussion are considered unduly conservative and deviate from economic principles. It is therefore very important that the Solvency II framework, as originally envisaged, will become market-based, avoids pro-cyclicality and should be able to withstand market volatility. The EU politicians and regulators drafting the framework should therefore ensure that the measures to be implemented are robust enough throughout the cycle. ING Insurance Eurasia is working actively with its colleagues in the insurance industry to advise EU politicians and regulators come up with concrete proposals that further these objectives.
• The Dodd-Frank Act, its implementing regulations and other financial regulatory reform initiatives could have adverse consequences for the financial services industry, including ING Insurance US and/or materially affect the results of operations, financial condition and liquidity. The 2010 Dodd-Frank Act directs existing and newly-created government agencies and bodies to conduct certain studies and promulgate a multitude of 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 rule-making process has begun, there continues to be significant uncertainty regarding the results of ongoing studies and the ultimate requirements of those regulations that have not yet been adopted. Until final regulations are promulgated pursuant to the Dodd-Frank Act, the full impact of the Dodd-Frank Act on the businesses, products, results of operation and financial condition will remain unclear.
• State insurance regulators and the National Association of Insurance Commissioners (NAIC) regularly re-examine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, are often made for the benefit of the consumer at the expense of the insurer and could have a material adverse effect on the financial condition and results of operations. The NAIC continues to work on comprehensive reforms related to life insurance reserves and the accounting for such reserves, although the timing and extent of further changes to statutory reserves and reporting requirements are uncertain.
The Supervisory Board is responsible for supervising the policy of the MBI Eurasia and the general course of affairs of the company and its businesses. For Risk Management purposes the Supervisory Board is assisted by two sub-committees: • The Audit Committee assists the Supervisory Board in supervising and advising the MBI Eurasia with respect to the structure and operation of internal risk management and control systems, as well as compliance with legislation and regulations applicable to ING Insurance Eurasia and its subsidiaries; • The Risk Committee assists the Supervisory Board in supervising and advising the MBI Eurasia with respect to ING Eurasia’s strategy and its risk policies, including the risks inherent in its business activities.
Model disclosure ING quantifies the impact of the following types of risk in its EC model: • Market risk – Assets and Liabilities are replicated by the business units using a finite set of standard financial instruments. The set of standard instruments consists of zero coupon bonds, market indices, equity forwards, swaptions, callable bonds, FX options and equity options. Each unit is provided with 300 risk neutral and 200 risk volatile scenarios which are created for multiple equity indices and exchange rates, consistent with a multi-currency dynamic term structure model. The 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. Local actuarial software uses these 500 scenarios to derive stochastic cash flows. Based on this a replicating portfolio is derived. The quality of the replication is monitored by several statistical criteria, including R-squared, and benchmarked against market value sensitivities such as duration, convexity and changes in value for larger interest rate and equity shocks. By including equity options, FX options and swaptions in the replicating instruments ING Insurance Eurasia is able to incorporate implied volatility risk in the considered risk types. Credit spread risk is captured through credit-risk-bearing zero coupon bonds in the set of replicating instruments; • Credit default risk capital – Calculated on all portfolios which contain credit or transfer risk, including investment portfolios. The EC is calculated based on the following seven drivers: Probability of Default (measure of the standalone creditworthiness of individual debtors), Exposure at Default (estimated size of the financial obligation at the moment of default in the future), Loss Given Default (estimated recovery value of the underlying collateral or guarantees received (if any) and the unsecured part), Industry of the debtor, Country of the debtor, Remaining tenor of the underlying transactions and Type of Assets; • Insurance Risk – Calculated by the business unit for all sub-risks for Life, Morbidity and P&C Risk; 254 ING Group Annual Report 2011
Risk profile The following table presents the reconciliation from the EC 2010 for Insurance excluding US as reported in the Annual Report 2010, to the comparable basis for ING Insurance Eurasia 2011. This reflects the changes in scope and methodology. For the remainder of the risk management paragraph of ING Insurance Eurasia, the EC on a comparable basis to 2011 is used.
