Notes to the Consolidated annual accounts of NN Group continued 146 NN Group Annual Report 2013
The calling or buy-back of Tier 2 capital and Tier 1 Hybrid Securities will continue to be proposed for authorisation to the European Commission on a case by case basis until ING has fully repaid the core Tier 1 securities to the Dutch State, but ultimately until 18 November 2014, whichever date comes first. Notwithstanding this restriction, ING was allowed to call the EUR 1.25 billion hybrid securities, originally issued by ING Verzekeringen N.V. on 21 December 2012.
The 2012 amended Restructuring Plan includes a repayment schedule for the remaining core Tier 1 securities to the Dutch State.
The amendments to the restructuring plan of 2013 were formally approved by the European Commission by decision of 5 November.
As a result, the total impact on Total equity was EUR 996 million.
Transfer of ING U.S. At 30 September 2013, the remaining interest in ING U.S. was transferred to ING Groep N.V. by way of dividend in kind of EUR 6,826 million. As of the date of transfer, ING U.S. ceased to be consolidated; the results for the period until transfer are presented as discontinued operations. Reference is made to Note 33 “Discontinued operations”.
As the transfer was performed at carrying value, the transaction did not impact Net result from continuing and discontinued operations. The transfer reduced Shareholder’s equity with EUR 6,826 million as the reserves relating to ING U.S. were released. Furthermore Minority interest of EUR 3,010 million relating to ING U.S. was also transferred The impact on Total equity is therefore EUR –9,836 million. Reference is made to Note 13 “Equity”.
Japan Life, representing COLI business, and the Japan Closed Block VA, are reported separately to reflect the distinct nature of these two Japanese businesses. Under NN Group’s existing accounting policies, the net insurance liability of any business line must be adequate at the 50% confidence level. The Japan Closed Block VA business had a reserve inadequacy at the 50% confidence level in October 2013. This inadequacy used to be offset by surplus adequacies in other businesses in the same business line that the Japan Closed Block VA business used to be part off, The separate reporting of the Japan Closed Block VA business line therefore triggered a charge of approximately EUR 575 million before tax to restore the reserve inadequacy. This charge resulted in a write-off of all deferred acquisition costs (DAC) related to the Japan Closed Block VA business of EUR 1,405 million partly compensated by a release of the Life insurance provision related to unearned revenues of EUR 867 million, and an increase in the life insurance provisions for the remaining amount.
NN Group Annual Report 2013 149 54 RECLASSIFIED BALANCE SHEET AND CASH FLOW STATEMENT In order to provide comparable information based on a comparable scope of entities, reclassified Consolidated balance sheets and reclassified Consolidated cash flow statements are presented for the years 2012 and 2011 in addition to the IFRS-EU statements. In these reclassified statements all businesses that have been divested or presented as held for sale as at 31 December 2013, are treated as held for sale in 2012 and 2011.
Net cash flow from operating activities –8,247 –448 –1,587 723 2,068 Net cash flow from investing activities 8,126 –806 1,548 –2,881 2,477 Net cash flow from financing activities 457 –4,088 3,055 –2,737 –1,558 Net cash flow from entities held for sale 501 1,870 Effect of foreign exchange rate changes 182 –19 25 35 –56 Closing cash and cash equivalents at the end of the period/year 55 SUBSEQUENT EVENTS Defined Benefits Pension Fund in The Netherlands In February 2014 ING reached an agreement with the trade unions, the ING Pension Fund, the Central Works Council and the Association of Retired ING Employees (VSI) to transfer all future funding and indexation obligations of ING’s current closed defined benefit plan in the Netherlands to the Dutch ING Pension Fund. The agreement has made the ING Pension Fund financially independent from ING.
 Risk management framework. NN Group’s risk management framework takes into account the relevant elements of risk management, including its integration into NN Group’s strategic planning cycle, the management information generated, and a granular risk assessment.
The CRO is primarily responsible for:  setting risk policies;  formulating NN Group’s risk management strategy and ensuring that it is implemented throughout NN Group;  monitoring compliance with NN Group’s overall risk policies;  supervising the operation of NN Group’s risk management and business control systems;  reporting of NN Group’s risks and the processes and internal business controls; and  making risk management decisions with regard to matters which may have an impact on the financial results of NN
NN Group’s approach to risk management is based on the following components:  Risk management structure and governance systems. NN Group’s risk management structure and governance systems follow the “three lines of defence” model, which outlines the decision-making, execution and oversight responsibilities for the implementation of NN Group’s risk management. These structure and governance systems are embedded in each of NN Group’s organisational layers, from the holding level to the individual business units.
 Risk management policies, standards and processes. NN Group has a comprehensive set of risk management policies, standards and processes, which are updated regularly to align with market leading practices, applicable laws and regulations, and to changes in NN Group’s business and risk profile. These risk management policies, standards and processes apply throughout NN Group and are used by NN Group to establish, define, and evaluate NN Group’s risk tolerance levels and risk control processes and to ensure that the tolerance levels and policies are communicated throughout the organisational structure.
ORGANISATIONAL RISK MANAGEMENT STRUCTURE MANAGEMENT BOARD AND ITS (SUB)COMMITTEES The Management Board is responsible for defining, installing, and monitoring the risk management organisation in order to ensure its control systems are effective. The Management Board or its subcommittees approve all risk management policies as well as the quantitative and qualitative elements of NN Group’s risk appetite. The Management Board reports and discusses these topics with the Risk Committee, which is a sub-committee of the Supervisory Board, on a quarterly basis.
Chief risk officer The chief risk officer of NN Group (the CRO) is a member of the Management Board. The CRO bears primary and overall responsibility for NN Group’s risk management. The CRO must ensure that both the Management Board and the Supervisory Board are at all times informed of, and understand, the material risks to which NN Group is exposed. Each business unit has its own chief risk officer, who reports (directly or indirectly) to the CRO.
Board with respect to NN Group’s risk management strategy and policies.  Audit Committee. The Audit Committee reviews and assesses the applicable accounting standards and the
Company’s compliance therewith, the going concern assumption, significant financial risk exposures, significant adjustments resulting from audit, compliance with statutory and legal requirements and regulations, tax and tax planning matters with a material impact on the financial statements, and detection of fraud and other illegal acts.
