Key figures 4 ING at a glance 6 Chairman’s statement 8 ING share 10 2 Report of the Executive Board
ING and the financial environment 12 Strategy 16 Corporate responsibility 19 Capital management 22 Risk management 23 Human resources 24 Banking overview 26 –Retail Banking 29 –Commercial Banking 37 Insurance overview 41 –Insurance 43 –Investment management 52 3 Corporate governance
Parent company balance sheet 256 Parent company profit and loss account 257 Parent company statement of changes in equity 258 Accounting policies for the parent company annual accounts 259 Notes to the parent company annual accounts 260 6 Other information
Staff expenses and operating expenses Banking operations 10,153 10,158 10,122 9,970 9,070
Addition to loan loss provision Banking operations 1,751 2,973 1,280 125 103
Insurance operations –429 –220 n.a. –1,002 Underlying net result (in EUR million) 3,893 974 300 –226
Underlying Return on Equity based on IFRS-EU equity 9.7% 4.2% –0.8% Debt/equity ratio per 31 December (2) 13.3% 12.4% 13.5% (2) ING Group evaluates its debt/equity ratio on the basis of ‘core debt’ and ‘adjusted equity’.
Banking operations in EUR million unless otherwise indicated 2010 2009 % Change 2008
Underlying Return on Equity based on 7.5% core Tier 1 17.6% 5.0% 3.4% Underlying cost/income ratio 56.0% 68.7% 84.3% Underlying cost/income ratio, excl. market impacts 54.2% 54.3% 65.8% Employees (FTEs, per 31 December adjusted for divestments) 72,343 70,312 3 74,249 (1) Adjusted for divestments.
Insurance operations in EUR million unless otherwise indicated 2010 2009 % Change 2008
OUR STAKEHOLDERS ING conducts business on the basis of clearly defined business principles. In all our activities, we carefully weigh the interests of our various stakeholders: customers, employees, business relations and suppliers, society at large and shareholders. ING strives to be a good corporate citizen.
OUR CORPORATE RESPONSIBILITY ING wants to build its future on sustainable profit based on sound business ethics and respect for its stakeholders and be a good corporate citizen. For only by acting with professionalism and integrity, will we be able to maintain our stakeholders’ trust and preserve our reputation. Our Business Principles prescribe the corporate values we pursue and the responsibilities we have towards society and the environment: we act with integrity, we are open and clear, we respect each other and we are socially and environmentally responsible.
SUPERVISORY BOARD Peter A.F.W. Elverding(1) (62), chairman Jeroen van der Veer (63), vice-chairman J.P. (Tineke) Bahlmann (60) Henk W. Breukink(1) (60) Claus Dieter Hoffmann(2) (68) Piet C. Klaver (65) Godfried J.A. van der Lugt(3) (70) Aman Mehta (64) Joan E. Spero (66) Jackson P. Tai(4) (60) Lodewijk J. de Waal (60)
Audit Committee Jackson Tai, chairman Tineke Bahlmann Henk Breukink Godfried van der Lugt Jeroen van der Veer
Nomination Committee Peter Elverding, chairman Piet Klaver Joan Spero Jeroen van der Veer Lodewijk de Waal
** The current composition of the Supervisory Board Committees can be found on the Company’s website (www.ing.com).
INSURANCE LATIN AMERICA Insurance Latin America includes ING’s pension, insurance and investment businesses in the region and is present in six countries including Mexico, Chile, Peru, Colombia, Uruguay, and Brazil through its joint venture in SulAmérica, the leading independent wealth management and insurance company in the country. In Latin America, ING is the second largest provider of mandatory pensions.
RETAIL BANKING Retail Banking provides retail and private banking services to individuals and small and medium-sized enterprises in the Netherlands, Belgium, Luxembourg, Poland, Romania, Turkey, India, Thailand and China (through a stake in Bank of Beijing) with a multi-product, multi-channel distribution approach. In mature markets, we focus on wealth accumulation, savings and mortgages, with an emphasis on operational excellence, cost leadership and customer satisfaction. In developing markets we aim to become a prominent local player by offering simple but high quality products. ING Direct offers direct banking services in Canada, Spain, Australia, France, the US, Italy, Germany, the UK and Austria. ING Direct’s focus is on offering five simple and transparent retail banking products at very low cost: savings, mortgages, payment accounts, investment products and consumer lending.
The requirements proposed by the Basel Committee will demand stronger capital reserves and liquidity buffers to protect banks during economic downturns. Most of the requirements will not come into force until 2013, but ING is relatively well positioned to meet them.
As a major international company, ING has a responsibility to make a positive contribution to society through its commercial activities and by being a good corporate citizen. For example, our personal financial services help people to be better at managing their money. We have a Corporate Responsibility (CR) programme through which we ran many initiatives in 2010, one of which was a series of workshops for entrepreneurs advising them how to run their businesses in a more environmentally sustainable way.
In 2010, ING continued to work towards being a top employer, to attract and retain employees and to enhance employee engagement. Our 2010 Winning Performance Culture Survey showed that throughout the ING Group employee engagement had risen. Most people say they like their job and are proud to work for the company. I am very pleased with the outcome of the survey because it was not an easy year for our people given all the changes the company went through.
As I stated, 2010 was a year of real transition for ING. We have gone through a lot of change and reshaped our businesses. We know there are more challenges and opportunities ahead and we stand ready to meet them.
Shares in issue and shares outstanding in the market in millions Year-end
Prices depositary receipts for ordinary shares* Euronext Amsterdam by NYSE Euronext in EUR 2010 2009 2008
* 2009 prices were adjusted for the increase in the number of shares due to the rights issue, while 2008 was not adjusted.
ING GROUP** A A1 A ING BANK*** – short term A-1 Prime-1 F1+ – long term A+ Aa3 A+ – financial strength C+ ING INSURANCE**** – short term A-2 Prime-2 F2 – long term A– Baa1 A –
> Economic recovery remains fragile > Far-reaching changes in regulation and supervision > CEBS stress test passed > Streamlining process continued > Strong business performance
Although economic conditions broadly improved, risks remained significant due to eurozone sovereign risk fears and a continued weak performance of the US economy. The financial sector was also confronted with proposed changes in the regulatory environment, as authorities launched proposals to increase capital, liquidity and risk requirements for banks and insurers.
Throughout 2010, work continued on the operational separation, which was successfully effectuated by the end of the year. A new governance structure was successfully put in place in order to ensure that the to-be separated units operate at arm’s-length. In July, the CEBS stress test confirmed ING’s ability to endure a stressful economic scenario. ING’s commercial results further improved in 2010, as it continued along the path of reducing complexity and increasing focus, by divesting a number of non-core activities.
ECONOMIC RECOVERY REMAINS FRAGILE Macroeconomic conditions broadly improved in 2010, but the downside risks in the markets remained considerable. Manufacturing and global trade rose significantly, supported by increased stock building and a surge in fixed investments. However, in many advanced economies, household consumption remained low, reflecting continuously weak levels of consumer confidence due to a prolonged decline in household incomes and private wealth accumulation. In contrast, in many emerging economies, household spending and corporate investments remained at elevated levels and thus fuelled job creation. This was not enough, however, to quell fears of a further widening of global imbalances.
The continued weak performance of the US economy in particular contrasted sharply with economic growth rates achieved in developing markets like China, India and Brazil. Moreover, rising concerns on eurozone sovereign risks caused renewed distress in financial markets. As a result, market volatility remained high and, across the board, investor confidence did not significantly improve. In the second half of the year, however, financial conditions started to slightly improve, partly thanks to unprecedented European policy initiatives and unconventional monetary easing in the US.
Looking ahead, most developed economies and a few emerging markets continue to face challenging economic circumstances, in addition to which underlying sovereign risks and financial system vulnerabilities remain a significant concern. The outlook for the global economy in 2011 therefore continues to be uncertain.
DEVELOPMENTS IN SUPERVISION AND REGULATION In 2010, agreement was reached at EU level on the introduction of a new supervisory structure for the financial sector. The new European architecture consists of the existing national authorities and the newly created European Systemic Risk Board (ESRB) and the following three European Authorities: Banking (EBA), Insurance and Occupational Pensions (EIOPA) and Securities and Markets (ESMA). These institutions are in place since 1 January 2011. Operational day-to-day supervision continues to be with national supervisors.
The Basel Committee’s reforms have introduced two international minimum standards for liquidity risk supervision with the aim of ensuring banks have an adequate liquidity buffer to absorb liquidity shocks. The first one is the liquidity coverage ratio (LCR; to be introduced on 1 January 2015), which is a test to promote shortterm resilience of a bank’s liquidity risk profile by ensuring that it has sufficiently high-quality liquid assets to survive a significant stress scenario lasting for 30 days. The second one is a net stable funding ratio (NSFR; to be introduced on 1 January 2018), which is a test to promote resilience over a longer period by creating additional incentives for banks to fund their activities with more stable funding on an ongoing basis. The NSFR test is similar to the LCR except the period over which it is tested is one year.
ING generally supports the Basel Committee and European Commission reform programmes to strengthen the global capital and liquidity regulations and reduce market volatility. Notwithstanding, a number of proposals may hamper traditional retail-oriented institutions in their intermediary function, and thus reduce their ability to play their important role in the European economy. Further, the new rules still allow national regulators a measure of autonomy. For instance, the liquidity requirements assign relatively large powers to national regulators, which may affect the level playing field in the European Internal Market. Hence, the biggest challenge for policy makers and supervisors is to take a coordinated and unified approach. It is essential that supervisors and regulators across the globe adopt a more consistent and coordinated approach (e.g. while Europe is already introducing Basel III, Basel II is not yet fully applied in the US).
What is more, in a white paper published in July 2010, the European Commission concluded that the existing differences between national Insurance Guarantee Schemes across the EU create insufficient and uneven levels of protection for insurance policyholders. Therefore, the Commission has suggested a minimum harmonisation directive requiring the establishment of an Insurance Guarantee Scheme as a last-resort mechanism in each Member State. Legislative proposals are expected in the second half of 2011.
ING PASSES STRESS TEST CEBS Together with 90 other EU-based financial institutions, ING was subject to the 2010 EU-wide stress testing exercise coordinated by the Committee of European Banking Supervisors (CEBS), in cooperation with the European Central Bank, and 2Report of the Executive Board
In the first quarter of 2010, the separation process was kicked-off with a global inventory exercise. During this phase it was confirmed that the most challenges lay in Europe, in particular in the Netherlands. The most complicated issues related to IT, human resources, distribution and commercial agreements, as well as our capital structure. To facilitate the disentanglement process, all shared services, contracts, arrangements, co-ownerships, cross-directorships, and all services provided and received (including those delivered by third parties) had to be analysed and either fully separated or covered in temporary or long-term service agreements.
Over the course of 2010, the vast majority of support functions were moved to the bank and the insurer/investment manager respectively. The activities that will remain at Group level until the completion of the separation process are those that relate to our responsibilities to shareholders. These include support functions which are vital to comply with material legal and regulatory requirements, and/or to ensure effective and efficient execution of Group control. Consequently, both businesses have their own head office, with their own corporate support functions from 1 January 2011.
Commercial performance Banking (2) 7,814 7,266 Operating result Insurance (3) 1,743 1,434 Total market impacts Banking –201 –3,046 Total market and other impacts Insurance (4) –2,262 –1,636 Risk costs –1,751 –2,859 Underlying result before tax 5,343 1,159 of which: – Insurance –519 –202
ING Group’s net result for the full-year 2010 was EUR 3,220 million compared to a net loss in 2009 of EUR 935 million. The 2010 net result includes a EUR 513 million goodwill write-down in the US in the third quarter of 2010 and a EUR 634 million write-down of deferred acquisition costs (DAC) in the fourth quarter as part of the measures to improve transparency and address the reserve adequacy of the US Closed Block Variable Annuity (VA) business in the US.
Shareholders’ equity per share was EUR 10.99 at year-end 2010 versus EUR 8.95 at year-end 2009.
Going forward, ING Group strives to create strong independent businesses and make certain that the interests of all ING businesses are equally served. In addition, assuming favourable economic conditions and availability of excess capital, the Group will concentrate on repurchasing the remaining core Tier 1 securities issued to the Dutch State. Moreover, in 2010, we determined a base case divestment scenario for the insurance and investment management operations, which is further outlined below.
ING believes that the increasing social, economic and environmental challenges – such as demographic, ethical and value change, food scarcity, climate change and energy tensions, require businesses worldwide to critically review and adapt their business models.
CLEAR CORPORATE RESPONSIBILITY VISION The essence of ING’s corporate responsibility (CR) strategy is that we pursue profit on the basis of sound business ethics and respect for our stakeholders. We therefore have a clear vision on ethical, social and environmental issues, for both our banking and insurance operations.
Following our clients increased appetite for the renewable sector, ING’s investment in energy projects related to renewable sources increased exponentially from 2005 to 2010.
REMUNERATION To ensure that corporate responsibility is an integral part of our corporate strategy, our social, ethical and environmental objectives were used as a measure of performance in the remuneration policy for the Executive Board and senior management in 2010.
ING BUSINESS PRINCIPLES The ING Business Principles prescribe our core values of integrity, transparency, respect and social and environmental responsibility. To ensure that every employee in every part of the organisation understands how his/her actions and behaviours can help earn and retain customer and stakeholder trust, ING implemented an innovative training and awareness programme. According to our 2010 employee engagement survey, 93% of our employees indicated that living up to the Business Principles is important. 81% of our employees feel that the principles guide them in their everyday decisions at work.