Equity Impact of changes in equity prices which impacts direct equity exposure and loss of fee income from unit linked, Variable Annuity (VA), pension and fund business.
in implied volatilities – For Equity measured by the impact of a relative increase in implied volatilities based on tenor: 80% for tenors less than 1 year, up 30% for tenors between 1and 3 years, up 20% for tenors between 3–7 years and up 10% for tenors of 7 years and above.
NOTE: this impact was not disclosed in 2010 for IFRS earnings as it was considered to be immaterial
IFRS Earnings, AFR & EC: Embedded options in: – traditional Life products in Korea – guaranteed separate account pension business in the Netherlands – VA business in Japan
In order to avoid double counting Credit Default Risk is only captured for IFRS earnings, while Credit Spread Risk is only measured for AFR. The only exception is impaired assets for which Credit Spread risk is measured for IFRS earnings.
AFR & EC: Debt securities in all regions. Liquidity premium offset primarily in the Benelux
Within ING Insurance Eurasia, the goal is to maintain a low-risk, well diversified credit portfolio that meets or exceeds market based benchmark returns. ING Insurance Eurasia has a policy of maintaining a high quality investment grade portfolio while avoiding large risk concentrations. The emphasis is on managing business developments within the business lines by means of top-down concentration limits for individual borrowers and certain asset classes.
Model disclosure The table below shows the main risk categories for credit risk within ING Insurance Eurasia. EC numbers are based on a 99.5% confidence interval on a one-year horizon. IFRS and AFR sensitivities measurement is described in the table below.
Credit Default Impact of a default of counterparties on IFRS earnings
Natural Resources 1.6% 1.5% Food, Beverages & Personal Care 1.0% 1.0%
Largest economic exposures: ING Insurance Eurasia portfolio, by geographic area (1)
The decrease in Rest of Europe is mainly due to decreased exposure to Central Governments of Southern European countries.
Government Lending 280 Other 88 262 ING Group Annual Report 2011
In comparison to 2010 figures, the overall cover amount remained largely unchanged. The increase in cash collateral is due to the data quality improvements with regards to reinsurance exposures and bond repo positions in the Hong Kong life business. For residential mortgage lending, the total loan amount decreased nearly 4%, while the total cover amount for residential mortgages decreased approximately by 2%. The decrease was most notable in the category ‘other cover’ (which comprises of insurance policies received and pledged securities), mainly due to a decrease in the number of covers and the average cover value. The guaranteed value of the Dutch National Mortgage Guarantee scheme (NHG) is estimated to be EUR 1.6 billion. The estimated value of the guarantee can differ depending on the number and amount of rejected NHG claims under the scheme (rejection of claims can occur in case the lending institution does not fully comply with the NHG rules).
Problem loans At 31 December 2011 EUR 65 million was classified as a problem loan (2010: EUR 73 million).
Increase/(decrease) in loan loss provision 19.7 21.6 Exchange differences –0.2 0.2 Other changes 0.5 0.0 Closing balance 83.2 73.0
• BL ALCO Provided oversight on all financial risk related issues for ING Insurance US. Advised management on risk limits and appetites, approved investment mandates, oversaw assumption setting. Implemented and monitored ING Group risk policies ensuring consistency across business units.
In the last quarter of 2011, ING Insurance US transitioned to an expanded risk governance structure as described below.
Executive Level As noted above, during 2011 ING Insurance US transitioned from a financial risk committee called “Business Line Insurance US & BL US Closed Block Variable Annuity Asset Liability Committee” and a non-financial risk committee called “Operational Risk Committee” to the expanded structure described below.
– Model Committee Oversees all model and model validation risk issues across ING Insurance US. Responsible for preparation/pre-approval of model risk items and oversight on model validation.
Risk Management Function The Chief Risk Officer bears primary and overall responsibility for the risk management function within ING Insurance US, which identifies, measures, monitors and reports risk within ING Insurance US. The risk function maintains and updates the policy framework, develops and maintains risk methodologies and advises on the risk tolerance and risk profile. The CRO makes sure both the Supervisory Board and MB AIH are well informed and understand ING Insurance US’s risk position at all times.