Group.  Third line of defence: corporate audit services (CAS). CAS provides an independent assessment of the standard of internal control with respect to NN Group’s business and support processes, including governance, risk management and internal controls.
RISK MANAGEMENT FRAMEWORK NN Group’s risk management framework comprises a series of sequential steps, through which NN Group seeks to identify, measure and manage the risks to which it is exposed. The diagram below sets out these steps.
 Risk assessment. NN Group, centrally at the executive level and at the business unit level, considers how events identified in the previous step might affect the achievement of NN Group’s strategic objectives. Key risks are assessed on a regular basis and, where appropriate, this analysis is supported by models (such as for NN Group’s economic capital calculation; see also “NN’s Risk Profile—Economic capital”). NN Group conducts regular top-down assessments of its key risks, both at the holding level and at the level of the individual business units.
 Monitoring. The effectiveness of NN Group’s risk management itself is also monitored. Regular monitoring ensures that risk management is maintained at all organisational levels of NN Group and is carried out by all three lines of defence.
RISK MANAGEMENT POLICIES, STANDARDS AND PROCESSES NN Group has a comprehensive set of risk management policies, standards and processes in place. These policies, standards and processes are regularly updated to align with industry practices and changes in NN Group’s business profile, and to comply with applicable laws and regulations. Key areas of risk management for which NN Group has established policies, standards and processes are set out below.
 ensure IFRS results before tax are sufficient following a 1 in 20 annual risk sensitivity; NN Group quantifies this risk using sensitivities on the IFRS results before tax.
 ALM. NN Group aims to match its asset portfolio to its liabilities with optimal strategic asset allocation and by limiting any mis-matches to an acceptable degree. The ALM process is integral in ensuring adequate liquidity for policyholder obligations.
 Managing investments. NN Group has an appetite for investments that will provide an appropriate risk and return for NN’s policyholders and shareholders.
IFRS RESERVE ADEQUACY TEST All of NN Group’s operating insurance entities need to ensure that their IFRS insurance reserves are tested for adequacy taking into account the insurance premium rate levels and the uncertainty of future returns on investments. The reserve adequacy test is executed by evaluating insurance liabilities on current best estimate actuarial assumptions plus a risk margin to ensure that the reserves remain adequate based on these assumptions. The assumed investment earnings are a combination of the run-off of portfolio yields on existing assets, anticipated new premiums and reinvestment rates in relation to maturing assets.
MODEL GOVERNANCE AND VALIDATION NN Group’s model governance and validation function seeks to ensure that NN Group’s models achieve their intended purpose. Models and their disclosed metrics are approved by the Model Committee. The findings of the model validation function are also reported regularly to the Model committee. This committee is responsible for modelling policies, processes, methodologies, and parameters which are applied within NN Group. Furthermore, the model validation function carries out validations of internal models related to Solvency II. To ensure independence from the business and other risk departments, the model validation department head reports directly to the CRO.
 Market and credit risk. Market risk is the risk of potential losses due to adverse movements in financial market variables. Counterparty default risk is the risk of potential losses due to default by NN Group’s debtors (including bond issuers), trading counterparties or mortgage holders. In relation to market and credit risk, NN Group distinguishes between its general account businesses and its separate account businesses. - General account businesses. The general account businesses are those in which NN Group bears the market and credit risk. NN Group’s earnings from the general account businesses depend not only on underwriting, but also on the performance of NN Group’s investment portfolio. The general account includes NN Group’s life insurance and non-life insurance businesses. Market and credit risks include (i) equity risk, (ii) real estate risk, (iii) interest rate risk, (iv) credit spread risk, (v) counterparty default risk and (vi) foreign exchange risk.
ECONOMIC CAPITAL Economic capital is NN Group’s internal measurement of the amount of capital required for the risks that NN Group is exposed to through its balance sheet, its business and its daily operations.
Economic capital by risk category 2013 2012 Insurance risk 1,697 1,918 Business risk 2,128 2,539 Market and credit risk: – General account 3,211 3,214 – Separate account 964 930 Diversification benefit between risk categories –2,505 –2,783 Total modelled risk insurance operations 5,495 5,818 Operational risk 531 566 Economic capital of other business; NN Bank, IIM units on local required capital levels and other non-modelled
Also, Japan Life and Japan Closed Block VA businesses were classified as discontinued operations until 4th quarter 2013 and therefore were not included in the scope of NN Group’s 2012 risk disclosures. The scope of the current disclosure includes the Japan Life and Japan Closed Block VA businesses, which were modelled using the internal model after diversification. The Asian held for sale insurance businesses for which transactions have been concluded during 2013 are included in the adjusted 2012 figures using 150% of the Solvency I requirements. The economic capital of other entities that are part of NN Group but were not reported in 2012 as part of ING Insurance Eurasia have been approximated with IFRS equity, as they were held for sale.
INSURANCE RISK Insurance risks are the risks related to the events insured by NN Group and comprise actuarial and underwriting risks such as mortality, longevity, morbidity, and non-life insurance risks, which result from the pricing and acceptance of insurance contracts.
NN Group’s morbidity risk lies in health insurance which pays out a fixed amount, reimburses losses (e.g. loss of income), or pays for expenses of medical treatment related to certain illness or disability events. The main exposures to morbidity risks within NN Group are the disability insurance policies underwritten in Netherlands Non-Life, the health and accidental death covers within the Corporate Owned Life Insurance business in Japan Life, and the healthcare insurance business in Greece.
Management of the insurance risks is done by ensuring that the terms and conditions of the insurance policies that NN Group underwrites are correctly aligned with the intended policyholder benefits to mitigate the risk that unintended benefits are covered. This is achieved through NN Group’s underwriting standards, product design requirements, and product approval and review processes.