In 2010 we continued to focus on raising the awareness of environmental and social risk issues among our colleagues 2 Report of the Executive Board
The strategy for ING Bank will take into account growing customer awareness and the increasing demand for sustainable solutions. A strong and transparent framework of environmental and social risk policies, financial education and community development programmes will remain important building blocks of this strategy.
The CR strategy for ING Insurance will focus on financial education and community development. With regard to investment management, environmental and social risk policies will continue to play an important role.
(in EUR million) 2,120 2,028 (5) Customer satisfaction index (3) 69.1% 69.1% Economic value (in EUR million) Total assets 1,247,110 1,163,643 Shareholders’ equity 41,555 33,863 Total income 54,887 47,765 Result before tax 4,477 –1,525 Net result 3,220 –935 Personnel expenses: salaries 5,501 5,076 Personnel expenses: other 2,270 2,262 Employee engagement index (4) 75% 71% Diversity Percentage of women in the international management council 14.9% 12.8% ING Chances for Children Number of children provided with access to education 125,175 107,575 Green energy MWh (in thousands) of electricity purchased by ING that is derived from renewable resources 332,843 330,582 Dow Jones Sustainability Index (6) 72 75 FTSE4Good Index Included Included
INVESTING IN THE COMMUNITY In line with our ambition to make a positive contribution to society, ING has launched community investment programmes in both developed and developing communities. Our employees are essential to make these programmes a success. They are committed to donate money or do voluntary work – for our global campaigns or for one of the many programmes that have been developed by our local branches.
ING plays an important role as a financial intermediator in society. The essence of our business is transformation, which takes many forms and serves various customer needs. In our retail banking operations, for example, we transform on-demand entrusted deposits into long dated mortgage loans. Through our payments and cash management operations we make money available when and where customers need it. Our insurance business is all about transformation through time by converting uncertain future cash flows into fixed flows, whether they are in the form of life insurance contracts or pensions. Geographic transformation takes place through our international commercial banking network when we help corporate customers fund their international business plans.
Customer behaviour and demographics have an important bearing on risk management of both our banking and insurance products. Life expectancy, people’s propensity to move from one place to another, tax changes and many other factors impact the pricing and hedging of products such as mortgages and annuity contracts. We therefore update lapse assumptions, prepayment assumptions and all other relevant metrics regularly.
ING operates in financial markets that have become increasingly interconnected as a result of globalisation. ING has a risk appetite framework that captures and restricts the different dimensions along which adverse markets impact ING’s capital and liquidity position. In addition, ING increasingly conducts company-wide stress tests as a supplementary tool to assess resilience.
Furthermore, ING Netherlands was again ranked as one of the top employers in 2010 based on criteria such as good employment conditions, training facilities and internal promotion opportunities.
Talents ING’s Executive Board invests time in personal interaction with high-potential talents at all levels of the organisation. Networking opportunities include regular, lunch meetings with the CEO and Executive Board members. ING’s executive leadership also engage with high-potential talents at larger-scale events such as ING’s Management Conference and as part of leadership development programmes such as ING’s Inclusive Leadership Journey programme and the IIGP.
Putting people first in a changing environment > Ready for the operational split by year-end 2010; Building two strong stand-alone organisations > Key succession plans and programmes in place to attract, develop, assess and retain talent > Finger on the pulse of the organisation
Additional ‘How-to-deal-with-Change’ courses were implemented in response to organisational restructuring programmes, in the Netherlands, the US, Asia/Pacific and Latin America. The courses helped employees deal with the consequences of changes, whether to settle into a new job at ING or find a new external opportunity.
Last but not least, ING will focus on competitive remuneration linked to performance within the CRD III (Capital Requirements Directive III) framework.
FINANCIAL DEVELOPMENTS Underlying result before tax (excluding the impact of divestments and special items) increased more than fourfold to EUR 5,862 million from EUR 1,361 million in 2009. This strong improvement was driven by volume growth, strengthening of the interest margin, lower negative market-related impacts and a more normalised level of risk costs. Almost all business segments contributed to the increase. ING Direct and ING Real Estate benefited from the signs of stabilisation in the property markets: ING Direct posted an underlying result before tax of EUR 1,450 million after a loss in 2009, while ING Real Estate reduced its loss by EUR 925 million to EUR 63 million in 2010.
Retail Banking 11,431 8,763 Commercial Banking 5,811 5,097 Corporate line banking 55 –377
environment’) require us to follow a prudent approach to optimise our limited resources.
PREFERRED BANK FOR OUR CUSTOMERS During the year ING Bank made significant progress in many areas. Customer centricity was enhanced by introducing a number of new products, services and initiatives. This included initiatives to more pro-actively and systematically measure and monitor customer satisfaction. Furthermore, ING has taken steps to ensure that every customer gets the right products and services, via the right distribution channels, and at the right returns or costs. All our employees’ efforts are focused on deepening customer relationships.
ING Belgium developed an online consumer loans tool to give customers quick decisions on loan requests. ING-DiBa in Germany launched a financial advice portal which gives customers answers to common questions on private finance. Commercial Banking improved its international network to deliver better customer service. The Net Promoter Score (NPS) has been adopted by all parts of the business to measure and improve customer centricity.
ING Bank made good progress in 2010 on its ambitions for 2013. Underlying income increased by 28.3% to EUR 17,298 million. Excluding market-related impacts, underlying income rose 7.4%. The underlying cost/income ratio improved to 56.0% (or 54.2% excluding market-related impacts). The underlying return on equity, based on 7.5% of RWA, was up to 17.6% compared with 5.0% in 2009.
With regard to new capital requirements proposed by Basel III, ING is well prepared to meet them.
The bank starts from a strong base: it is one of the largest savings banks in the world with a strong funding base; its direct service model is internationally renowned and ensures low-cost distribution; and it has an extensive international network, especially for globally operating clients. This unique combination of capabilities and geographic footprint ensures that ING Bank is well positioned for the future.
Retail Banking has established strong positions in the mature markets of the Benelux, Western Europe, the US, Canada and Australia, and is well placed to capture growth opportunities in the high-growth markets of Central Europe and Asia. The good performance of 2010 was driven by a healthy increase in the margins we make on savings accounts and mortgages in the Netherlands, the lower risk costs and impairments at ING Direct, and volume growth in emerging markets. Retail Banking is developing into a leader in providing ‘direct if possible, advice when needed’ services. Customer centricity remains a key focus across the business. In 2010, the Net Promoter Score methodology was rolled out in India, Poland, Romania, Luxembourg and Turkey and is now ‘live’ across the entire retail organisation, except for ING’s joint ventures in China and Thailand.
Total underlying income increased by 30.4% to EUR 11,431 million. The interest result rose 13.6%, mainly driven by higher margins and volumes, particularly in the Netherlands and at ING Direct. The interest results of Retail Belgium and Retail Central Europe were almost flat, while they increased in Asia. Commission income remained flat, as small declines in the Benelux and at ING Direct were offset by increases in Asia and Central Europe. Investment and other income improved significantly, mainly due to lower impairments on debt securities at ING Direct USA.
The addition to the loan loss provisions declined 24.0% to EUR 1,254 million in 2010, or 70 basis points of average risk-weighted assets, compared with 101 basis points in 2009. This decline was mainly caused by lower risk costs at ING Direct USA. Risk costs for the mid-corporate and SME segments remained elevated.
The return on equity, based on a 7.5% core Tier 1 ratio, rose to 19.9% from 6.6% in 2009, driven by the improved results. In 2010, total risk-weighted assets increased by 5.5% to EUR 176 billion at year-end, mainly outside the Benelux.
RETAIL NETHERLANDS FINANCIAL DEVELOPMENTS The underlying result before tax of Retail Netherlands increased 58.0% to EUR 1,395 million in 2010 from EUR 883 million in 2009, driven by higher income and lower expenses, despite an increase in risk costs. Underlying income rose 11.6% to EUR 4,333 million in 2010. This increase was fully attributable to a 15.8% higher interest result, mainly driven by higher interest margins on savings and mortgages. Net production in residential mortgages was EUR 5.5 billion, while volumes in business lending decreased by EUR 1.1 billion due to low demand.
At the core of Retail Banking’s long-term strategy is the focus on the ‘direct if possible, advice when needed’ model, introduced in 2009 following changing market conditions and customer behaviour. To this end, in the Netherlands a new distribution model was set up in 2009 and by year-end 2010, 250 branches had been converted to support the new multi-channel service concept, which offers customers the option of banking from home via the internet, telephone or e-mail, or by visiting branches for face-to-face advice. This initiative is progressing well: in 2010, the customer base increased by 0.9%, mainly as a result of the so-called Overstap service – a newly introduced, hassle free package to switch bank.
Funds entrusted increased by a modest EUR 0.4 billion. Operating expenses declined 3.8% to EUR 2,376 million in 2010, driven by the cost containment programme started in 2009 and efficiency improvements related to the merger of ING Bank and Postbank. Risk costs increased 6.0% to EUR 561 million, or 108 basis points of average risk-weighted assets, as economic recovery in the Netherlands remained fragile.
The mortgage market share was up to 16.6% in 2010 (monthly new production), with net production in residential mortgages at EUR 5.5 billion. Funds entrusted increased by a modest EUR 0.4 billion, while volumes in lending decreased due to low demand.
Another initiative involved executives visiting various customers in the Netherlands, the objective being to build customer relationships and hear their feedback on different issues. This programme of visits will continue in 2011.
Private Banking Retail NL also provides private banking services in the Netherlands to wealthy individual customers. The intention is to create a strong private banking franchise. In 2010, Private Banking introduced a single IT system for its fixed mutual-fund activities.
BUSINESS DEVELOPMENTS Retail Belgium is the fourth biggest bank in the country, serving over two million customers. It has a strong brand position and has shown a solid commercial and financial performance for several years in a row, despite fierce overall competition in 2010.
Retail Belgium’s market share in mortgages recovered in 2010 and is back to the previous year’s level of around 12%. Net production in mortgages was EUR 2.8 billion, while other lending increased by EUR 1.4 billion. The bank increased savings volumes, driven by the launch of an online savings product, Orange Book, aimed at retaining existing customers. It also introduced a third-party fund for the retail segment, which was well received by the market: third-party mutual funds represented EUR 932 million (or 32%) of the entire mutual-fund production.
ING has been acknowledged as one of the three best ICT employers in the Netherlands by independent research company, CRF.
WestlandUtrecht Bank In 2009, ING and the European Commission agreed that, as a result of the state aid ING had received, it would have to separate some business units. Part of the agreement was that ING would create a new company in the Dutch retail market out of part of its current operations, by combining the Interadvies banking division (including WestlandUtrecht and the mortgage activities of NationaleNederlanden ) and the existing consumer lending portfolio of ING Retail. This business, WestlandUtrecht, would – once separated – be hived off (the so-called carve-out) as a competing bank, offering a wider range of products, including savings accounts. By mid-November 2010, WestlandUtrecht Hypotheekbank was 2Report of the Executive Board
The branch transformation programme was largely responsible for adding some 53,000 new clients in 2010, bringing the total to over two million. Total number of sales online products amounted to nearly 300,000.
ING Direct Italy launched a customer acquisition campaign in which new customers received a free smartphone when opening a payment account. This was done in preparation for offering Italians mobile access to ING Direct’s website by the end of 2010. In the early stages of the campaign 24,000 accounts were opened in one weekend.
Top employer Engaged employees are essential to our success. Everyone knows they have a role to play in contributing to ING’s vision and strategy, and know they can make a real difference. Results from the 2010 WPC Survey (ING’s global annual employee engagement survey) show that employee engagement level at ING Direct rose to 76% in 2010, up from 72% in 2009. However, at some business units the engagement level was lower. At ING Direct France, for example, the engagement score was down 2% at 52%. An area identified for improvement by staff was ‘leadership’, which will be addressed in 2011. And at ING Direct Italy, the score was up 2% at 61%, with a clear priority to work on ‘accountability’, which will be an area for improvement this year. The employee engagement result in North America was 83%, well above the overall result.
In Spain, ING Direct enhanced its distribution channels by opening two physical bank outlets. This is part of our strategy to provide customers with predominantly direct services and face-to-face advice when needed. We expect to open another 25 outlets across the country in 2011.
In Romania, ING has achieved its ambition to become the country’s most preferred bank, serving over one million customers. ING Bank Romania made further progress in internet banking, in which it is a leader in terms of transaction numbers. It was voted the ‘most popular online brand’ in the financial sector.
The business units in the region are moving towards the ‘direct if possible, advice when needed’ business model. They are also striving to become the customer’s preferred bank through operational excellence, customer centricity and being a top employer.
ING Vysya Bank’s employee engagement score in the WPC survey was up from 66% in 2009 to 71% in 2010.
TMB Bank held an Employee Engagement Survey, organised by Gallup. Engagement levels rose from 20% to 49% because of the introduction of a clear organisational structure, better defined job descriptions and a more transparent performance evaluation and recognition system. It also set up a TMB Employee Service Centre for staff to give their feedback.
Results from the 2010 WPC Survey (ING’s global annual employee engagement survey) in Retail Asia overall show that the employee engagement level was 71% in 2010, up from 65% in 2009.
Across the Retail organisation, the focus will remain on further developing the ‘direct if possible, advice when needed’ business model. The Net Promoter Score methodology, which is ‘live’ across the entire retail organisation, will be further embedded across the business.
Retail Belgium continued its domestic branch transformation programme and aims to bring the number of converted branches to 477 by the end of 2011.