Product Approval and Review Process A critical aspect of risk management is that all new products are designed, underwritten and priced appropriately. Within ING Insurance US this is safeguarded by the Product Approval and Review Process (PARP). This standard includes requirements to risk profile, traditional and value-oriented pricing metrics, targets and documentation. The PARP includes requirements to assess market risks, insurance risk, compliance risk, legal risk, credit risk, operational risk as well as assessment of the administration and accounting aspects of the product. Customer suitability is integral part of the PARP requirements.
Reserve adequacy US ERM instructs and supervises all ING Insurance US entities to ensure that the total insurance liabilities of ING Insurance US 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 of the best-estimate scenario.
Model governance During 2011 new models with regard to the disclosed metrics were approved by the Insurance Model Committee at the ING Group level. Under the new governance structure this will be the responsibility of the ING Insurance US Model Committee.
Financial Risks For financial risks, the risk tolerance is translated to risk limits on several sensitivities assuming a moderate stress scenario. • US Regulatory Capital Requirements sensitivities
Other than this, several other limit structures are put in place on corporate and business unit level. Examples include but are not limited to the following: • Issuer concentration limits • Mortality concentration limits • Catastrophe and mortality exposure retention • Minimum liquidity requirements • Investment and derivatives guidelines and limits
Non-Financial Risks To ensure robust non-financial risk management, which also reflects the risk tolerance levels, ING Insurance US monitors the full implementation of ING Insurance US’s risk policies, minimum standards and implementation guidelines. Business units have to demonstrate that the appropriate steps have been taken to control their operational and compliance risk. ING Insurance US applies scorecards to measure the quality of the internal control within a business unit. Scoring is based on the ability to demonstrate that the required risk management processes are in place and effective within the business units.
Non-Financial Risk Dashboard The Non-Financial Risk Dashboard (NFRD) is a quarterly report that is a quarterly report that is discussed at the meetings of the Supervisory Board, AIH Executive Committee and ING Insurance US management bodies. The NFRD provides management at all organisational levels with information on their key operational, compliance and legal risks. The NFRD is based on defined risk tolerance and a clear description of the risks and responses enabling management to prioritise and to manage operational, compliance and legal risks.
RISK TYPE DESCRIPTION ING Insurance US measures the following main types of risks that are associated with its business risk: • Insurance risk – risks such as mortality and morbidity 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. • 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.
• Credit risk – the risk of potential loss due to default by ING Insurance US debtors (including bond issuers) or trading counterparties. • Business risk – the exposure to value loss due to fluctuations in volumes, margins and costs, as well as client behaviour risk. These fluctuations can occur because of internal, industry, or wider market factors. It is the risk inherent to strategy decisions and internal efficiency, and as such strategic risk is included in business risk.
INSURANCE RISK Insurance risks are comprised of actuarial and underwriting risks such as mortality, longevity, morbidity etc. which result from the pricing and acceptance of insurance contracts.
Mortality Within mortality risk there are two main parts: – Positive mortality risk exists when more insureds dying than expected, leading to higher claims than expected. – Negative mortality risk exists when insureds live longer than expected, leading to higher claims than expected (moderate shocks are not material to the P&L).
The largest earnings sensitivity to positive mortality risk arises in the Retail Life insurance business.
– Impact of losses on assets and liabilities due to movements in the volatility implied from market option prices.
– For interest rate – measured by the impact of a relative increase of 30% in implied swaption volatilities
Embedded guarantees in business and derivatives used to hedge equity exposures
–25% –15% –5% +15% +15% +25% Earnings sensitivity before RAT Policy Impact 750 500 100 –250 –600 –900 RAT Policy Impact (RAT50) –950 –600 –200 0 0 0 Total estimated Post Refinement Earnings Sensitivity –200 –100 –100 –250 –600 –900
Mitigation ING Insurance 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.
Real Estate ING Insurance US has a small exposure to direct real estate, which is composed primarily of Home Office real estate and real estate from foreclosed loans.
Lending Risk – Risk related to certain illiquid investments made by ING Insurance US – Measured at original cost (purchase price) less any prepayments or amortisations and excluding any accrued and unpaid interest or the effects of any impairment.