Insurance risks are diversified between business units. Risk not mitigated by diversification is managed through concentration and exposure limits and through reinsurance:  tolerance limits for non-life insurance risks are set by line of business for catastrophic events and individual risk; for instance, every year Netherlands Non-Life and ING Re reinsure windstorm catastrophe risks. As windstorm risk diversifies well with other risks taken by NN Group, from 2014 NN Group has increased its tolerance level for this risk and decreased the re-insurance cover for windstorm catastrophe risk;  tolerance limits for life insurance risks are set per insured life and significant mortality events affecting multiple lives such as pandemics;  reinsurance is used to manage risk levels (such as morbidity reinsurance in the COLI business in Japan Life). Reinsurance creates credit risk which is managed in line with the reinsurance credit risk policy of NN Group, and;  NN Group participates in industry pools in various countries to mitigate the risk from terrorism.
Risk measurement The table below sets out NN Group’s economic capital for insurance risk as at 31 December 2013 and 2012, respectively.
Economic capital for insurance risk 2013 2012 Mortality (including longevity) 1,556 1,805 Morbidity 380 385 P&C 429 367 Diversification benefit –669 –639 Total 1,696 1,918
BUSINESS RISK Business risks are the risks related to the management and development of the insurance portfolio but excludes risks directly connected to insured events. Business risk includes policyholder behaviour risks and expense risks. Business risks can occur because of internal, industry, or wider market factors.
Expense risk Total administrative expenses for NN Group in 2013 amounted to EUR 1,842 million. Part of these expenses is variable, depending on the size of the business and sales volumes, and part are fixed and cannot immediately be adjusted to reflect changes in the size of the business. Expense risk relates primarily to the fixed part of NN Group’s expenses, and is the risk that actual per policy expenses in the future exceed the assumed per policy expenses. A significant portion of the fixed expenses is incurred in the closed block operations of Netherlands Life, where NN Group is exposed to the risk that the overheads relating to IT administration systems will remain constant, or even increase, while the number of policies in the in-force book gradually decreases, leading to a per policy expense increase.
A change in expense risk assumptions, though it would be reflected over time through IFRS result before tax, would result in an immediate change in the present value of the liabilities used to determine Available Financial Resources and available regulatory capital in the Netherlands.
Economic capital for business risk 2013 2012 Policyholder behaviour 1,096 1,400 Expense 1,388 1,663 Diversification benefit –356 –525 Total 2,128 2,538
Economic capital general account 2013 2012 Equity risk 1,406 1,162 Real estate risk 744 807 Interest rate risk 262 194 Credit spread risk net of illiquidity premium offset 2,234 2,521 Foreign exchange risk 213 377 Inflation risk 51 8 Counterparty default risk 519 354 Diversification benefit –2,219 –2,208 Total 3,210 3,215
Equity risk Equity risk in the general account is due to impact of changes in prices of directly held equities and equity derivatives such as futures and options.
Risk profile The table below sets out NN Group’s general account equity assets as at 31 December 2013 and 2012, respectively.
From time to time, NN Group protects the downside risk of the general account equity portfolio by buying put options and other hedge instruments. The most recent occasion on which NN Group did so was during the euro crisis in 2011-2012.
Risk measurement Economic capital for equity risk in the general account increased from EUR 1,162 million in 2012 to EUR 1,406 million in 2013. This exposure includes mutual funds with both fixed income and equity underlying positions. On a look-through basis in the overall exposure, the weighting of equities, which requires a higher economic capital than fixed income investments, increased due to stock market developments.
Real estate risk Real estate risk is the risk of loss of market value of real estate assets due to a change in rental prices, required investor yield, or other factors.
Risk profile NN G ’s general account real estate exposure decreased from EUR 5,055 million at 31 December 2012 to EUR 4,657 million as at 31 December 2013. The real estate exposure is mainly present in Netherlands Life and Netherlands Non-Life. NN Group has two different categories of real estate: (i) investments in real estate funds and real estate directly owned, and (ii) investments in buildings occupied by NN Group. Several of the real estate funds owned by NN Group include leverage and therefore the actual real estate exposure is larger than NN Group’s positions in these funds. During 2013, the gross real estate exposure decreased mainly as a result of market value decreases.
Eurozone EUR Japan JPY(2) Other Currencies(2) Maturities 2013 2012 2013 2012 2013 2012 1 –4,627 –4,010 222 138 –183 –143 2 –4,148 –3,971 –84 –174 –177 –306 3 –5,235 –4,317 –307 –329 –168 –209 3-5 –7,452 –7,356 –870 –938 –352 –561 5-10 –15,076 –15,109 –2,204 –2,285 –786 –927 10-20 –23,545 –23,219 –2,357 –2,718 –1,087 –1,208 20-30 –15,422 –15,977 –907 –973 –413 –489 30+ –14,752 –16,976 –577 –515 –82 –95 Total –90,257 –90,935 –7,084 –7,794 –3,248 –3,938
Liability valuations depend on the discount rate applied and are sensitive to movements in that discount rate, particularly given that approximately one third of the liability cash outflows occur from year 20. Different policyholder liability discount rates apply depending on the accounting or regulatory framework; thus, the interest rate risk differs by accounting regime.
 Available regulatory capital (outside the Netherlands). For the purposes of available regulatory capital in all jurisdictions outside the Netherlands in which NN Group operates, general account policyholder liabilities are valued at a single discount rate set when the policies are sold. General account fixed income assets are typically held at the same value as is reported on the IFRS balance sheet, although in several jurisdictions such as Japan, Spain and Greece, certain assets can be held at amortised cost on the regulatory balance sheet. Changes in interest rates affect available regulatory capital in these jurisdictions when fixed income assets are valued at market value, and the liability valuations are insensitive to interest rate movements.
 Available regulatory capital (Netherlands). For the purposes of available regulatory capital in the Netherlands, general account policyholder liabilities are measured at fair market value based on the DNB swap curve. In 2013 NN Group moved from the discount curve based on the ECB AAA yield curve to the DNB swap curve, which, amongst other things, is more liquid and less subject to dislocations. Since mid-2012, the DNB curve has been adjusted to include an ultimate forward rate (UFR), extrapolating the curves beginning in year 20 to an ultimate forward rate of 4.2% at year 60. General account fixed income assets are held at market value, thereby creating interest rate sensitivities in the available regulatory capital, which are the same as the liability sensitivities for matching cash flows up to 20 years. However, mismatches occur for longer-term cash flows due to the application of the UFR.