In 2011, ING Direct will continue to work towards becoming a more complete retail bank, with a different approach from its competitors. Retail Central Europe will continue to implement the ‘direct if possibile, advice when needed’ model. ING Bank Turkey plans to launch the Orange Account, the first variable savings account in the country. Retail Asia will improve the customer experience by launching customer-centric products and will continue to build the brand.
According to Greenwich Associates research January 2011, PCM is perceived to have a strong position in the Netherlands, Belgium and Central and Eastern Europe. In the Netherlands, ING Commercial Finance is market leader, while General Lease and Car Lease rank No.3. In Belgium, ING Lease is the second largest leasing company.
ING Structured Finance achieved its aim to be a Top 10 player globally by ranking in the Top 10 in various locations in the category MLA by number of deals. ING maintained its No.1 position from Q1 through Q4 in key tables such as MLA and bookrunner for syndicated loans in the Netherlands by volume and bookrunner for syndicated loans in the Benelux by volume.
In September, the Bottom Line initiative was launched in Central and Eastern Europe. This stresses that Commercial Banking is aligned internally to deliver relevant solutions to clients and emphasises ING’s commitment to becoming a leading commercial bank in Central and Eastern Europe.
Major deals The world economy gradually recovered in 2010 from the recession of 2009. Tensions remained, however, including fiscal tightening, a fluctuating euro and debt concerns within the eurozone, continued credit tightness and intensified competition. At national and international levels there were discussions about the best ways to restore financial stability. Stricter regulations for banking were implemented.
From Fitter, Focused, Further… Throughout 2010, Commercial Banking focused investments and resources on achieving its Fitter, Focused, Further strategic goals: namely, to develop key market and product positions, improve client satisfaction by implementing client-centric initiatives, reduce costs and enhance operational excellence.
STRUCTURED FINANCE Structured Finance (SF) is a specialist commercial lending business, providing loans across the globe to support capital intensive investment and working capital. It is managed in three groups: Energy, Transport and Infrastructure Group; Specialised Financing Group; and International Trade and Export Finance.
LEASING & FACTORING The Leasing and Factoring (L&F) product line provides financial and operational leasing services for a wide range of equipment as well as receivables financing and other factoring solutions to ING’s corporate clients, mid-corporate and SME customers. L&F’s principal distribution channel is through the network of ING Bank’s retail and commercial branches with additional sales via direct, intermediary, vendor and internet channels. Although the overall European leasing market has shrunk by around 30% from 2008 to 2010 due to the economic downturn, L&F has maintained its market position in its core markets. L&F’s 2010 results showed a strong improvement on 2009, driven by a combination of stable volumes overall, higher margins, reduced risk costs and an excellent performance by ING Car Lease, which benefited from a sustained recovery in the second-hand car markets and an increasing order book from major corporate customers.
Credit margins began returning to normal levels during the year after reaching a peak in 2009. Volumes remained under pressure in 2010. Demand was low as companies continued deleveraging across key geographic and business markets. Investment and M&A activity stayed subdued.
Payments and cash management services are a prerequisite for customer acquisition and retention and are especially important in times of scarce liquidity in the market. ING is market leader in payments processing in the Netherlands and a large player in Belgium.
ING continues to deliver on its strategic objectives of reducing exposure to real estate, simplifying the company and further strengthening its capital base.
ING Real Estate Finance and ING Real Estate Development are not impacted by the transactions and will continue to be part of ING Bank.
CONCLUSIONS AND AMBITIONS Commercial Banking has the right capabilities in place: strong established relationships with clients, client and sector expertise, a very strong position in the Benelux and Central and Eastern Europe, a well-sized international branch network and an international product offering. It has a leading position in specialised business and good risk management skills.
Customer centricity and cross-selling were intensified during the year. Commercial Banking closed several landmark deals and earned notable rankings in league tables across Europe proving that its performance is being recognised.
L&F’s capabilities in the specialist field of asset-based finance was recognised during the year with ING Commercial Finance being ranked as the No.1 Factoring Company in the Netherlands by MT Finance business magazine while ING Lease UK was named Lessor of the Year for the third successive year by the NACFB trade association.
FM continues to bring in sizeable and profitable business for Commercial Banking. After a record year in 2009, income in 2010 normalised but it was still FM’s second best year. FM faced several uncertainties during the year: the market environment, changes in financial regulation, liquidity, funding and deleveraging concerns. Although client flows remained buoyant, margins fell to lower levels. Revenues in developed markets were negatively impacted due to the sovereign debt crisis and the weaker client flows that the crisis caused.
FM increased profitability against reduced risk. Value-at-Risk has progressively been reduced since 2007, while both trading and client income has increased substantially. Investments have been focused on increased FM capacity in the emerging markets and to improve service for Financial Institutions. Three top priority initiatives were expanding the FX Options Platform, increasing the Commodities Product Offering and improving alignment with risk management to ensure the success of product and client initiatives in emerging markets. Cross-selling programmes for clients in emerging markets were initiated.
ING REAL ESTATE ING Real Estate includes the Finance, Development and Investment Management businesses. ING continued to steadily reduce its exposure to real estate, including an evaluation of the position of Real Estate Investment Management (REIM) within the banking business.
BUSINESS DEVELOPMENTS Insurance sales were higher in 2010, assisted largely by strong Corporate-Owned Life Insurance (COLI) sales in Japan, but also by stronger sales elsewhere in Asia/Pacific and higher mandatory pension sales in Latin America.
Total operating result 1,743 1,434 Gains/losses and impairments –505 –544 Revaluations 601 –346 Market and other impacts –2,359 –746 Underlying result before tax –519 –202
Central and Rest of Europe 254 291 United States (excl. US Closed Block VA) 308 356 US Closed Block VA –1,793 –654 Latin America 342 273 Asia/Pacific 516 383 ING Investment Management 173 169 Corporate Line insurance –1,093 –1,309 Total –519 –202
AMBITION 2013 By 2013, Insurance/IM intends to lift investment margins to 105 basis points on 4% growth per annum in general account assets. The business also plans to reduce life/IM administrative expenses as a ratio of operating income to 35% and to grow sales by 10% per annum and to achieve a return on equity in excess of 10%.
Having achieved the operational separation of Insurance/IM from Banking at the end of 2010, ING Insurance/IM is working towards two successful IPOs of the business by sharpening its strategic direction, strengthening the capital base, and improving investment results.
In preparing for two IPOs, ING Insurance/IM implemented a number of measures to increase transparency and bring US Insurance accounting and hedging in line with US peers. Central to these measures was the creation of a separate business line, US Closed Block VA within ING Insurance/IM. The changes will improve reserve adequacy, allow the company to better hedge interest rate risk, and reduce earnings volatility. (See Financial Developments above and the ‘US Closed Block VA’ section for details of these changes and their financial impact.)
> Leading regional player in insurance and pensions > Wide transformation of business under way in the Netherlands > Focus on improving efficiency and pursuing selective growth opportunities
FINANCIAL DEVELOPMENTS The underlying result before tax in the Benelux increased by 167.3%, reflecting a higher operating result (EUR 53 million), lower negative real estate revaluations (EUR 379 million) as well as lower negative realised gains on real estate (EUR 57 million). After a period of strongly declining real estate values, the ING Insurance Real Estate Portfolio benefited from both the continuing recovery in the UK real estate market and stabilising yields in Continental Europe.
Operating result before tax increased 8.5%, as a higher investment margin and lower expenses more than compensated for a lower technical margin as well as a lower non-life result. The higher investment margin (EUR 89 million or 24.1% increase) reflected a higher fixed income result as cash balances were reinvested over the course of 2010. The non-life result was EUR 156 million compared to EUR 248 million in 2009. This was due to the inclusion of favourable one-off items in the 2009 result. Furthermore, adverse claims development in the disability business and a few large fire claims in 2010 contributed to the decline in the non-life result.
BUSINESS DEVELOPMENTS The mild economic recovery in Europe continued in 2010, despite the debt crisis in southern Europe and Ireland casting a shadow over economic activity. Sentiment improved, the level of unemployment began to fall and capacity utilisation was on the rise. In the Benelux, economic conditions improved. After GDP fell 3.9% and 2.7% per cent respectively in the Netherlands and Belgium in 2009, economic growth was 1.7% in the Netherlands and 2.0% in Belgium in 2010.
Insurance Benelux focused on improving its performance in 2010 by continuing to reduce costs and capturing existing growth opportunities in the Netherlands by transforming its key insurance business there, and building on the success of the bancassurance model in Belgium and Luxembourg.
In October, NN Retail received the Keurmerk Klantgericht Verzekeren (quality recognition for customer-focused insurance) from the Stichting Toetsing Verzekeraars, rewarding efforts to improve customer focus. In addition, customer-focused initiatives paid off with an internal survey finding that customers rated 9 out of 10 their satisfaction with NN’s handling of a cross-section of claims, and with 80% of customers requests being settled within five working days.
In other One programme achievements, overall costs in Insurance Benelux were reduced by 25% over the past two years and a survey of employees showed that 90% of employees were motivated by the transformation strategy.
Although the retail insurance market remained subdued, NN was particularly active and successful in the corporate market, winning many major new high-profile corporate clients, including TomTom and Accenture.
New sales (APE) decreased by EUR 40 million to EUR 352 million in 2010 from EUR 392 million in 2009, largely caused by a EUR 34 million reduction in APE in Greece, particularly in the Greek bancassurance channel.
BUSINESS DEVELOPMENTS Insurance Central and Rest of Europe presents solid growth opportunities with a market of approximately 220 million people and relatively low penetration rates for life insurance and pensions. It operates in Poland, Hungary, the Czech Republic, Slovakia, Romania, Bulgaria, Greece, Turkey and Spain.
Regulatory change Some governments in the region remain under severe budgetary pressure and this has resulted in changes to the local regulatory environment for mandatory pensions, due to the demands of the deficit and debt definitions of the Maastricht Treaty.
CONCLUSIONS AND AMBITIONS Most economies in the region are expected to experience above average eurozone GDP growth rates in 2011. In time, standards of living in the region are likely to increase gradually to West European standards. Recent changes to regulations for pensions remain a concern, and could constrain growth in the short term. However, Insurance Central and Rest of Europe has strong market positions in life and pensions and is well positioned to capitalise on economic recovery. ING has a strong reputation in the marketplace, well-regarded management teams in place and a solid customer base. The businesses are well situated to make a substantial contribution to the Europe-based IPO of ING Insurance/IM.
The macroeconomic environment in 2010 was an improvement on 2009. However, it was still challenging for business, with a lingering recession and severe public debt problems in some countries, resulting in subdued growth across the region.
The focus in 2010 continued to be on preparing for future growth, managing costs carefully and further improving sales processes.
Growth strategy With competition increasing, new distribution channels opening and changing regulations, it remains ING’s goal to continue to be a competitive, market-leading company that offers customers the best professional advice and value for money. In 2010, ING worked on several major initiatives to achieve this. These included the introduction of new products and entering new business segments – for example the introduction of Group Life in Poland. Also, a Tied Agency Overhaul programme began in Spain and will be rolled out gradually across the rest of the region. In Turkey, a life insurance licence was obtained.
> Sharpened focus on Retirement Services and Life Insurance businesses > Simple rollover mutual funds target retirees > Separate business line created for
The challenging state of the US economy, including the high level of unemployment and low interest rates, was a significant headwind for the businesses in 2010. Despite these external factors, overall sales and operating profit were higher than in 2009, thanks to a continued focus on cost reduction, a variety of new sales initiatives and efforts to improve the investment margin.
The rise in operating income was driven by a higher investment margin mainly from lower interest rate swap expenses and reinvestments into (longer duration) fixed income securities, and also from higher fees and premium-based revenues, as a result of higher assets under management.
The Life Insurance unit is a Top 5 writer of individual term life insurance and a top writer of permanent life insurance. Its group unit is a major writer of large-case group life and disability insurance and a Top 5 writer of employer stop-loss insurance.
In 2010, all businesses continued to concentrate on providing customer-focused products, competitive returns and quality service.
In Retirement Services, ING serves the full spectrum of the US market from full-service plans to recordkeeping services only. The business is positioned to serve all sizes and employer segments of the market – including corporate, education, government and healthcare.
The integration of CitiStreet, a recordkeeping business that ING acquired in 2008, entered its final stage. As part of the drive to control expenses and improve margins, staffing levels across Retirement Services were reduced in 2010.
FINANCIAL DEVELOPMENTS The underlying loss before tax was EUR 1,793 million in 2010 compared to an underlying loss of EUR 654 million in 2009. The negative underlying result was driven by reductions in the deferred acquisition cost (DAC) balance. In the second quarter of the year, the DAC balance was reduced as a result of an 11.9% decline in the S&P 500 during the quarter. In the fourth quarter, the DAC balance was further reduced mainly due to a non-recurring DAC writedown of EUR 975 million. This DAC write-down, triggered by making the VA business a separate business line, was implemented to improve the reserve adequacy to the 50% confidence level for the business on a stand-alone basis.
Excluding these non-operating items, the operating result improved by EUR 26 million to EUR 49 million in 2010 from EUR 23 million in 2009, as lower expenses more than offset the decrease in operating income.
During the year, Individual Retirement offered for the first time a number of lower cost rollover annuity products targeted primarily at current participants exiting ING-managed retirement plans. These included two fixed index annuities (ING Select Multi-index 5 and ING Select Multi-Index 7), a registered fixed annuity and a mutual fund individual retirement product.
Administrative expenses increased by 10.9% on a constant currency basis which was primarily attributable to investments to roll out wealth management projects throughout the region.