Privately placed bonds and commercial mortgage loans in the United States.
placements issued by Western European corporations account for the majority of the non-US exposure. The decrease in exposures to the Netherlands is partially related to a reduction in the exposure to the Dutch state.
ING Insurance US defines two 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 various expected and adverse business conditions, which might result in the inability of realising 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 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
liquidity problems in distressed markets. Liquidity risk is measured through several metrics including ratios and cash flow scenario analysis, in a base case and under several stressed scenarios.
ING INSURANCE US COMPLIANCE RISK The ING Insurance 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.
• Technology Enhancements: ING Insurance US Compliance enhanced technology and tools to improve compliance risk management in the areas of anti-money laundering, position reporting and personal trading.
• Enterprise Functions: ING Insurance US Compliance enhanced its organisation by implementing greater focus on consistent enterprise-wide compliance processes and dedicated teams to support critical functions across all business lines, including advertising review, customer complaint resolution, branch office compliance inspections and compliance training. Compliance also integrated its team and processes supporting all of the ING Insurance US wholesale broker-dealers in the Retirement, Insurance and Annuity Manufacturing business lines to provide more effective and consistent controls.
INSURANCE INVESTMENTS The Insurance Investments business consists of certain parts of ING Insurance that will not be part of the divestment of the Latin American, Eurasian and US business. In the course of the divestment process of these businesses the composition of the Insurance Investments portfolio may change. Furthermore, at some stage parts of the Insurance Investments portfolio itself may be divested or closed down. In some cases this can take many years. Currently the most important parts of this portfolio are: • Financing activities of ING Insurance and some of it’s sub holdings; • Certain activities related to prior divestments, such as legal claims in Mexico and the ownership of a Mexican mortgage company; • ING’s stake in the Brazilian SulAmerica joint venture; • The run-off of former non-life and reinsurance activities.
OBJECTIVES ING Group Capital Management (Capital Management) is responsible for the sufficient capitalisation of ING Group entities at all times in order to manage the risk associated with ING’s business activities. This involves the management, planning and allocation of capital within ING Group. ING’s Corporate Treasury is part of Capital Management. It executes the necessary capital market transactions, term (capital) funding and risk management transactions. Capital Management monitors and plans capital adequacy on a consolidated basis at three levels: ING Group, ING Insurance and ING Bank. Capital Management takes into account the metrics and requirements of regulators (Insurance Group Directive (IGD) Solvency I, Tier 1 and BIS ratios and limits for hybrid capital), rating agencies (leverage ratios, Adjusted Equity) and internal models such as the economic capital and market value balance sheet approach for parts of ING Insurance including Available Financial Resources (AFR).
Other qualifying capital (8) 8,502 9,813 Insurance Group Directive adjustments (9) –2,792 –1,244 Group leverage (core debt) –7,917 –8,462 Total capital (Adjusted Equity for Group, BIS capital for Bank and IGD capital for Insurance) 54,369 54,475 47,124 49,145 21,406 20,335
Shareholders’ equity (parent) 23,475 20,159 Hybrids issued by ING Group (2) 2,604 2,094 Hybrids issued by ING Insurance (3) 1,726 2,207 Required regulatory adjustments –6,399 –4,125
(2) Hybrids issued by ING Group at notional value. (3) Hybrids issued by ING Insurance at notional value capped at 25% of EU required capital. (4) In the fourth quarter 2011, ING reviewed the calculation of the IGD ratio to ensure consistent application throughout the Group. As a consequence, several changes have been made, mainly related to (i) certain provisions which are internally reinsured and for which required capitals were netted out in the past and (ii) changes in the allocation of policyholder liabilities to the relevant capital requirement categories. The reported IGD Solvency I ratio in 2010 of 250% has been adjusted for this change into 230%.