Risk profile The nature of long-term insurance liabilities gives insurers the potential to hold fixed income assets even in adverse market conditions, thereby continuing to receive the coupons and the principal amount at maturity. Credit spread risk materialises in different ways depending on the different valuation curves used to discount assets and liabilities in order to determine these metrics.
 Available regulatory capital (Netherlands). On the regulatory capital balance sheet, general account fixed income assets are held at market value, thereby creating credit spread sensitivities in the available regulatory capital. The long duration of NN Group’s fixed income assets amplifies the impact of credit spread sensitivities. By contrast, the liabilities are not sensitive to credit spread movements.
The table below sets out the market value of NN Group’s general account fixed-income bonds which are subject to credit spread risk by type of issuer at 31 December 2013 and 2012, respectively.
Market value Percentage 2013 2012 2013 2012 Government Bonds 44,251 50,831 71% 71% Asset Backed Securities 7,199 7,267 12% 10% Financial Institutions 4,452 5,845 7% 8% Utilities 1,501 1,815 2% 3% Transportation & Logistics 857 449 1% 1% Telecom 795 1,013 1% 1% General Industries 638 591 1% 1% Food, Beverages & Personal Care 622 675 1% 1% Other Corporate and Financial Bonds 2,040 2,961 3% 4% Total 62,355 71,447 100% 100%
NN primarily uses long-term bonds issued by central governments and other public agencies of governments to match its long term liabilities as such bonds are amongst the few tradable fixed income securities generating cash flows for 20 years and longer. The table below sets out the market value of NN Group’s general account assets invested in government bonds by country and maturity.
Germany AAA 0% 155 70 115 331 263 3,288 4,215 153 8,590 12,225 Netherlands AAA 98% 17 132 82 104 1,210 1,458 3,399 6,402 7,183 France AA+ 0% 64 100 44 108 265 276 2,472 2,197 5,526 5,586 Belgium AA 41% 141 242 210 830 1,413 911 1,498 69 5,314 4,739 Japan AA- 99% 276 68 128 331 1,425 1,740 837 294 5,099 8,183 Austria AAA 0% 210 44 85 174 803 1,462 588 728 4,094 3,937 Italy BBB 0% 21 109 21 63 178 880 124 5 1,401 1,393 Multilateral AAA 2% 81 65 132 44 345 285 376 34 1,362 719 Finland AAA 0% 7 16 14 49 343 355 324 1,108 1,079 Spain BBB- 65% 3 25 14 60 46 513 387 1,048 907 United States AAA 0% 39 401 31 190 51 4 177 893 1,018 Others 46% 227 264 364 524 1,010 676 348 3,413 3,862 Total 37% 1,241 1,536 1,240 2,808 7,352 11,848 14,745 3,480 44,250 50,831
Exposures to Dutch, German and French government bonds are primarily held by Netherlands Life. Of the EUR 15 billion German and Dutch government bonds held by NN Group, more than half will mature after year 20, and more than 80% of the EUR 5.5 billion French government bonds held by NN Group will mature after year 20. These long-term government bonds are sensitive to sovereign credit spread movements versus EUR swap rates. With regards to Central and Eastern Europe, government bond exposures in Poland, Czech Republic, Hungary, Slovakia, Romania, and Turkey are mainly domestically held). In 2011 and 2012, NN Group reduced its Greek, Italian, Spanish and French government bond exposures in response to the deteriorating credit ratings of these countries and to alleviate concentration risk. The remaining Greek government bonds are all held by NN Group’s Greek business unit, and 65% of the Spanish government bonds are held by NN Group’s Spanish business unit. During 2013, NN Group began reducing its German and Dutch government bond positions to invest in higher-yielding asset classes. It also began reducing its holdings of government bonds in Japan where such bonds were held for liquidity reasons.
Market value of non-government bond securities 2013 by number of years to maturity
The table below sets out NN Group’s holdings of asset-backed securities by market value of asset type and the percentage of NN Group’s total general account asset-backed securities portfolio as at 31 December 2013 and 2012, respectively.
Risk mitigation NN aims to maintain a low-risk, well diversified credit portfolio. NN Group has a policy of maintaining a high quality investment grade portfolio while avoiding large risk concentrations. In order to reduce the credit spread risk, NN Group has increased its investments in non-listed and own-originated assets. Going forward, the volatility in NN Group’s credit spread risk will continue to have possible short term negative effects on the balance sheet. However, in the long run, these investments will back the long-dated and illiquid liabilities well. The concentration risk on individual issuers is managed using rating-based issuer limits on one (group of related) single name(s), effectively managing the default risk of the issuers.
The table below sets out NN Group’s general account economic capital for credit spread risk.
Counterparty Default risk Counterparty default risk is the risk of loss of investments due to unexpected default, or deterioration in the credit standing, of the counterparties and debtors (including reinsurers) of NN Group. The economic capital for counterparty default risk is primarily based on the associated issuer’s probability of default (PD) and the estimated loss-given-default (LGD) on each individual asset combined with diversification across assets. Note that fixed income bonds are also subject to counterparty default risk, but this risk is included in credit spread risk.
General account mortgages, reinsurance and loans and advances 2013 2012 Mortgages 14,218 5,398 Reinsurance 331 348 Other loans 2,900 2,260 Cash 6,749 6,778 Total 24,198 14,784
Risk mitigation NN Group uses different credit risk mitigation techniques. For retail lending portfolios, mortgages on the house, pledges of insurance policies, or retaining the investment accounts of clients are all important elements of credit risk mitigation. For OTC derivatives, the use of ISDA master agreements accompanied with credit support annexes is an important example of risk mitigation. Other forms of credit risk mitigation include reinsurance collateral.