BUSINESS DEVELOPMENTS Latin America surged ahead in 2010 with economic growth rates generally exceeding those of most countries in Europe as well as the US.
ING operates the second largest pension business in Latin America and has leading positions in the region’s most attractive pension, insurance and asset management markets. In Peru, ING is ranked No.2 in mandatory pensions with a 30.5% market share, in Uruguay, the second largest; in Mexico and Chile, the third largest; and in Colombia, the company ranks among the Top 5 mandatory pension providers.
Insurance Latin America will continue to pursue operational efficiency by the sharing of best management practices, a disciplined approach to expense control largely through regional procurement initiatives and the search for synergies in the businesses in the region.
Insurance Asia/Pacific performed very well in 2010, recording strong growth in new sales and profitability. Strong sales in Japan, new products in Malaysia and Hong Kong and robust bank distribution sales all contributed to the result. The business focused on boosting commercial momentum by continuing to develop and strengthen bancassurance relationships and lifting tied agent productivity.
The operating result of EUR 472 million in 2010 rose by 29.3% or 11.6% excluding currency effects from EUR 365 million in 2009, driven by higher operating income, partly offset by moderate growth in expenses.
The life operating income increased 20.6% or 6.2% excluding currency effects to EUR 1,618 million in 2010 from EUR 1,342 million in 2009. The increase was attributable to higher fees and premium-based revenues driven by volume growth in most countries as well as an ongoing improvement in the investment margin reflecting increased investment income, growth in general account assets and reinvestment of cash in longer-duration assets.
During the year, the priorities for the business were to improve operational efficiency and contain costs as well as to expand sales through the roll out of a wealth management business across the region. Customer retention strategies for the mandatory pension business were refined.
New sales (APE) rose to EUR 1,389 million, up 35.6% or 20.6% excluding currency effects from EUR 1,024 million in 2009. Sales growth was driven by strong contributions from new products and bank distribution sales.
BUSINESS DEVELOPMENTS Most of Asia recorded strong economic growth in 2010. Robust domestic demand and trade within Asia boosted consumer confidence, which in turn buoyed investor sentiment and led to strong stock market growth. Despite some concerns about the impact of economic restraint measures in China earlier in the year, overseas funds continued to find a home in Asia’s emerging markets.
Insurance Asia/Pacific is one of the largest foreign insurers in Asia with nine insurance companies in seven countries: China, Hong Kong, South Korea, Japan, Malaysia, India and Thailand.
FINANCIAL DEVELOPMENTS Assets under management (AuM) increased by 12.8% or EUR 43.8 billion to EUR 387 billion at year-end 2010. Foreign exchange impact and market performance were responsible for EUR 23.1 billion and EUR 24.6 billion of the increase respectively. There was a net outflow of EUR 3.7 billion as a result of EUR 125.5 billion of outflows and EUR 121.8 billion of inflows.
At year-end 2010, assets managed for retail clients increased slightly to 39% from 37% of total AuM at year-end 2009. General account assets (proprietary) increased to 37% of total AuM while the institutional clients segment decreased to 24%. The composition of fixed income, equity and money market investments was 64%, 31% and 5% respectively of total AuM.
Underlying result before tax increased by EUR 4 million to EUR 173 million in 2010 as a result of a EUR 30 million reduction in negative revaluations in private equity investments and the reversal of an impairment on assets in India (EUR 8 million), which were offset by a EUR 35 million lower operating result.
On the retail front, ABN AMRO in the Netherlands began to distribute nine ING IM mutual funds. The former Fortis Bank Nederland, now integrated with ABN AMRO, has offered ING IM products for some time.
As announced in 2009, ING IM outsourced the funds administration, custody and transfer agent functions of its Luxembourg fund range to Brown Brothers Harriman (BBH) in order to offer its unit holders a-best-in-class operational service.
A special distribution division was created to focus on capturing a larger share of fund business from ING affiliate businesses, reflecting the importance of this business. Investments were made to enhance retail and institutional distribution and marketing teams. ING IM Americas launched the ING Infrastructure, Industrials and Materials Fund, a closed end fund, in January 2010.
Latin America recorded another strong year of performance, extending its solid track record in the mandatory pension market. ING IM partnered ING’s insurance and pension businesses in the roll-out of a wealth management platform. The global attractiveness of the region was reflected in the successful launch of a new Latin America fund at ING IM Taiwan.
investment strategies and services to ING’s global network of businesses and third-party clients.
Combining all three businesses allowed for an enhanced, unified strategy across the three regions and provided further synergy opportunities in distribution and sales as well as in manufacturing, operations and administration.
ING IM concentrated mainly on improving performance across all asset classes, delivering superior client service, enhancing risk management, exploiting synergies between the regional ING IM businesses, and upgrading systems and infrastructure.
It strengthened partnerships with ING businesses and developed third-party business opportunities. The emphasis was on accelerating the growth in revenues and assets under management, working more cost efficiently and building a common culture and set of values within the business.
ING IM recorded a strong increase in the number of funds registered. There were 21 new funds registered in Korea. Four new funds were registered each in Hong Kong and Taiwan, and three were registered in Singapore. In 2010, many awards were won. These included the AsianInvestor 2010 Investment Performance Awards for institutional funds management in the category of Asia fixed income; the Asia Asset Management Institutional Fund House Taiwan 2009 Award; the ASEAN Most Innovative Investment Manager title in Malaysia – and the Asset Manager of the Year 2010 award in the Philippines by The Asset magazine.
CONCLUSIONS AND AMBITIONS ING IM is committed to becoming a top-tier performing investment management business. ING IM has solid growth opportunities both through affiliated ING channels and through retail and institutional third-party business.
Also in January 2010, the Supervisory Board held its annual full-day meeting on ING’s strategy and the 2010 Financial Plan, including the related risks. The Supervisory Board extensively discussed the possible strategies for the coming three years focusing on customer centricity, preparing for the separation of the banking and insurance operations and on generating capital and cash flow to repay the Dutch State. The ambitions for the new banking and insurance organisation were also discussed as well as the Dutch Banking Code. The Supervisory Board approved the 2010 Financial Plan and ING’s strategic direction. The opportunity for appeal against the decision of the European Commission regarding certain elements in the Restructuring Plan was discussed and supported by the Supervisory Board.
The 4Q 2009 and the 2009 annual figures were discussed in February 2010, including the related reports from the internal and 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 about ING’s exposure to the sovereign debt of Southern European countries and was updated on management’s vision of ING’s real estate exposure. The draft agenda of the annual General Meeting was discussed and approved. An important topic was the discussion on the ING Trust Office. The Supervisory Board took note of investor feedback on ING’s performance over 2009.
AUDIT COMMITTEE MEETINGS In 2010, the Audit Committee met five times, with no absentees, to discuss the annual and quarterly results and the annual US GAAP results. The development of the insurance results, the real estate exposure and cost development within ING, as well as management actions concerned, were discussed several times during the year.
RISK COMMITTEE MEETINGS The Risk Committee met four times with no absentees. In each Risk Committee meeting the financial risk reports for Banking, Insurance and Group and the non-financial risk reports for banking and insurance were discussed. Management reported on the outcome of stress tests for banking and insurance. In May an extensive discussion took place on the eurozone turmoil and the possible risks for ING. The Risk Committee closely monitored the effect of the non-financial risk mitigating activities during the year. Each meeting ended with a general discussion on possible future risks.
In August, the Supervisory Board was informed in detail about the developments of the insurance business in the US including possible measures to be taken. A discussion took place on ING’s corporate responsibility policy and the implementation of ING’s Business Principles within the business also in light of the Corporate Governance Code. The Supervisory Board was updated on the effect of the new Basel III regulation on the core Tier 1 ratio and on the implementation of the Solvency II regulations.
Jackson Tai was appointed to the Supervisory Board on 22 April 2008. He became chairman of the Audit Committee as of May 2009. Jackson stepped down from the Supervisory Board in order to avoid any conflicts of interest given the proposal by Bank of China to appoint Jackson Tai as one of its non-executive directors.
ANNUAL ACCOUNTS AND DIVIDEND The Executive Board has prepared the annual accounts and discussed these with the Supervisory Board. The annual accounts will be submitted for adoption at the 2011 General Meeting as part of the Annual Report. ING will not propose to pay a dividend over 2010 at the annual General Meeting.
On 26 January 2009, ING Group reached an agreement with the Dutch State regarding the Illiquid Assets Back-up Facility (‘IABF’), as further described in note 33 to the consolidated annual accounts. During 2009, ING Bank N.V. issued various series of debt instruments under the 2008 Credit Guarantee Scheme of the Dutch State (‘Bonds’), for the first time on 30 January 2009.
However, ING Group voluntarily applies the principles of the Banking Code regarding remuneration with respect to the members of its Executive Board, and considers these principles as a reference for its own corporate governance. ING Group’s remuneration policy for the Executive Board and Senior Management is in agreement with these principles. The remaining principles of the Banking Code are not considered as a reference for ING Group’s own corporate governance, although the application thereof by ING Bank N.V. and its subsidiaries will be reflected to a certain extent in ING Group’s own corporate governance structure and corporate governance practices.
Share issues are to be decided by the General Meeting, which may also delegate its authority. Each year, the General Meeting is asked to delegate authority to the Executive Board to issue new ordinary shares or to grant rights to subscribe for new ordinary shares, both with and without pre-emptive rights for existing shareholders. The powers delegated to the Executive Board are limited: • in time: powers are delegated for a period of 18 months; • by number: insofar sufficient unissued ordinary shares are available in the authorised capital, ordinary shares may be issued up to a maximum of 10% of the issued share capital, or, in the event of a merger or takeover, 20% of the issued capital; and
The Board of ING Trust Office reports on its activities through an annual report, which has been included on pages 71–73.
During 2010, ING Group did not provide any form of compensation to parties that are directly or indirectly involved with the production or publication of analysts’ reports, with the exception of credit-rating agencies.
VOTING ON THE ORDINARY SHARES BY HOLDERS OF DEPOSITARY RECEIPTS AS PROXY OF ING TRUST OFFICE Although the depositary receipts for shares do not formally carry any voting rights, holders of depositary receipts, in practice, rank equally with shareholders with regard to voting. ING Trust Office will, subject to certain restrictions, grant a proxy to a holder of depositary receipts allowing such holder, in the name of ING Trust Office, to exercise the voting rights attached to the number of ordinary shares that corresponds to the number of depositary receipts held by such holder of depositary receipts. On the basis of such a proxy, the holder of depositary receipts may vote at his or her own discretion.
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 diverse – an estimated 38% of shares outstanding are held in the US, 33% in the Benelux, 17% in the UK, 7% in Switzerland and 5% in the rest of the world. Please refer to the ‘ING share’ chapter for more details.
GENERAL MEETING FREQUENCY, NOTICE AND AGENDA OF GENERAL MEETINGS General meetings are normally held each year in April or May, to discuss the course of business in the preceding financial year on the basis of the reports prepared by the Executive Board and the Supervisory Board, and to decide on the distribution of dividends or other distributions, the appointment and/or reappointment of members of the Executive Board and the Supervisory Board (if any), other items requiring shareholder approval under Dutch law, and any other matters proposed by the Supervisory Board, the Executive Board or shareholders or holders of depositary receipts in accordance with the Articles of Association.
RECORD DATE Pursuant to Dutch law, the record date for attending a general meeting and voting on the proposals in that general meeting is the twenty-eighth day before the day of the general meeting. Shareholders and holders of depositary receipts who hold shares and/or depositary receipts for shares at the record date are entitled 3Corporate governance
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. Pursuant to the 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. The list will also be non-binding pursuant to a resolution of the General Meeting to that effect adopted by an absolute majority of the votes cast which majority represents more than one-third of the issued share capital.
receipts for shares held by the relevant holder of depositary receipts. ING Trust Office has made it easier for votes to be cast this way by putting arrangements in place for proxy voting and e-voting.
VOTING ON THE ORDINARY SHARES BY ING TRUST OFFICE ING Trust Office has discretion to vote in respect of shares for which it has not issued voting proxies to holders of depositary receipts and has not received any voting instructions. According to its articles of association and the Trust Conditions, ING Trust Office is guided primarily by the interests of the holders of depositary receipts, taking into account the interests of ING Group and its affiliated enterprises.
PROXY VOTING FACILITIES ING Group is a participant of 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.
• to authorise the repurchase of outstanding shares and to cancel shares.
The current term of appointment of Koos Timmermans will expire at the end of the 2011 annual General Meeting. At this meeting he will be nominated for reappointment.
PROFILE OF MEMBERS OF THE SUPERVISORY BOARD The Supervisory Board has drawn up a profile to be used as a basis for its composition. The profile was submitted for discussion to the General Meeting in 2010. It is available on the website of ING Group (www.ing.com) and at the ING Group head office.
FUNCTION OF THE SUPERVISORY BOARD The function of the Supervisory Board is to supervise the policy of the Executive Board and the general course of events of ING Group and its business, as well as to provide advice to the Executive Board. In line with Dutch company law, the Corporate Governance Code and the Articles of Association, the Supervisory Board Charter requires all members of the Supervisory Board, including the State Nominees, to act in accordance with the interests of ING Group and the business connected with it, taking into account the relevant interests of all the stakeholders of ING Group, to perform their duties without mandate and independent of any interest in the business of ING Group, and to refrain from supporting one interest without regard to the other interests involved.