IGD Capital 21,406 20,335 Hybrids issued by ING Group –2,604 –2,094 Hybrids issued by ING Insurance –1,726 –2,207 Revaluation reserve debt securities –4,379 –1,164 Revaluation reserve crediting to life policyholders 3,493 1,488 Required regulatory adjustments 2,791 1,244 Capital base 18,981 17,602
As reported for ING Insurance excluding US in 2010 19.7 10.4 Excluding non-ING Insurance Eurasia AFR and EC 1.4 –2.0 ING Insurance Eurasia 2010, before changes 21.1 8.4 Change pension funds fee business to statutory basis –1.5 –0.1 Change in models and methodology –1.0 3.0 ING Insurance Eurasia 2010, on a basis comparable to 2011 18.6 11.3
For the capital adequacy assessment of ING Insurance’s US domiciled regulated insurance business, available capital is measured under US statutory accounting principles and required capital is measured under the US regulatory Risk Based Capital (RBC) methodology as prescribed by the National Association of Insurance Commissioners (NAIC). For ING’s US domiciled regulated insurance business, the consolidated RBC ratio (available capital/required capital) is estimated to be approximately 488% for the period ended 31 December 2011. The actual US consolidated RBC ratio may be different from the estimate since the statutory results are not final until filed with the regulators. For ING Insurance’s US domiciled regulated insurance business, the RBC ratio was 426% at the end of 2010.
BIS capital 47,123 49,145 IGD capital 21,406 20,336 Group leverage (core debt) –7,917 –8,462 Regulatory capital 60,612 61,019
Insurance Groups Directive Year-end actual Capital coverage ratio 225% 230% Required capital 100% 100% Target ratio 150% 150%
Result of group companies after taxation 5,337 3,004 Other results after taxation 429 –194 Net result 5,766 2,810
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
ING Bank N.V. 34,345 34,451 ING Verzekeringen N.V. 20,134 ING Insurance Topholding N.V. 23,465
ING Insurance Topholding N.V. was incorporated on 29 March 2011. ING Group transferred ownership of ING Verzekeringen N.V. to ING Insurance Topholding N.V. on 29 December 2011.
Changes in ING Groep N.V. shares held by group companies –4 –10 Closing balance 57,949 54,594 2 OTHER ASSETS
As at 31 December 2011, the Share of associates reserve included an amount of EUR 836 million (2010: EUR 741 million) related to the former Stichting Regio Bank and the former Stichting Vakbondsspaarbank SPN that cannot be freely distributed.
The total amount of non-distributable reserves is EUR 9,042 million (2010: EUR 7,552 million).
REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS Pursuant to the legal requirement under Section 2:393 sub 5 at e and f of the Dutch Civil Code, we have no deficiencies to report as a result of our examination whether the report of the Executive Board, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under Section 2:392 sub 1 at b-h has been annexed. Further we report that the report of the Executive Board, to the extent we can assess, is consistent with the annual accounts as required by Section 2:391 sub 4 of the Dutch Civil Code.
For 2011, the Executive Board, with the approval of the Supervisory Board, has determined to appropriate the entire result to reserves, so that no dividend will be paid.
Adverse capital and credit market conditions may impact our ability to access liquidity and capital, as well as the cost of credit and capital. The capital and credit markets have been experiencing extreme volatility and disruption since the second half of 2008. In some cases, market developments have resulted in restrictions on the availability of liquidity and credit capacity for certain issuers.
In the course of 2008 and 2009, governments around the world, including the Dutch government, implemented unprecedented measures to provide assistance to financial institutions, in certain cases requiring (indirect) influence on or changes to governance and remuneration practices. In certain cases governments nationalised companies or parts thereof. The measures adopted in the Netherlands include both liquidity provision and capital reinforcement, and a Dutch Credit Guarantee Scheme. The liquidity and capital reinforcement measures expired on 10 October 2009, and the Credit Guarantee Scheme of the Netherlands expired on 31 December 2010. Our participation in these measures has resulted in certain material restrictions on us, including those required by to with the European Commission (‘EC’) as part of our Restructuring Plan. See ‘Risks Related to the Restructuring Plan – Our agreements with the Dutch State impose certain restrictions regarding the issuance or repurchase of our shares and the compensation of certain senior management positions’, ‘Risks Related to the Restructuring Plan – 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’. The Restructuring Plan as well as any potential future transactions with the Dutch State or any other government, if any, or actions by such government regarding ING could adversely impact the position or rights of shareholders, bondholders, customers or creditors and our results, operations, solvency, liquidity and governance.