Netherlands Life NN Bank 2013 2012 2013 2012 Performing mortgage loans 7,769 5,107 6,118 136 Past due mortgage loans (1–90 days) 185 129 93 2 Non-performing mortgage loans (more than 90 days past due)
Netherlands Life NN Bank 2013 2012 2013 2012 Past due for 1–30 days 125 96 64 2 Past due for 31–60 days 42 23 22 0 Past due for 61–90 days 19 10 8 0 Total 186 129 94 2
MARKET AND CREDIT RISK: SEPARATE ACCOUNT The separate account businesses are those in which the policyholder bears the majority of the market and credit risk. NN Group’s earnings from the separate account businesses are primarily driven by fee income. However, in the case of variable annuities and the guaranteed separate account pension business in the Netherlands, NN Group retains risk associated with the guarantees provided to its policyholders. Businesses in this category are (i) the variable annuities (VA) portfolio, (ii) the group pension business in the Netherlands for which guarantees are provided, and (iii) other separate account business, primarily the unit linked business.
Average Remaining Years Variable Annuity Japan GMAB 299,563 11,575 458 811 3.2 Variable Annuity Japan GMDB (3) 46,743 3,112 205 57 7.1 Variable Annuity Europe 40,931 1,238 33 25 7.2
From a risk management perspective, NN Group distinguishes three blocks of variable annuities:  Guaranteed minimum accumulation benefit (GMAB) products of Japan Closed Block VA: Under this type of variable annuity, a minimum guaranteed benefit is paid upon death or at maturity of the policy at the end of the initial investment period. The survival guarantee is only available up until the original policy term, mainly 10 years, and cannot be changed. The minimum guaranteed benefit is either a single premium or an amount which may lock-in at a higher guarantee level depending on the product. The GMAB product was sold from 2005 until 2009 in Japan through banks and security brokers. The guarantees of this product were highly in the money but with the improving stock markets in Japan and the weakening of the JPY, have moved closer to at-the-money. The volatility risks of the options and guarantees increase when the option is at the money and closer to maturity.
 Guaranteed minimum death benefit (GMDB) products of Japan Closed Block VA: Under this type of variable annuity, a minimum guaranteed benefit is paid upon the death of the policyholder. The GMDB product has a generally predefined term of 10 years and provides the option to extend the guarantee of the policy during the investment phase up to age 90, and in the case of some policies, also allow further extension to whole of life. At death, the product pays a maximum of the guaranteed value and the account value. During the insured period, the client can receive the maximum of the minimum guaranteed benefit and the account value at death or at survival after the term of the product. There are different funds underlying the policyholder account value, including Japanese equity, Japanese bond, global equity and global bond funds. The value of the minimum guarantee depends on the level and volatility of equity, bond and foreign exchange markets.
 VA products of Insurance Europe: NN Group has been selling VA products in Europe since 2008, including in Belgium, Italy, Luxembourg, Poland, Spain and Hungary. The products mostly have minimum guaranteed living benefits such as survival benefit or withdrawal benefits.
Closed Block VA Japan Asset and Liability Movements 2013 2012 2011 2010 2009 Change in Value of Policyholder Guarantee 2,411 1,652 –748 –481 543 Change in Value of Hedge Assets 2,367 1,482 –582 –537 458 Economic Hedge Result 44 170 –166 56 85
Separate account guaranteed group pension business in the Netherlands 2013 2012 Account value 10,858 12,487 Additional IFRS reserve for guarantee 606 744
In the Dutch separate account pension portfolio, investments are held in separate accounts on behalf of the sponsor employer who concluded the contract with NN Group. Regardless of actual returns on these investments, NN Group guarantees pension benefits for the beneficiaries under the contract. Contracts are typically re-negotiated every five years, but the guarantee obligations to the beneficiaries survive termination of the contract with the sponsor employer unless otherwise agreed.
The sponsor employer selects the investments based on a basket of equity and fixed income instruments and real estate and pays a fee for the guarantee. The value of the guarantee that NN Group provides is sensitive to interest rates, movements in the underlying funds and the volatility of those funds.
Other separate account business Risk profile The other separate account business primarily consists of unit linked insurance policies, which provide policyholders with fund selection combined with an insurance cover. In a unit linked policy, the investment risk is borne by the policyholder, although there are some unit linked products where NN Group has provided guarantees on the performance of specific underlying funds. Unit linked products without guarantees do not expose NN Group to market risk, except to the extent that the present value of future fees is affected by market movements of the underlying policyholder funds.
Risk mitigation The market risks of the unit linked and other separate account business are managed at the design of the product. Currently NN Group does not hedge the market risks related to the present value of future fee income derived from this business.
Economic capital for the separate account businesses 2013 2012 Variable annuity 591 812 Separate account guaranteed group pension business in the Netherlands
Other separate account business (unit linked) 217 187 Diversification benefit –108 –170 Total 964 930
NN defines three levels of Liquidity Management. Short-term liquidity, or cash management covers the day-to-day cash requirements under normal business conditions and targets funding liquidity risk. Long-term liquidity management considers business conditions, in which market liquidity risk materialises. Stress liquidity management looks at the company’s ability to respond to a potential crisis situation. Two types of liquidity crisis events can be distinguished: a market event and an NN Group specific event. These events can be short-term or long-term and can both occur on a local, regional or global scale.
Risk measurement Liquidity risk is measured through several metrics including ratios and cash flow scenario analysis, in the base case and under several stressed scenarios. The liquidity risk metrics indicate that liquidity resources would be sufficient to meet expected liquidity uses under the scenarios tested. NN Group does not hold a specific economic capital for liquidity risk in its insurance economic capital model as liquidity is sufficiently available in the insurance business units.
The operational risk management areas can be defined as given below:  Control and processing risk: the risk due to non-adherence with business policies or guidelines as well as the risk of loss due to unintentional human error during (transaction) processing.  Fraud risk: the risk of loss due to abuse of procedures, systems, assets, products or services of NN Group by those who intend to unlawfully benefit themselves or others.  Information (technology) risk: the risk of financial or reputational loss due to inadequate information security, resulting in a loss of data confidentiality, integrity and availability.  Continuity and security risk: the risk of threats that might endanger the continuity of business operations and the security of our employees.  Unauthorised activity risk: the risk of misuse of procedures, systems, assets, products and services.  Employment practise risk: the risk of loss due to acts inconsistent with employment, health or safety laws, agreements and from payment of personal injury claims or diversity/discrimination events.
RISK MITIGATION For operational risk NN Group has developed a framework governing the process of identifying, assessing, mitigating, monitoring and reporting operational risks.