HENK W. BREUKINK (Born 1950, Dutch nationality, male; appointed in 2007, term expires in 2011) Former managing director of F&C and country head for F&C Netherlands (asset management firm). Other business activities: non-executive/vice-chairman of VastNed Offices/Industrial (real estate fund) and non-executive director of F&C hedge funds, Ireland (listed companies). Non-executive director of Brink Groep BV. Non-executive chairman of Heembouw Holding B.V. Chairman of the Supervisory Board of Omring (health care institution). Member of the Supervisory Board of HaagWonen (housing corporation). Senior executive coach.
The Corporate Governance Committee assists the Supervisory Board in monitoring and evaluating the corporate governance of ING as a whole and the reporting thereon in the Annual Report and to the General Meeting and advises the Supervisory Board on improvements. On 31 December 2010, the members of the Corporate Governance Committee were: Peter Elverding (chairman), Henk Breukink, Claus Dieter Hoffmann, Aman Mehta and Lodewijk de Waal.
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 the Remuneration report on pages 84 and 85. Members of the Supervisory Board are permitted to hold shares and depositary receipts for shares in the share capital of ING Group for long-term investment purposes. Details are given on page 85. Transactions by members of the Supervisory Board in these shares and these depositary receipts for shares are subject to the ING regulations for insiders. These regulations are available on the website of ING Group (www.ing.com).
Other business activities: member of the Supervisory Board of PGGM N.V. Member of the Advisory Board of Zorgverzekeraars Nederland. Chairman of the Supervisory Council of SNV. Chairman of the Advisory Board of Stichting Nationaal Fonds Kunstbezit. Member of the Netherlands’ National Contact Point (NCP) of the OECD. Chairman of the Supervisory Council of Museum Volkenkunde.
CHANGES IN THE COMPOSITION At the 2010 annual General Meeting Piet Klaver was reappointed as member of the Supervisory Board. In addition, Piet Hoogendoorn, Harish Manwani and Karel Vuursteen retired from the Supervisory Board at the end of the 2010 annual General Meeting.
Claus Dieter Hoffmann has decided to retire from the Supervisory Board at the end of the 2011 annual General Meeting.
GODFRIED J.A. VAN DER LUGT (Born 1940, Dutch nationality, male; appointed in 2001, resigned on 24 January 2011) Former chairman of the Executive Board of ING Group (retired in May 2000). Other business activities: chairman of the Supervisory Board of Stadsherstel Amsterdam N.V. Chairman of the Advisory Board of Kasteel De Haar and R.C. Oude Armenkantoor. Member of the Investment Advisory Committee of Stichting Instituut GAK.
AMAN MEHTA (Born 1946, Indian nationality, male; appointed in 2008, term expires in 2012) Former chief executive officer of Hong Kong & Shanghai Banking Corporation (HSBC) in Hong Kong. Other business activities: non-executive director of each of Tata Consultancy Services, Jet Airways Ltd., PCCW Ltd., Vedanta Resources Plc, Wockhardt Ltd., Godrej Consumer Products Ltd., Cairn India Ltd., Emaar MGF Land Ltd. and Max India Ltd. Member of the governing board of Indian School of Business. Member of the International Advisory Council of INSEAD.
The following report is issued in compliance with the provisions of article 15 of the trust conditions for registered shares in the share capital of ING Groep N.V. and best-practice provision IV.2.6 of the Dutch Corporate Governance Code.
of shares equal to the number of depositary receipts held by the relevant holder of depositary receipts on the record date. During the AGM, ING Trust Office voted on these shares in accordance with the voting instructions given. A more detailed overview of these voting results can be found on the website of ING Group (www.ing.com).
ING Trust Office promotes the solicitation of proxies of shareholders of ING Group other than ING Trust Office itself and of specific proxies or voting instructions of holders of depositary receipts. ING Trust Office encourages the greatest possible participation of shareholders and holders of depositary receipts and promotes the execution of voting rights in a transparent way. At the same time it prevents that a minority of shareholders and holders of depositary receipts could use a chance majority of votes to the disadvantage of the shareholders and holders of depositary receipts present nor represented at a general meeting of ING Group.
DEPOSITARY-RECEIPTS STRUCTURE During the years 2007–2010, participation of shareholders, excluding ING Trust Office, and holders of depositary receipts in annual general meetings of ING Group continually increased from 36.7% to 41.3%. Only the extraordinary general meeting of 25 November 2009 deviates from this trend with a markedly lower turnout of 31.1%.
On 27 April 2010, the Board convened before the AGM to discuss the proxy voting results and to decide on the initial position of the Board vis-à-vis the items on the agenda of the AGM.
On 30 August 2010, the Board held a meeting to discuss, among other things, the composition and profile of the Board and to prepare for the meeting of holders of depositary receipts of 24 November 2010. During this meeting the Board also discussed the proposed amendments to the Articles of Association and the trust conditions for registered shares in the share capital of ING Group (the ‘Trust Conditions’). These amendments were effectuated on 7 October 2010, as a result of which the Articles of Association and the Trust Conditions are fully in line with the Dutch Corporate Governance Code.
ANNUAL GENERAL MEETING ING GROUP, VOTES CAST AND VOTING BEHAVIOUR ING Trust Office attended the AGM. During this meeting ING Trust Office asked the Executive Board and the Supervisory Board of ING Group various questions, answered questions of shareholders and holders of depositary receipts and made a statement on how it proposed to vote, where desired.
Holders of depositary receipts who did not attend the AGM in person or who were not represented by a third party, were entitled to give binding voting instructions to ING Trust Office for a number 3 Corporate governance
OTHER In 2010, ING Trust Office obtained external legal advice on several issues relevant for the performing of its activities.
CONTACT DETAILS The contact details of ING Trust Office are: Maartje Dapperen
The Board currently consists of Jan Veraart, chairman, Mick den Boogert, Carel van den Driest, Paul Frentrop and Herman Hazewinkel.
Huib Blaisse stepped down as a member of the Board as of 1 September 2010. On 11 October 2010 the Board announced through the website of ING Trust Office that it intended to fill the vacancy, and, with a view to a balanced spread of the succession, to reappoint the sitting members of the Board, each for a different term. At the same time the Board announced that the holders of depositary receipts could make recommendations to the Board in connection with the vacancy and the reappointments during a period ending on 18 November 2010. The Board did not receive any recommendations. As a result the Board decided to appoint Mick den Boogert as a member of the Board as of 8 February 2011 for a term ending per 1 January 2015. Furthermore, Jan Veraart, Carel van den Driest, Paul Frentrop and Herman Hazewinkel were reappointed as members of the Board as of 1 January 2011, for terms ending per 1 May 2013, 1 May 2012, 1 May 2014 and 1 January 2015 respectively.
In 2010, the board of ING Continuity Foundation (the ‘Board’) held three meetings, on 28 April, 8 December and 22 December.
We have audited ING Groep N.V.’s internal control over financial reporting as of 31 December 2010, 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.
REMUNERATION POLICY The primary objective of the remuneration structure is to enable ING to retain and recruit qualified and expert leaders, senior staff and other high-qualified employees, who have a drive for excellence in serving the interests of the company’s various stakeholders. ING endeavours to match compensation of the company’s leadership appropriately against a variety of factors, such as the complexity of functions, the scope of responsibilities, the alignment of risks and rewards, and the long-term objectives of the company and its stakeholders, which is all the more important given the changing international standards regarding responsible remuneration. These factors differ for each role, line of business and country. This is especially the case for ING with its operations in over 40 countries and over 100,000 employees of whom around 73,000 are based outside the Netherlands (over 60% of senior management is non-Dutch). As much as possible for a global financial institution of this size, ING aims to take account of all these differences and also of the standards applied within similar financial institutions in the various countries in which it operates.
In addition, the remuneration policy provides for a balanced mix between fixed and variable compensation. Variable compensation will not exceed 100% of fixed salary at the time of allocation. Fixed compensation (i.e. the base salary levels) will be determined in line with the relevant market environment as an integral part of total direct compensation, and will be reviewed from time to time by the Supervisory Board. The policy provides for an at target variable compensation of 40% in cash and 40% in stock (in total 80%) of base salary if performance criteria are met. If performance criteria (as predetermined by the Supervisory Board) are exceeded, the variable component can be increased from target to maximum, not exceeding 100% of base salary at the time of allocation.
Supervisory Board discretion to review the policy and the remuneration paid ING as a company is expected to go through significant changes during the coming year. Moreover, the relevant international employment market is very much in flux. In order to ensure that ING can adapt to these two uncertain factors, the Supervisory Board will re-evaluate in 2012, or earlier should regulatory developments require this, whether the new remuneration policy (adopted in 2010) will be in line with the long-term objectives of the company, the relevant international context, as well as the societal perception of ING as a company. Should it become clear, after such evaluation, that the new remuneration policy has led to an unintended or inequitable outcome, the Supervisory Board will have the discretion to correct the previously allocated variable remuneration. However, it is understood that any such correction could not lead to a deviation from the requirement that variable compensation cannot exceed 100% of base salary during any year, as required under the Dutch Banking Code.
Pensions Executive Board members Members of the Executive Board who are employed on the basis of a Dutch employment contract, will participate in the new defined contribution pension plans introduced in 2010 as part of the remuneration policy. Individual board members participating in the pension plan that existed before the introduction of the new plans were given the choice to keep their existing pension arrangement. The existing pension arrangement, approved by the 2006 General Meeting, is based on a defined contribution plan. Alternatively, they can also switch to the new arrangements.
Members of the Executive Board working on a non-Dutch employment contract will be offered pensions in line with local practices.
PROPOSED AMENDMENTS TO REMUNERATION POLICY ADOPTED IN 2010 In 2010 the European Union issued the Capital Requirements Directive III which contained significant regulations in relation to remuneration for certain categories of employees in banks and asset managers. The implementation date is 1 January 2011 and in the Netherlands incorporation into law took place by means of a decree. The Dutch central bank (DNB), which is responsible for the day-to-day supervision, published its final guidelines in December 2010. Many of the specific requirements under CRD III relate to executive remuneration and therefore affect the current Executive Board remuneration policy.
In order to comply with the Capital Requirements Directive III, it is proposed to amend the Executive Board remuneration policy with respect to the allocation of variable compensation as set out hereinafter.
For 2011, at least 40% of total variable compensation will be based on predefined non-financial performance indicators. The incorporation of non-financial indicators in the overall assessment is particularly aimed at further improving sustainable business practices within ING. These indicators depend on the specific responsibilities of the individual Executive Board member. For each Executive Board member a number of performance objectives are formulated relating to customer relationships, improving sustainable business practices/corporate responsibility, execution of the restructuring and separation plans, employee engagement, leadership and talent.
The vesting of deferred cash and deferred stock awards is conditional and subject to an ex-post assessment by the Supervisory Board. The ex-post assessment is based on factors such as trailing liabilities stemming from prior decisions made by each Board member; whether the company suffered a significant failure 3 Corporate governance
For the Management Board Insurance and senior management in ING’s insurance operations, remuneration will be in line with the general principles of the new remuneration policy for the Executive Board. However, changes in the mix between fixed salary and variable pay as well as the allocation of variable compensation will need to be weighted in light of the different regulatory requirements within the international insurance industry and the separation of ING’s banking and insurance activities.
Variable compensation in cash 623 0 Variable compensation in stock 623(3) 69,878 0
(1) The number of shares is based on the average ING stock price on the day on which the 2010 year-end results were published. The maximum number of shares to be granted to the Executive Board members will be tabled for approval at the General Meeting. The shares will be awarded in May.
(4) Patrick Flynn was appointed to the Executive Board on 27 April 2009. The figures for this member reflect compensation earned in the capacity as Executive Board member. Thus, the figure for 2009 reflects a partial year as Executive Board member.
Compensation of former members of the Executive Board amounted to nil for 2010, EUR 2,842 thousand for 2009 and EUR 6,387 thousand for 2008.
Information on the options outstanding and the movements during the financial year of options held by the members of the Executive Board as at 31 December 2010 (1)
Average interest rate Repayments amounts in thousands of euros 2010 2009 2008
(1) The amount reflects a housing mortgage loan granted in 1992, well before
ING depositary receipts for shares and options held by Supervisory Board members Supervisory Board members are permitted to hold ING depositary receipts for shares as a long-term investment. The table below shows the holdings by members of the Supervisory Board. Supervisory Board members did not hold ING options at yearend 2010.
Mathieu Blondeel, chairman, Belgium Marcel Koopman, secretary, the Netherlands Norbert Lucas, deputy chairman, Germany Leo D Antuono, deputy secretary, Belgium Werner Fözö, Austria Jean-Claude Van Den Abeele, Jean Pierre Lambert, Belgium Kaloyan Marinov, Bulgaria Vladimir Koudela, Czech Republic Mourad Benzaaza, France Carolin Simonis, Germany Nikolaos Ploumis, Greece Csilla Dobos, Hungary Matilde D’Alessandro, Italy Arsène Kihm, Luxembourg Bernard Bodt, Jeffrey Dinsbach, Robert Milewski, Gerrit Riphagen, Havva Tasgil, Gerard Veldman, Jelte Wiersinga, the Netherlands Mieczyslaw Bielawski, Mariusz Cieslik, Poland Mihai Ailincai, Roxana Florescu, Romania Miguel Angel Hernandez, Raoul Lopez, Spain Sam Chaudhuri, Rina Goldenberg, UK.