We are subject to the jurisdiction of a variety of banking and insurance regulatory bodies, some of which have proposed regulatory changes that, if implemented, would hinder our ability to manage our liquidity in a centralised manner. Furthermore, regulatory liquidity requirements in certain jurisdictions in which we operate are generally becoming more stringent, including those forming part of the ‘Basel III’ requirements discussed further below under ‘–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’, undermining our efforts to maintain this centralised management of our liquidity. These developments may cause trapped pools of liquidity, resulting in inefficiencies in the cost of managing our liquidity, and hinder our efforts to integrate our balance sheet, which is an essential element of our Restructuring Plan.
The frequency and severity of such events, and the losses associated with them, are inherently unpredictable and cannot always be adequately reserved for. Furthermore, we are subject to actuarial and underwriting risks such as, for instance, mortality, longevity, morbidity, and adverse claims development which result from the pricing and acceptance of insurance contracts. In accordance with industry practices, modelling of natural catastrophes is performed and risk mitigation measures are taken. In case claims occur, reserves are established based on estimates using actuarial projection techniques. The process of estimating is based on information available at the time the reserves are originally established and includes updates when more information becomes available. Although we continually review the adequacy of the established claim reserves, there can be no assurances that our actual claims experience will not exceed our estimated claim reserves. If actual claim amounts exceed the estimated claim reserves, our earnings may be reduced and our net results may be adversely affected.
The final text of the Level I Framework Directive includes rules regarding, among other things, own funds, capital requirements, investments and group supervision. Following adoption of this Level I Framework Directive, the European Commission and EIOPA (European Insurance and Occupational Pensions Authority), formerly CEIOPS, have initiated the development of detailed rules following the Lamfalussy process. Under this process, Directives related to financial institutions are developed on the basis of a four level approach intended to complement the principles of the Directive Level 2 measures will be issued by the European Commission (delegated acts and/ or implementing technical standards proposed by EIOPA) and Level 3 guidance will be issued by EIOPA.
• 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 authorize 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 US broker-dealers to increased risk of SEC enforcement actions and liability. The SEC staff released a study on this issue.
Board (‘FSB’), consisting of representatives of national financial authorities of the G20 nations. The G20 and the FSB have issued a series of papers and recommendations intended to produce significant changes in how financial companies, particularly companies that are members of large and complex financial groups, should be regulated. These proposals address such issues as financial group supervision, capital and solvency standards, systemic economic risk, corporate governance including executive compensation, and a host of related issues associated with responses to the financial crisis. The lawmakers and regulatory authorities in a number of jurisdictions in which the Group’s subsidiaries conduct business have already begun introducing legislative and regulatory changes consistent with G20 and FSB recommendations, including proposals governing consolidated regulation of insurance holdings companies by the Financial Services Agency in Japan, proposals governing executive compensation by the financial regulators in the Netherlands (DNB), Germany (BaFIN) and the United Kingdom (FSA).
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. 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 stabilize 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 recognize 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.
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, Canada 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 entrants in the markets that may have new operating models that are not burdened by potentially costly legacy operations. Increasing competition in these or any of our other markets may significantly impact our results if we are unable to match the products and services offered by our competitors. Over time, certain sectors of the financial services industry have become more concentrated, as institutions involved in a broad range of financial services have been acquired by or merged into other firms or have declared bankruptcy. These developments could result in our competitors gaining greater access to capital and liquidity, expanding their ranges of products and services, or gaining geographic diversity. We may experience pricing pressures as a result of these factors in the event that some of our competitors seek to increase market share by reducing prices. In addition, under the Restructuring Plan we were required to agree to certain restrictions imposed by the EC, including with respect to our price leadership in EU banking markets and our ability to make acquisitions of financial institutions and other businesses. See ‘Risks related to the Restructuring Plan — The limitations required by the EC on our ability to compete and to make acquisitions or call certain debt instruments could materially impact the Group’.