RISK MITIGATION NN G ’s compliance function has developed a framework governing the process of identifying, assessing, mitigating, monitoring and reporting compliance risks. The compliance function works with a scorecard process to annually evaluate the level to which the compliance risk management framework is embedded in each business. NN Group continuously enhances its compliance risk management program to ensure that NN Group complies with international standards and laws.
NN is fully committed to complying with all applicable sanction legislation and with all obligations and requirements under those applicable laws, including freezing and reporting obligations with regard to transactions involving a U.S., EU or UN sanction target. Furthermore, NN Group designates specific countries as ultra high risk and prohibits client engagements and transactions (including payments or facilitation) involving those countries. Certain exceptions on this policy are allowed after express and case-specific consent, and provided that the applicable sanctions laws and regulations are met. At present, the specified countries are Myanmar, North Korea, Sudan (North Sudan and South Sudan), Syria, Iran and Cuba. Each of these countries is subject to a variety of EU, U.S. and other sanctions regimes. NN Group has had a sanctions policy in place since 2007 and has a mandate to run down any existing commitments. As such, remaining exposure and contacts arise solely in the context of NN Group’s on-going efforts to run down the legacy portfolio of commitments.
ECONOMIC CAPITAL FOR ENTITIES OUTSIDE NN GROUP’S INTERNAL MODEL NN has several businesses which are not included in the internal model as the internal model has been developed for insurance operations. NN Group determines the economic capital for these businesses using an approach consistent with the way these businesses are included in the AFR calculations as described in the Capital Management section.
Economic capital for other business NN Bank, IIM units on local required capital levels and other non-modelled 2013 2012 Pension fund business in Europe 178 157 NN Bank 271 34 ING Investment Management 191 223 Other non-modelled entities 236 417 Asia discontinued 112 1,504 Total 988 2,335
Measured by the impact of a relative increase based on multiplying duration by a rating-based shock calibrated to the 1 in 10 sensitivities of the internal model (e.g. Double A 10-year bond shock is 120 basis points) AAA and AA-rated government bonds and home government bonds in local currency excluded, exception only applicable to Greek bonds Shocks for structured credit are 50% higher than for similarly rated corporate and government bonds
This is measured by the impact of a 10% drop in real estate prices only for the minority holdings and direct for all real estate re-valued through P&L. Other holdings will be included in case of possible impairments caused by the drop in prices however as rental income is not assumed under the regulatory capital base case, the –10% shock applied is off-set by +5% rental income resulting in an effective shock of –5%.
This is measured by the impact of a 10% drop in real estate prices only for the minority holdings and direct for all real estate re-valued through P&L. Other holdings will be included in case of possible impairments caused by the drop in prices. As rental income is already included in planned annual earnings, no offset (to the –10% shock) is taken into account for rental income.
Mortality sensitivity is determined using a 1 in 10 mortality sensitivity of internal model
Morbidity sensitivity is determined using a 1 in 10 morbidity sensitivity of internal model
SENSITIVITIES OF REGULATORY CAPITAL AT RISK One of the three quantitative risk appetite statements of NN Group is to ensure that there is sufficient cash capital. The cash capital is determined by the ability of subsidiaries to pay dividends and their potential need for capital injections to continue operations within the local market. Whether or not a capital injection is necessary is assessed based on available regulatory capital and commercial target levels of regulatory required capital. Market stresses primarily impact the available regulatory capital, but in the case of regulated entities within Netherlands Life and ING Life Japan, required regulatory capital also moves with market movements.
(2) A high level estimate has been used to calculate the impact of interest rate stresses on the risk margin which in used to determine the regulatory available and required capital in Netherlands Life.
The equity sensitivity is primarily related to the general account equity holdings and increased during the year as the total value of equity securities increased.
2013 Greece Italy Ireland Portugal Spain Total Residential mortgages and other consumer lending 9 18 27 Corporate Lending 75 25 100 Financial Institutions Lending 11 170 181 Government Lending Total Lending 20 75 25 0 188 308
RMBS 27 236 182 263 708 CMBS Other ABS 12 2 14 Corporate Bonds 287 254 15 164 720 Covered Bonds 9 5 355 369 Financial Institutions’ bonds (unsecured) 58 26 76 160 Government Bonds 39 1,303 53 5 1,013 2,413 Total Debt Securities 66 1,905 312 228 1,873 4,384
2012 Greece Italy Ireland Portugal Spain Total Residential mortgages and other consumer lending 12 19 31 Corporate Lending 50 25 75 Financial Institutions Lending 7 254 261 Government Lending Total Lending 19 50 25 0 273 367
Total exposure to the GIIPS countries was reduced by EUR 683 million in 2013. NN Group reduced its exposure in debt securities by EUR 605 million and Financial Institutions lending by EUR 80 million. In debt securities, ABS exposure decreased by EUR 329 million, mainly in Italy by EUR 106 million and Ireland by EUR 100 million, and covered bonds went down by EUR 171 million, mainly in Spain by EUR 152 million. The decrease in Financial Institutions lending was mainly in Spain by EUR 84 million.
ING applies the following main capital definitions:  Insurance Group Directive capital (NN Group) – This regulatory concept is defined as shareholders’ equity plus hybrid capital, prudential filters and certain adjustments. IGD capital is calculated in accordance with method 3 “method based on accounting consolidation” of the Dutch Act on Financial Supervision. In this method the solvency margin is calculated on the basis of the consolidated accounts and is the difference of (i) the assets eligible for the inclusion in the calculation of the solvency margin based on the consolidated data; and (ii) the minimum amount of the solvency margin calculated on the basis of the consolidated data. In applying this method a solvency deficit of an insurance subsidiary, if any, is taken into account, as well as regulatory adjustments of the Dutch insurance subsidiaries based on the Dutch Act on Financial Supervision. See “Capital Base” disclosures in this section. This capital definition is applied in comparing IGD capital to EU required capital base. As of 30 September 2013, the IGD ratio for NN Group was adjusted for the transfer of ING U.S. Inc. from NN Group N.V. to ING Groep N.V. and a change in the calculation methodology. Prior period has not been restated to reflect these adjustments, as the impact is not material.