Consolidated balance sheet of ING Group as at 31 December amounts in millions of euros 2010 2009
Deferred acquisition costs 10 10,604 11,398 Assets held for sale 11 681 5,024
Consolidated profit and loss account of ING Group for the years ended 31 December amounts in millions of euros 2010 2010 2009 2009 2008 2008
Valuation results on non-trading derivatives 40 –410 –4,676 2,300 Net trading income 41 627 1,125 –749 Share of profit from associates 6 314 –461 –404
Unrealised revaluations after taxation (1) 2,603 11,867 –18,485 Realised gains/losses transferred to profit and loss (1) 86 1,554 2,476 Changes in cash flow hedge reserve 475 –805 746 Transfer to insurance liabilities/DAC –1,644 –2,079 2,193 Exchange rate differences 2,884 59 –1,086 Other revaluations –3 –9 –23 Total amount recognised directly in equity (other comprehensive income) 4,401 10,587 –14,179
Comprehensive income attributable to: Equity holders of the parent 7,634 9,665 –14,703 Minority interests 92 –131 –242
Cash and cash equivalents at beginning of year 20,959 31,271 –16,811 Effect of exchange rate changes on cash and cash equivalents 265 –4 –464 Cash and cash equivalents at end of year 55 20,740 20,959 31,271
(1) 2009 includes payments on non-voting equity securities (payment of the 2008 coupon of EUR 425 million, the repayment premium of EUR 346 million and the coupon in the repayment of EUR 259 million). 2008 includes dividends paid on ordinary shares.
As at 31 December 2010 Cash and cash equivalents includes cash and balances with central banks of EUR 13,072 million (2009: EUR 15,390 million; 2008: EUR 22,045 million). Reference is made to Note 55 ‘Cash and Cash equivalents’.
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 2,890 2,890 –6 2,884 Other revaluations –3 –3 Total amount recognised directly in equity 4,414 4,414 –13 4,401
AUTHORISATION OF ANNUAL ACCOUNTS The consolidated annual accounts of ING Groep N.V. (‘ING Group’) for the year ended 31 December 2010 were authorised for issue in accordance with a resolution of the Executive Board on 14 March 2011. 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 1.1.
Furthermore, in 2009 IFRS 9 ‘Financial Instruments’ was issued, which is effective as of 2013. However, this standard is not yet endorsed by the EU and, therefore, is not yet part of IFRS-EU. Implementation of IFRS 9 – if and when endorsed by the EU – may have a significant impact on equity and/or result of ING Group.
The valuation of real estate involves various assumptions and techniques. The use of different assumptions and techniques could produce significantly different valuations.
Upon impairment, the full difference between amortised cost and fair value is removed from equity and recognised in net profit and loss. Impairments on debt securities may be reversed if there is a decrease in the amount of the impairment which can be objectively related to an observable event. Impairments on equity securities cannot be reversed.
Exchange rate differences in the profit and loss account are generally included in Net trading income. Reference is made to Note 41 ‘Net trading income’, which discloses the amounts included in the profit and loss account. Exchange rate differences relating to the disposal of Available-for-sale debt and equity securities are considered to be an inherent part of the capital gains and losses recognised in Investment income. As mentioned in Group companies below any exchange rate difference deferred in equity is recognised in the profit and loss account in Net result on disposals of group companies. Reference is also made to Note 13 ‘Shareholders’ equity (parent)/non-voting equity securities’, which discloses the amounts included in the profit and loss account.
A financial asset is classified as at fair value through profit and loss if acquired principally for the purpose of selling in the short term or if so designated by management. Management will make this designation only if this eliminates a measurement inconsistency or if the related assets and liabilities are managed on a fair value basis.
Investments Investments (including loans quoted in active markets) are classified either as held-to-maturity or available-for-sale and are initially recognised at fair value plus transaction costs. Investment securities and loans quoted in active markets with fixed maturity where management has both the intent and the ability to hold to maturity are classified as held-to-maturity. Investment securities and actively traded loans intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices, are classified as available-for-sale.
Property under development is stated at fair value (with changes in fair value recognised in profit and loss) if ING Group has the intention to recognise the property under development after completion as real estate investments.
The Group as the lessee The leases entered into by ING Group are primarily operating leases. The total payments made under operating leases are charged to the profit and loss account on a straight-line basis over the period of the lease.
When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.
The Group as the lessor When assets are held subject to a finance lease, the present value of the lease payments is recognised as a receivable under Loans and advances to customers or Amounts due from banks. The difference between the gross receivable and the present value of the receivable is unearned lease finance income. Lease income is recognised over the term of the lease using the net investment method (before tax), which reflects a constant periodic rate of return. When assets are held subject to an operating lease, the assets are included under Assets under operating leases.
As of 2010, following changes to IFRS 3 ‘Business Combinations’, where a business combination is achieved in stages, ING Group’s previously held interests in the assets and liabilities of the acquired entity are remeasured to fair value at the acquisition date (i.e. the date ING Group attains control) and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to profit or loss, where such treatment would be appropriate if that interest were disposed of. Acquisition-related costs are recognised in profit or loss as incurred and presented in the profit and loss account as Other operating expenses.
Adjustments to the fair value as at the date of acquisition of acquired assets and liabilities that are identified within one year after acquisition are recognised as an adjustment to goodwill; any subsequent adjustment is recognised as income or expense. On disposal of group companies, the difference between the sale proceeds and book value (including goodwill) and the unrealised results (including the currency translation reserve in equity) is included in the profit and loss account.
If the Group purchases its own debt, it is removed from the balance sheet, and the difference between the carrying amount of the liability and the consideration paid is included in the profit and loss account.
As at 31 December 2009, the Legacy Variable Annuity business in the US was inadequate at the 90% confidence level. As there were offsetting amounts within other Group business units, the Group remained adequate at the 90% confidence level. In line with the above policy, specific measures were defined to mitigate the inadequacy in the Legacy Variable Annuity business in the US. These specific measures are effective as of 2010 and result in a limitation of additions to DAC that would otherwise result from negative amortisation and unlocking. This limitation of DAC is applied on a quarterly basis and in any year if and when a reserve inadequacy existed at the start of the year. The impact on 2010 was EUR 610 million lower DAC and consequently lower result before tax. In addition, reserve adequacy in Insurance US Closed Block VA improved through the DAC write-down as disclosed in Note 51 ‘Operating segments’.
EARNINGS PER ORDINARY SHARE Earnings per ordinary share is calculated on the basis of the weighted average number of ordinary shares outstanding. In calculating the weighted average number of ordinary shares outstanding: • Own shares held by group companies are deducted from the total number of ordinary shares in issue; • The computation is based on daily averages; • In case of exercised warrants, the exercise date is taken into consideration.
Amounts held at central banks 7,983 10,989 Cash and bank balances 4,264 3,965 Short term deposits insurance operations 825 436 2 AMOUNTS DUE FROM BANKS
As at 31 December 2010, the balance sheet value included equity securities which were lent or sold in repurchase transactions amounting to EUR 69 million (2009: EUR 175 million) and nil (2009: nil), respectively. As at 31 December 2010, the balance sheet value included debt securities which were lent or sold in repurchase transactions amounting to EUR 65 million (2009: EUR 325 million) and EUR 667 million (2009: EUR 353 million), respectively.
Notes to the consolidated annual accounts of ING Group continued 4 INVESTMENTS
The fair value of the securities classified as held to maturity amounts to EUR 11,854 million as at 31 December 2010 (2009: EUR 14,809 million).
Reclassifications to investments held to maturity (2009) In 2009 ING Group reclassified EUR 689 million of available-for-sale investments to held-to-maturity. The reclassification resulted from reduction in market liquidity for these assets; ING Group has the intent and ability to hold these assets until maturity.
Exposure to debt securities ING Group’s exposure to debt securities is included in the following balance sheet lines: Debt securities
ING Group’s total exposure to debt securities included in available-for-sale investments and assets at amortised cost of EUR 266,859 million (2009: EUR 250,370 million) is specified as follows by type of exposure and by banking and insurance operations: Debt securities by type and by banking and insurance operations Banking operations Insurance operations Total
Loans to, or guaranteed by, public authorities 28,671 28,149 27,282 22,933 55,953 51,082
Accumulated impairments of EUR 71 million (2009: EUR 59 million) have been recognised.
ING Dutch Retail Master Fund C.V. 16 210 1,642 310 56 37 ING Dutch Office Master Fund C.V. 16 201 1,527 285 –12 30 ING Lionbrook Property Partnership LP 33 151 572 148 27 20 ING Retail Property Fund Iberica LP 30 140 1,635 1,156 –51 50 ING Dutch Residential Master Fund C.V. 13 111 1,019 194 –34 22 ING Retail Property Fund Australia 29 107 886 479 20 65 ING Dutch Office Master Fund II C.V. 16 104 775 129 31 27 ING Real Estate Asia Retail Fund 28 99 723 417 –46 140
ING Real Estate Nordic Property Fund FGR 16 56 940 588 –7 52 Steadfast Capital Fund II LP 68 56 83 2 6 ING Retail Property Partnership Southern Europe C.V. 21 55 1,001 745 –27 69 ING Logistics Property Fund Europe C.V. 25 51 467 263 –22 23 Other investments in associates 886
The total amount of direct operating expenses (including repairs and maintenance) incurred from Real estate investments that generated rental income for the year ended 31 December 2010 was EUR 113 million (2009: EUR 87 million). The total amount of direct operating expenses (including repairs and maintenance) incurred from Real estate investments that did not generate rental income for the year ended 31 December 2010 was EUR 6 million (2009: EUR 46 million).
Real estate investments 1,900 3,638 Investments in associates 2,568 2,580 Other assets – property development and obtained from foreclosures 2,153 2,515 Property and equipment – property in own use 1,642 1,686 Investments – available-for-sale 633 689
Gross carrying amount as at 31 December 4,617 4,516 18 27 4,635 4,543 Accumulated depreciation as at 31 December –1,564 –1,530 –16 –22 –1,580 –1,552
Goodwill Changes in Goodwill There were no additions to goodwill in 2010. Additions to Goodwill in 2009 mainly relate to the consolidation of 3W Holding BV (EUR 26 million) and to the extension of ING Group’s Interhyp AG share of EUR 7 million. A goodwill impairment of EUR 540 million was recognised in 2010. The impairment relates to the reporting unit Insurance US. There was no goodwill impairment in 2009. All other changes in goodwill are mainly caused by foreign exchange rate differences.
Retail Central Europe 870 834 Retail Belgium 49 49 Retail Netherlands 1 1 ING Direct 468 460 Commercial Banking – Lease 68 66 ING Real Estate 31 39 Commercial Banking – Other 15 14 Insurance Benelux 48 48 Insurance Central & Rest of Europe 123 122 Insurance Latin America 680 591 Insurance US * 483 Insurance Asia/Pacific – South Korea 192 171 Insurance Asia/Pacific – Rest of Asia 2 2 ING Investment Management 218 191 * Excluding US Closed Block VA
As of 2010 ING Investment Management is a separate reporting unit following the change in operating segments as explained in Note 51 ‘Operating Segments’.
11 ASSETS AND LIABILITIES HELD FOR SALE Assets and liabilities held for sale include disposal groups whose carrying amount will be recovered principally through a sale transaction rather than through continuing operations. This relates to businesses for which a sale is agreed upon or a sale is highly probable at the balance sheet date but for which the transaction has not yet fully closed. For 31 December 2010 this relates mainly to Pacific Antai Life Insurance Company Ltd. (PALIC), ING Arrendadora, S.A. de C.V. in Mexico, ING Real Estate Investment Management (ING REIM) and Clarion Real Estate Securities. For 31 December 2009 this relates mainly to the Swiss and Asian Private Banking business, PALIC, and three US independent retail broker-dealer units. Reference is made to Note 30 ‘Companies acquired and companies disposed’ for more details.
Notes to the consolidated annual accounts of ING Group continued 12 OTHER ASSETS
The total amount of borrowing costs relating to Property development and obtained from foreclosures, capitalised in 2010 is EUR 18 million (2009: EUR 98 million).
The 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 cannot be freely distributed.
Issue of shares 1,848 Buy-back of shares –183,158 –44 Exercise of B warrants 18,013 5 Issued share capital as at 31 December 2008 2,063,148 495
Ordinary shares All ordinary shares are in registered form. No share certificates have been issued. Ordinary shares may be transferred by means of a deed of transfer. A transfer of ordinary shares requires written acknowledgement by ING Groep N.V. The par value of ordinary shares is EUR 0.24. The authorised ordinary share capital of ING Groep N.V. currently consists of 4,500 million ordinary shares; it increased in 2008 from 3,000 million shares to 4,500 million shares as a result from an amendment made to the Articles of Association on 8 October 2008. As at 31 December 2010, 3,832 million of ordinary shares were issued and fully paid.
Non-voting equity securities (Core Tier 1 securities) On 12 November 2008, ING Groep N.V. issued one billion non-voting equity securities to the Dutch State at EUR 10 per non-voting equity security, resulting in an increase of ING Group’s core Tier 1 capital of EUR 10 billion. The nominal value of each security is EUR 0.24. On 21 December 2009 ING repurchased EUR 5 billion of these securities. The non-voting equity securities do not form part of ING Group’s share capital; accordingly they do not carry voting rights in the General Meeting.
More than 1 year but less than 2 years 4,321 6,545 More than 2 years but less than 3 years 3,552 1,164 More than 3 years but less than 4 years 2,113 1,375 More than 4 years but less than 5 years 864 1,478 More than 5 years 5,571 2,846 Total floating rate debt securities 30,428 23,429
17 INSURANCE AND INVESTMENT CONTRACTS, REINSURANCE CONTRACTS The provisions for insurance and investment contracts, net of reinsurance (i.e. the provision for ING Group’s own account) is presented in the balance sheet gross under ‘Insurance and investment contracts’ and ‘Reinsurance contracts’.