 Regulatory Capital framework – Insurance and Investment Management legal entities have to comply with local statutory capital frameworks that are under supervision of local regulators. Most of these frameworks for insurance businesses in Europe are based on Solvency I principles and are expected to migrate to Solvency II starting in 2016.
 Financial Leverage (NN Group) – Financial Leverage is the sum of hybrid capital, sub-debt and net financial debt.
In May 2013, the US Insurance business was successfully separated and listed (VOYA) on the NYSE. NN Group has divested this business in several tranches. In May NN Group sold approximately 28% shares in Voya and successfully completed the secondary offering of Voya with proceeds of EUR 644 million. On 30 September 2013, NN Group transferred its remaining shares of the US Insurance business to ING Group. In October, ING Group sold another tranche of approximately 15% shares in Voya with proceeds of EUR 788 million. At the end of 2013, ING Group still owns 56.7% of the US Insurance business.
Nationale-Nederlanden Bank N.V. (part of NN Group) acquired parts of Westland-Utrecht Bank (owned by ING Bank) per 1 July 2013. This acquisition was funded by a capital injection from ING Group and therefore not increasing financial leverage of NN Group.
Additionally, ING Group is in process of preparing NN Group for a separate listing in 2014. As part of those preparations to become a stand-alone company, ING Group injected EUR 1 billion of capital to further strengthen the capitalisation of NN Group.
The Dutch life insurance companies of NN Group have been using the ECB AAA curve to perform the regulatory test of adequacy of their insurance liabilities at year end 2012. On 12 July 2013, Fitch downgraded France to AA+, resulting in French government bonds no longer being included in the ECB AAA curve. The downgrade caused a drop of the ECB AAA curve of on average 15 basis points (dependent on the point on the curve), leading to an increase in the valuation of the liabilities and therefore a decrease in available regulatory capital if a shortage resulted from the test of adequacy. The DNB swap curve is the only alternative curve to the swap curve allowed by DNB that is available to Dutch life insurance companies to discount liabilities in the regulatory test of adequacy. As of Q3 2013, the Dutch life insurance companies of NN Group have been granted permission by DNB to use the DNB swap curve for the test of adequacy. The impact of the w F mm m NN L ’ 39%-points.
A key priority of Capital Management is to ensure that strong stand-alone companies are created for banking and insurance in preparation of the separation. Both operations need to stay adequately capitalised based on local regulatory and rating agency requirements and interdependencies should be reduced to a minimum. The entities should also be able to access capital markets independently.
(1) Hybrids issued by ING Group at notional value. (2) Hybrids issued by NN Group at notional value capped at 25% of EU required capital. As from 1 January 2013 the hybrid issued by NN Group N.V. with notional amount of EUR 476 million does not qualify anymore for IGD Capital based on regulations from DNB. (3) The actual required regulatory adjustments for IGD capital and the EU required capital may be different from the estimate since the statutory results are not final until filed with the regulators. (4) The IGD Solvency I ratio reported in the 2012 Annual Report of 245% is restated due to the change in accounting policy for employee benefits as disclosed in the section “Changes in accounting policies in 2013” on page 33.
Hybrids issued by NN Group to ING Group (1) 2,401 2,451 Hybrids issued by NN Group (2) 491 496 Total hybrids (b) 2,892 2,947
External debt issued by NN Group N.V. 694 External debt issued by US Holding companies 2,307 Senior Debt issued by NN Group to ING Group 1,000 1,311 Other net financial debt (3) 1,457 Total financial debt (c) 1,000 5,769
Financial leverage ratio (e) = (d) / {(a) + (d)} 26% 31%
Change of scope of AFR 2012 amounts in billions of euros AFR (1) As reported for ING Insurance EurAsia (excluding held-for-sale operations) in 2012
Change in model and methodology (1) –0.8 Include NN Group’s businesses in Japan as modelled business
Include legacy units and holding –3.8 NN Group 2012 excluding US Insurance business on a basis comparable to 2013
(1) The change in model and methodology refers to the change in accounting policy for employee benefits as disclosed in the section “Changes in accounting policies in 2013” on page 33.
AFR and EC 2013 2012 AFR 13.6 11.4 EC 7.0 8.7 Excess AFR over EC 6.6 2.7 AFR-EC ratio 193% 131%
Main credit rating of ING at 31 December 2013 Standard & Poor’s Moody’s Fitch Rating outlook Rating outlook Rating outlook ING Group N.V. A- stable A3 negative A negative – long term
NN Group N.V. – short term A-2 P-2 F2 – long term BBB+ stable Baa2 negative A- negative
NN Group Annual Report 2013 185 amounts in millions of euros 2013 2012 Result of group companies 47 1,092 Other results after tax –37 –54 Net result 10 1,038
Unrealised revaluations property in own use –13 –13 Unrealised revaluations available-for-sale investments and other
Net result from continuing and discontinued operations 1,038 1,038 Total comprehensive income 0 0 1,898 0 1,113 3,011
Transfer to share of associates reserve 164 –164 Balance as at 31 December 2012 (restated) 0 17,750 7,252 0 1,421 26,423
Net result from continuing and discontinued operations 10 10 Total comprehensive income 0 0 –3,905 0 –35 –3,940
(1) Other reserves includes Retained earnings, Other reserves and Unappropriated result.
ESTABLISHMENT OF NN GROUP Until recently, ING Verzekeringen N.V. (“ING Insurance”) was the holding company of the insurance and investment management activities of ING. As such, ING Insurance prepared consolidated financial statements under IFRS-EU that included ING Insurance and all its subsidiaries. ING Insurance was a wholly-owned subsidiary of ING Insurance Topholding N.V. (“ING Topholding”), a wholly-owned subsidiary of the ultimate parent ING Groep N.V. ING Topholding was a holding company with no other assets, liabilities and activities than its 100% holding in ING Insurance.
The merged entity NN Group N.V. is in substance a continuation of ING Insurance. As of 2013, NN Group prepares consolidated financial statements under IFRS-EU in which all assets and liabilities of ING Insurance and its subsidiaries are included at their existing carrying values. The parent company financial statements are those of NN Group N.V. As ING Topholding was a holding company with no other assets, liabilities and activities than its 100% holding in ING Insurance , the financial position and results of NN Group are not significantly different from what these would have been for ING Insurance.