Changes in the composition of the group in 2009 relate mainly to the sale of the annuity and mortgage business of Chile. Reference is made to Note 30 ‘Companies acquired and companies disposed’.
To the extent that the assuming reinsurers are unable to meet their obligations, the Group is liable to its policyholders for the portion reinsured. Consequently, provisions are made for receivables on reinsurance contracts which are deemed uncollectible. The life reinsurance market is highly concentrated and, therefore, diversification of exposure is inherently difficult. To minimise its exposure to significant losses from reinsurer insolvencies, the Group evaluates the financial condition of its reinsurers, monitors concentrations of credit risk arising from similar geographical regions, activities or economic characteristics of the reinsurer and maintains collateral. Reference is also made to the ‘Risk management’ section.
Changes in the composition of the group in 2009 relate mainly to the sale of ING Canada. Reference is made to Note 30 ‘Companies acquired and companies disposed’.
Exchange rate differences 593 981 Other changes 239 371 Closing balance 11,975 11,302
Changes in the composition of the group in 2009 relate mainly to the sale of ING Australia. Reference is made to Note 30 ‘Companies acquired and companies disposed’.
Notes to the consolidated annual accounts of ING Group continued 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 2010, liabilities concerning securities sold in repurchase transactions amounted to EUR 12,200 million (2009: EUR 17,991 million).
Equity securities 4,811 3,052 Debt securities 16,707 12,457 Funds on deposit 44,767 42,505
As at 31 December 2010, the Funds on deposit include amounts payable of EUR 43,995 million (2009: EUR 41,876 million) with regard to repurchase transactions.
Financial assets and liabilities at fair value through profit and loss –312 –18 –185 –2 5 –15 –527 Deferred acquisition costs and VOBA 2,967 –368 173 336 3 3,111 Fiscal reserve 1 1
Comprising: – deferred tax liabilities 3,602 2,399 – deferred tax assets –8,034 –3,969
Total unused tax losses carried forward 9,335 10,073 Unused tax losses carried forward not recognised as a deferred tax asset –2,862 –1,779 Unused tax losses carried forward recognised as a deferred tax asset 6,473 8,294
Deferred tax assets are recognised for temporary deductible differences, for tax loss carry forwards and unused tax credits only to the extent that realisation of the related tax benefit is probable.
As at 31 December 2010, the provision for reorganisation, of which EUR 317 million relates to termination benefits, mainly related to the merger of the Dutch Retail Banking activities as well as other restructuring activities.
Changes in the composition of the group –26 7 –1 –35 –27 –28
Relating to: Actuarial gains and losses in 2010 includes the impact of changes in mortality and indexation assumptions as set out below.
The actual return on the plan assets amounted to EUR 1,971 million (2009: EUR 1,229 million).
Expected cash flows During 2011 the expected contributions to pension plans are EUR 567 million.
(2) Included in remaining assets where maturities are not applicable are property and equipment, real estate investments and investments in associates. Due to their nature remaining assets consist mainly of assets expected to be recovered after more than 12 months.
Loans and advances to customers 61,973 14,357 32,322 141,482 324,625 4,187 578,946
Notes to the consolidated annual accounts of ING Group continued 23 LIABILITIES BY CONTRACTUAL MATURITY The tables below include all financial liabilities by maturity based on contractual, undiscounted cash flows. Furthermore, the undiscounted future coupon interest on financial liabilities payable is included in a separate line and in the relevant maturity bucket. Derivative liabilities are included on a net basis if cash flows are settled net. For other derivative liabilities the contractual gross cash flow payable is included. Non-financial liabilities are included based on a breakdown of the balance sheet amounts. Reference is made to the liquidity risk paragraph in the ‘Risk Management’ section for a description on how liquidity risk is managed.
Customer deposits and other funds on deposit 410,522 26,092 21,819 9,418 1,657 469,508 Financial liabilities at fair value through profit and loss
Coupon interest due on financial liabilities 4,163 1,578 5,654 15,371 55,681 82,447
For the year ended 31 December 2010, ING Group recognised EUR –748 million (2009: EUR –1,130 million) of fair value changes on derivatives designated under fair value hedge accounting in the profit and loss account. This amount was partly offset by EUR 752 million (2009: EUR 975 million) fair value changes recognised on hedged items. This resulted in EUR 4 million (2009: EUR –155 million) net accounting ineffectiveness recognised in the profit and loss account. As at 31 December 2010, the fair values of outstanding derivatives designated under fair value hedge accounting was EUR –4,474 million (2009: EUR –6,139 million), presented in the balance sheet as EUR 4,127 million (2009: EUR 2,727 million) positive fair values under assets and EUR 8,601 million (2009: EUR 8,866 million) negative fair values under liabilities.
As at 31 December 2010 and 31 December 2009, there were no non-derivatives designated as hedging instruments for cash flow hedge accounting purposes.
Gains and losses on the effective portions of derivatives designated under net investment hedge accounting are recognised in Shareholders’ equity. The balance in equity is recognised in the profit and loss account when the related foreign subsidiary is disposed. The gains and losses on ineffective portions are recognised immediately in the profit and loss account.
Notes to the consolidated annual accounts of ING Group continued 25 MAXIMUM CREDIT EXPOSURE ING Group’s maximum credit exposure as at 31 December 2010 and 2009 is represented as follows: Maximum credit exposure
Reinsurance contracts 5,789 5,480 Reinsurance and insurance receivables 2,201 2,125 Accrued interest and rents 16,194 18,306 Other accrued assets 2,888 2,497 Other receivables 5,623 5,838 Maximum credit exposure on balance sheet 1,072,836 1,001,097
Banks includes Amounts due from banks and balances with central banks. ING Bank N.V. has an obligation to maintain a reserve with an average monthly balance with the Dutch central bank. In December 2010 the required monthly average was EUR 5,909 million (2009: EUR 5,620 million). As at 31 December 2010 the balance on this reserve was EUR 334 million (2009: EUR 354 million).
Irrevocable facilities mainly constitute unused portions of irrevocable credit facilities granted to corporate clients. Many of these facilities are for a fixed duration and bear interest at a floating rate. ING Group’s credit risk and interest rate risk in these transactions is limited. The unused portion of irrevocable credit facilities is secured by customers’ assets or counter-guarantees by the central governments and exempted bodies under the regulatory requirements. Irrevocable facilities also include commitments made to purchase securities to be issued by governments and private issuers.
Years after 2015 280 28 SPECIAL PURPOSE ENTITIES AND SECURITISATION Securitisation ING Group as originator ING Group enters into synthetic securitisation programmes in order to reduce credit risk on certain assets. In synthetic securitisations, ING Group enters into a credit default swap with securitisation Special Purpose Entities (SPEs), in relation to which ING Group purchases credit protection in respect of residential mortgage loans and loans to small and medium-sized enterprises. The SPEs have in turn hedged their exposure with investors through the issue of credit linked notes or credit linked commercial paper. As a result of these transactions, ING Group has transferred a substantial part of the credit risk related to these loan portfolios to third-party investors. In general, the third-party investors in securities issued by the SPE have recourse only to the assets of the SPE and not to ING Group.
Collateralised debt obligations (CDO)-transactions Within ING Group, SPEs are used for CDO transactions. In a typical CDO transaction an SPE is used to issue structured, rated securities which are backed (or collateralised) by a pool of transferable debt securities. Besides investing in CDOs ING Group often has different roles in these transactions: • the arranger of the transaction; ING Group structures the SPE, acquires the assets for the SPE and sells the CDOs to investors; • collateral manager of the assets in the SPE; ING Group manages the assets based on strict conditions of the SPEs charter.
Gain/loss on disposal (2) 332 73 –26 379 (1) Cash outflow/inflow on group companies in the cash flow statement includes cash outflows/inflows on individually immaterial disposals in addition to the cash flows presented.
The above described disposals and ING Arrendadora S.A. de C.V. are expected to close in 2011 and will be deconsolidated in 2011 when ING loses control. They qualify as disposal groups held for sale at 31 December 2010 as ING expects to recover the carrying amount principally through the sale transactions. They are available for sale in their immediate condition subject to terms that are usual and customary for sales of such assets and the sales are considered to be highly probable.
Goodwill recognised in 2009 amounted to EUR 39 million as disclosed in Note 9 ‘Intangible assets’. This includes EUR 26 million in relation to the consolidation of 3W Holding B.V as disclosed below. There were no significant acquisitions in 2009.
Notes to the consolidated annual accounts of ING Group continued 3W Holding B.V.
Gain/loss on disposal (2) –292 (3) –38 –23 337 –16 (1) Cash outflow/inflow on group companies in the cash flow statement includes cash outflows/inflows on individually immaterial disposals in addition to the cash flows presented.
In February 2009, ING completed the sale of its 70% stake in ING Canada for net proceeds of EUR 1,316 million. This differs from the proceeds presented in the annual accounts of 2008 of EUR 1,265 million due to movements in the Canadian dollar/euro exchange rate between date of signing the sales agreement and the date of closing. The sale was effected through a private placement and a concurrent ‘bought deal’ public offering in Canada. This transaction resulted in a loss of EUR 38 million. ING Canada was previously included in the segment Insurance US.
In July 2009 ING reached an agreement to sell its non-core Annuity and Mortgage businesses in Chile to Corp Group Vida Chile, S.A for EUR 217 million. This sale does not impact ING’s Pension, Life Insurance, and Investment Management businesses in Chile where ING remains committed to developing leadership positions. This sale was completed in November 2009 and resulted in a loss of EUR 23 million. These non-core Annuity and Mortgages businesses were previously included in the segment Insurance Latin America.
In September 2009 ING reached an agreement to sell its life insurance and wealth management venture in Australia and New Zealand to ANZ, its joint venture partner. Under the terms of the agreement, ING sold its 51% equity stakes in ING Australia and ING New Zealand to ANZ for EUR 1,106 million cash proceeds. The transaction is part of ING’s Back to Basics strategy. The sale was completed in November 2009 and resulted in a profit for ING of EUR 337 million. The joint venture was previously included in the segment Insurance Asia/Pacific.
Loans and advances to customers 6 6 Amounts due from banks 43 43 Financial assets at fair value through profit and loss 78 78
Liabilities Insurance and investment contracts 7 7 Customer deposits and other funds on deposit 224 224
ING acquired the AFJP Pension (Origenes AFJP S.A.) company in Argentina as part of the Santander transaction. In November 2008 the Government of Argentina passed legislation to nationalise the private pension system (AFJPs). Under the law, all client balances held by the private pension system had to be transferred to the Argentina Government and AFJP’s pension business was terminated. The law became effective in December 2008 when the Argentine Social Security Administration (ANSES) took ownership over the affiliate accounts. The nationalisation impacted the pension assets only, thus leaving ING responsible for the ongoing operating costs and liabilities including severance obligations. This resulted in a loss of EUR 188 million being recognised in 2008.
Because of the geographic spread of its business, ING may be subject to tax audits in numerous jurisdictions at any point in time. Although ING believes that it has adequately provided for all its tax positions, the ultimate resolution of these audits may result in liabilities which are different from the amounts recognised.
Most significant joint ventures 2009 Interest held (%) Assets Liabilities Income Expenses
ING Capital Life Insurance Company Ltd 50 236 214 57 59 ING Vysya Life Insurance Company Ltd (1) 26 342 329 112 122
(1) Comprising eight members from 1 January 2009 to 31 May 2009 and 3 members from 1 June 2009 to 31 December 2009. (2) As of 1 June 2009, excluding three members that are also members of the Executive Board of ING Groep N.V.
Executive Board members 1,968 380 3.6% 4.6% Management Boards members of ING Bank N.V. and ING Verzekeringen N.V. 13 244 4.3% 3.6% 4 933
As at 31 December 2010, the remaining outstanding amount from the transaction price that remained payable by the Dutch State is EUR 13.1 billion. The net amount of other unamortised components of the total sales proceeds, as explained above, amounts to EUR 0.7 billion payable.
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 core Tier 1 security for 1.335 ordinary shares or bearer depositary receipts from three years after the issue date onwards, subject to certain conditions. 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 repurchase and conversion of the securities must be approved by the Dutch Central Bank.
In the framework of the transactions with the Dutch State disclosed in this note, certain arrangements with respect to corporate governance and executive remuneration were agreed with the Dutch State which will remain in place as long as the Dutch State owns at least 250 million non-voting equity securities, as long as the Illiquid Assets Back-up Facility is in place or any of the Government Guaranteed Bonds is outstanding (whichever expires last). These arrangements entail that: • the Dutch State may recommend two candidates (the ‘State Nominees’) for appointment to the Supervisory Board. Certain decisions of the Supervisory Board require approval of the State Supervisory Board members; • ING Group must develop a sustainable remuneration policy for the Executive Board and Senior Management that is aligned to new international standards and submit this to its General Meeting for adoption. This remuneration policy shall include incentive schemes which are linked to long-term value creation, thereby taking account of risk and restricting the potential for ‘rewards for failure’. This new remuneration policy must, amongst others, include objectives relating to corporate and social responsibility; • members of the Executive Board may not receive any performance-related payment – either in cash, options, shares or bearer depositary receipts – for the years 2008 and 2009 until the adoption of the new remuneration policy in 2010; • severance payments to Executive Board members are limited to a maximum of one year’s fixed salary, in line with the Tabaksblat Code; • ING has undertaken to support the growth of the lending to corporates and consumers (including mortgages) for an amount of EUR
– designated as at fair value through profit and loss 6,016 5,517 6,016 5,517 Investments
In order to determine which independent price in the range of prices obtained best represents fair value under IAS 39, ING applies a discounted cash flow model to calculate an indicative fair value. The key input to this model is a discount rate derived from an internal matrix that is used to construct the discount rate per security by applying credit and liquidity spreads relevant to the characteristics of such asset class. The main assumptions in this matrix include: • a base spread; • a liquidity risk premium; • an additional credit spread, based on: • seniority in the capital structure – an adjustment is applied to each security based on its position in the capital structure; • vintage – an adjustment is applied for underwriting guidelines deteriorating from 2004 to 2007 in combination with differences in home price developments for these vintages.