A legal reserve is carried at an amount equal to the share in the results of associates since their first inclusion at net asset value less the amount of profit distributions to which rights have accrued in the interim. Profit distributions which can be repatriated to the Netherlands without restriction are likewise deducted from the Share of associates reserve, which forms part of Shareholder’s equity.
accounts of NN Group N.V. amounts in millions of euros, unless stated otherwise 188 NN Group Annual Report 2013
Proportion of ownership interest and voting rights held by the direct parent company
Other assets 2013 2012 Receivables from group companies 1,375 3,917 Other receivables, prepayments and accruals 518 563 1,893 4,480
Equity 2013 2012 Share capital Share premium 11,605 17,750 Share of associates reserve 3,502 7,252 Other reserves and unappropriated result –880 1,421 14,227 26,423
Unappro– priated result Total Opening balance 512 –41 471 Net result 1,038 1,038 Unrealised revaluations 75 75 Transfer to Share of associates’ reserve –164 –164 Transfer to retained earnings –41 41 0 Closing balance 382 1,038 1,420
The total amount of Equity in the parent company annual accounts equals Shareholder’s equity (parent) in the consolidated annual accounts. Certain components within equity are different, as a result of the following presentation differences between the parent company accounts and consolidated accounts:  Unrealised revaluations within consolidated group companies, presented in the Revaluation reserve in the consolidated accounts, are presented in the Share of associates reserve in the parent company accounts;  Foreign currency translation on consolidated group companies, presented in the Currency translation reserve in the consolidated accounts, is presented in the Share of associates reserve in the parent company accounts; and  Revaluations on investment property and certain participations recognised in income and consequently presented in
The total amount of non-distributable reserves is EUR 3,502 million (2012: is EUR 7,252 million).
See Note 13 “Equity” in to the consolidated annual accounts for additional information.
Interest rate Year of Issue Due date Notional amount Balance sheet value 2013 2012 8.000% 2011 Perpetual EUR 450 450 450 Variable 2008 Perpetual EUR 813 813 834 Variable 2007 Perpetual EUR 740 740 758 4.176% 2005 Perpetual EUR 169 176 181 Variable 2005 Perpetual EUR 148 148 152 Variable 2005 Perpetual EUR 74 74 76 6.375% 2002 7 May 2027 EUR 476 491 496 2,892 2,947
Other liabilities by type 2013 2012 Debenture loans 694 Amounts owed to group companies 3,250 5,554 Other amounts owed and accrued liabilities 82 60 3,332 6,308
Amounts owed to group companies by remaining term 2013 2012 Within 1 year 2,873 5,250 More than 5 years 377 304 3,250 5,554 6 OTHER Guarantees As at 31 December 2013, NN Group N.V. had guarantees on behalf of ING Bank companies to third parties of nil (2012: EUR 221 million) outstanding.
REMUNERATION OF SENIOR MANAGEMENT, MANAGEMENT BOARD AND SUPERVISORY BOARD See Note 52 “Related parties” to the consolidated Annual Accounts for additional information.
THE MANAGEMENT BOARD NN GROUP R.A.J.G. (Ralph) Hamers, CEO and chairman E. (Lard) Friese, vice-chairman D. (Delfin) Rueda, CFO S.D. (Doug) Caldwell, CRO D.E. (Dorothee) van Vredenburch, member P.G. (Patrick) Flynn, member W.F. (Wilfred) Nagel, member
To: the Shareholder, the Supervisory Board and the Management Board NN Group N.V.
Management’s responsibility Management is responsible for the preparation and fair presentation of these annual accounts in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code, and for the preparation of the report of the Management Board in accordance with Part 9 of Book 2 of the Dutch Civil Code. Furthermore management is responsible for such internal control as it determines is necessary to enable the preparation of the annual accounts that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibility Our responsibility is to express an opinion on these annual accounts based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the annual accounts are free from material misstatement.
In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the annual accounts in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the annual accounts.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
NN Group has transferred its interest in its subsidiary ING U.S., Inc. (“ING U.S.”) to ING Groep N.V. by way of dividend in kind of EUR 6,826 million. Reference is made to Note 53 “Other events” for more details on the transaction.
In 2013, NN Group declared and paid a cash dividend of EUR 882 million (2012: nil) to ING Groep N.V. Reference is made to Note 13 “Equity” of the Consolidated annual accounts.
Certain of the statements contained in this Annual Report are not historical facts, including, without limitation, certain statements made of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation: (1) changes in general economic conditions, in particular economic conditions in NN Group’s core markets, (2) changes in performance of financial markets, including developing markets, (3) consequences of a potential (partial) break-up of the euro, (4) the implementation of NN Group’s restructuring plan to separate banking and insurance operations, (5) changes in the availability of, and costs associated with, sources of liquidity such as interbank funding, as well as conditions in the credit markets generally, including changes in borrower and counterparty creditworthiness, (6) the frequency and severity of insured loss events, (7) changes affecting mortality and morbidity levels and trends,
(8) changes affecting persistency levels, (9) changes affecting interest rate levels, (10) changes affecting currency exchange rates, (11) changes in investor, customer and policyholder behaviour, (12) changes in general competitive factors, (13) changes in laws and regulations, (14) changes in the policies of governments and/or regulatory authorities, (15) conclusions with regard to purchase accounting assumptions and methodologies, (16) changes in ownership that could affect the future availability to us of net operating loss, net capital and built-in loss carry forwards, (17) changes in credit ratings, (18) NN Group’s ability to achieve projected operational synergies and (19) the other risk factors and uncertainties detailed in the risk factors section contained in the most recent annual report of ING Groep N.V.
Any forward-looking statements made by or on behalf of NN Group speak only as of the date they are made, and, NN Group assumes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or for any other reason.
NN Group N.V. Amstelveenseweg 500 1081 KL Amsterdam P.O. Box 810, 1000 AV Amsterdam The Netherlands Telephone: +31 20 5418722 Internet: www.ing.com