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 upon quoted prices in an active market (Level 1), valuation techniques with observable parameters (Level 2) or valuation techniques that 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.
As a result of the offsetting impact as explained above, there is no significant impact on the sensitivity of fair values to unobservable inputs.
Level 3 assets increased because certain bonds were transferred to Level 3 in 2010 as a result of reduced market liquidity and/or pricing sources that could no longer be classified as market observable. On the other hand, Level 3 assets decreased in 2010 because of a transfer of available-for-sale investments of EUR 2.9 billion out of Level 3 to Level 2, relating to mortgage backed securities in the US. Previously these were classified in Level 3 because of the dispersion between prices obtained for the same security from different price sources. In 2010 prices supported by market observable inputs became available and were used in determining fair value.
Amounts recognised in profit and loss during the year 17 2 –133 –90 –1,525 –1,729 Revaluation recognised in equity during the year 7,378 7,378
Sale of assets –191 –113 94 –569 –22,211 –22,990 Maturity/settlement –41 –68 –4 –171 –3,103 –3,387 Reclassifications –43 –67 –5,994 –6,104
Transfers out of Level 3 –516 –123 –76 –3,387 –4,102 Exchange rate differences –20 5 –78 698 605 Changes in the composition of the group –92 –78 –170
Transfers out of Level 3 –176 –67 –266 –509 Exchange rate differences –1 58 7 64
Notes to the consolidated annual accounts of ING Group continued 35 INTEREST RESULT BANKING OPERATIONS
Interest income on available-for-sale securities 3,532 3,923 7,449 Interest income on held-to-maturity securities 549 612 669 Interest income on trading portfolio 32,692 40,844 45,510 Interest income on non-trading derivatives 1,709 3,936 7,076 Other interest income 4,870 5,528 5,157 Interest income banking operations 68,334 79,850 97,011
Gross premium income from life insurance policies 26,206 28,720 38,869 Gross premium income from non-life insurance policies 1,741 1,772 4,943
Direct gross premiums earned 1,744 1,746 4,889 Reinsurance assumed gross premiums earned 23 26 20 Total gross premiums earned 1,767 1,772 4,909
Income from investments in debt securities 5,651 5,429 6,535 5,651 5,429 6,535 Income from loans
Other includes EUR –24 million related to the sale of certain associates. The remainder includes result on disposal of certain real estate funds and other disposals that are individually not significant.
Notes to the consolidated annual accounts of ING Group continued 40 VALUATION RESULTS ON NON-TRADING DERIVATIVES
– hedges of net investment in foreign entities (ineffective portion) 1 –6 1 –6 – other non-trading derivatives –720 –237 –28 94 –3,722 2,412 –626 –3,959 2,384 Net result on non-trading derivatives –1,397 –1,560 –5,327 16 –3,538 2,235 –1,381 –5,098 –3,092
The Valuation results on assets and liabilities designated at fair value through profit and loss includes fair value changes on private equity funds and issued debt securities, designated at fair value through profit and loss. In 2009, the Valuation results on assets and liabilities designated at fair value through profit and loss were mainly a result of changes in fair value of financial liabilities, designated at fair value through profit and loss, due to market circumstances; it includes fair value changes on issued debt securities, designated at fair value through profit and loss, including fair value changes attributable to changes in own credit risk as disclosed in Note 20 ‘Financial liabilities at fair value through profit and loss’.
Notes to the consolidated annual accounts of ING Group continued 42 OTHER INCOME
Expenditure from investment contracts Costs of acquiring investment contracts 5 3 9 Other changes in investment contract liabilities 90 910 –905
The total Cost of acquiring insurance business (life and non-life) and investment contracts amounted to EUR 3,061 million (2009: EUR 643 million; 2008: EUR 2,628 million). This includes amortisation and unlocking of DAC of EUR 2,834 million (2009: EUR 458 million; 2008: EUR 2,026 million) and the net amount of commissions paid of EUR 1,789 million (2009: EUR 1,815 million; 2008: EUR 3,273 million) and commissions capitalised in DAC of EUR 1,562 million (2009: EUR 1,630 million; 2008: EUR 2,671 million).
Impairments on Loans and advances to customers are presented under Addition to loan loss provision. Impairments on investments are presented under Investment income. Reference is made to the ‘Risk management’ section for further information on impairments.
As per 31 December 2010 total options outstanding consists of 105,036,931 options (2009: 103,523,988; 2008: 73,826,891) relating to equity-settled share-based payment arrangements and 19,799,763 options (2009: 18,810,498; 2008: 13,436,490) relating to cash-settled share-based payment arrangements.
(1) 2008 reflects original numbers and amounts, not restated for the rights issue adjustment factor.
Addition/(releases) of provision for reorganisations and relocations 109 339 136 99 258 8 208 597 144
The weighted average statutory tax rate decreased significantly in 2010 compared to 2009. This is caused by the fact that in 2010 profits were realised in a significant part of the tax jurisdictions that incurred losses in 2009.
Unrealised revaluations –1,216 –4,712 6,647 Realised gains/losses transferred to profit and loss (reclassifications from equity to profit and loss) 8 –494 –1,423 Changes in cash flow hedge reserve –194 203 –137 Transfer to insurance liabilities/DAC 719 1,017 –1,129 Exchange rate differences 8 13 –2 Total income tax related to components of other comprehensive income –675 –3,973 3,956
Notes to the consolidated annual accounts of ING Group continued 49 EARNINGS PER ORDINARY SHARE
Diluted earnings per share data are calculated as if the stock options and warrants outstanding at year-end had been exercised at the beginning of the period. It is also assumed that ING Group uses the cash received from exercised stock options and warrants or non-voting equity securities converted to buy its own shares against the average market price in the financial year. The net increase in the number of shares resulting from exercising stock options and share plans or converting non-voting equity securities is added to the average number of shares used for the calculation of diluted earnings per share. The potential conversion of the non-voting equity securities has an anti-dilutive effect on the earnings per share calculation in 2010, 2009 and 2008 (the diluted earnings per share becoming higher or less negative than the basic earnings per share). Therefore, the potential conversion is not taken into account when determining the weighted average number of shares for the calculation of diluted earnings per share for these years.
In 2008 coupon was payable to the Dutch State per non-voting equity security of EUR 0.425, provided that ING Group’s capital adequacy position was and remained satisfactory both before and after payment in the opinion of the Dutch central bank. The full amount of EUR 425 million was recognised as a liability as at 31 December 2008. The amount was paid on 12 May 2009.
As of 2010: • Capital gains on public equity securities (net of impairments) are reported in the relevant business line. Until 2009 capital gains on public equity securities in Insurance were reported in the Corporate Line Insurance, whereas a notional return was allocated to the Insurance business lines.
• An at arm’s length fee is charged by ING IM to the relevant business line. Until 2009 a cost-based fee was charged. • The Corporate Line Insurance includes reinsurance by ING Re of ING Life Japan guaranteed benefits associated with single-premium variable annuity (SPVA) contracts, along with the corresponding SPVA hedging results. Until 2009 these were reported under Insurance Asia/Pacific.
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.
– Additions to loan loss provision 561 160 446 61 26 395 102 1,751 1,751 * Analysed as a part of operating expenses.
Operating segments Total 2010 Total Banking Total Insurance Total Segments Eliminations Total
Underlying income – Gross premium income 27,947 27,947 27,947 – Net interest result – banking operations 13,450 13,450 –93 13,357
Reconciliation between IFRS-EU and Underlying income, expenses and net result 2010 Income Expenses Net result
Divestments in 2010 mainly relate to the sale of the three U.S. independent retail broker-dealer units, the sale of the Private Banking businesses in Asia and Switzerland and to the sale of ING’s 50% stake in Summit Industrial Fund LP.
Reconciliation between IFRS-EU and Underlying income, expenses and net result 2009 Income Expenses Net result
Impairments and reversals of impairments on investments per operating segment 2009 Impairments Reversals of impairments
– Additions to loan loss provision 251 26 283 65 13 516 81 1,235 1,235 * Analysed as a part of operating expenses.
Underlying result before taxation 92 187 –868 –530 152 –2 179 –566 –1,356 –1,356 * Excluding US Closed Block VA
Underlying income – Gross premium income 37,744 37,744 37,744 – Net interest result – banking operations 11,062 11,062 90 11,152
Underlying result before taxation 593 –1,356 –763 –763 Taxation –231 –361 –592 –592
Reconciliation between IFRS-EU and Underlying income, expenses and net result 2008 Income Expenses Net result
Divestments in 2008 mainly relate to the sale of Chile Health business (ING Salud), part of the Mexican business (ING Seguros SA) and the Taiwanese life insurance business (ING Life Taiwan). Divestments in 2008 also relates to the operational result from the in 2010 divested units Private Banking business Asia and Switzerland and Summit.
Interest income (external) and interest expenses (external) breakdown by operating segments Insurance
Interest income (external) and interest expenses (external) breakdown by operating segments Banking
Eliminations –34,671 –13,705 –28,006 –11,964 –30,816 –18,747 * Excluding US Closed Block VA
Treasury bills and other eligible bills 4,441 3,182 7,009 Amounts due from/to banks 3,227 2,387 2,217 Cash and balances with central banks 13,072 15,390 22,045 Cash and cash equivalents at end of year 20,740 20,959 31,271
Not included in cash and cash equivalents: – amounts due to banks –59,954 –71,901 –138,527 – amounts due from banks 35,703 28,676 32,492
Cash and cash equivalents include amounts due to/from banks with a term of less than three months from the date on which they were acquired.
EXECUTIVE SUMMARY / RISK MANAGEMENT IN 2010 Taking measured risks is part of ING Group’s business. As a financial services company active in banking, investments, life insurance and retirement services, ING Group is naturally exposed to a variety of risks. To ensure measured risk-taking, ING Group has integrated risk management in its daily business activities and strategic planning. Risk Management assists with the formulation of risk appetite, strategies, policies and limits and provides a review, oversight and support function throughout ING Group on risk-related issues. The main financial risks ING Group is exposed to are credit risk (including transfer risk), market risk (including interest rate, equity, real estate, implied volatility and foreign exchange risks), insurance risk, liquidity risk and business risk. In addition, ING Group is exposed to non-financial risks, e.g. operational and compliance risks. The way ING Group manages these risks on a day-to-day basis is described in this risk management section.
Fair value hierarchy of pressurised ABS bonds 2010 Level 1 Level 2 Level 3 Total
US Subprime RMBS 17 1,629 1,646 US Alt-A RMBS 2,210 638 2,848
proposal narrows the definition of core Tier 1 and Tier 1 capital, and introduces a new definition for a leverage ratio that should become part of Pillar 1 of the Basel framework. The Basel Committee has also issued a proposal for new liquidity requirements. Apart from the above mentioned proposals, another aim is to reduce ‘pro-cyclicality’, to avoid that banks would be required to increase their capital in bad times when it is most scarce. Lastly, there is the proposal to introduce additional capital requirements for counterparty credit risk. Collectively these proposals are referred to as Basel III. These were issued by the Basel Committee in December 2010, and the deadlines for implementation of specific item are set for the timeframe 2013 to 2018.
• ING Group Credit Committee – Transaction Approval (GCCTA): Discusses and approves transactions which entail taking credit risk (including issuer investment risk). The GCCTA meets twice a week.
• ING Group Investment Committee (GIC): Discusses and approves investment proposals for ING Real Estate. The GIC meets on a monthly basis.
• Asset and Liability Committee ING Bank (ALCO Bank): Discusses and approves on a monthly basis the overall risk profile of all ING Bank’s market risks that occur in its Commercial Banking, and Retail & Direct Banking activities. ALCO Bank defines the policy regarding funding, liquidity, interest rate mismatch and solvency for ING Bank.
• Operational and Residual Risk Committee (ORRC): Discusses and approves issues related to Methods, Models and Parameters for Operational risk, Business risk in Banking, inter-risk diversification and consistency across risk types and businesses. The committee meets at least twice a year.
Board level risk oversight ING Group has a two-tier board structure consisting of the Executive Board and the Supervisory Board; both tiers play an important role in managing and monitoring the risk management framework. At the highest level of the ING organisation, there are board committees which oversee risk taking, and have ultimate approval authority.
ING GROUP RISK PROFILE ING Group uses an integrated risk management approach for both its banking activities and for its Insurance activities, and no longer uses an integrated risk management approach for ING Group. This change from a group-wide integrated risk management approach to a separate ING Bank and a separate ING Insurance approach was driven by the operational separation of ING Bank and ING Insurance. As a result the ING Group risk dashboard showing the metrics Earnings at Risk and Capital at Risk will no longer be provided. At the ING Bank and ING Insurance level new risk frameworks were introduced and implemented in 2010.
ING participated in the stress test conducted by the CEBS, which included a baseline scenario, adverse scenario and an additional sovereign shock for 2010 and 2011. This stress test demonstrated ING Bank’s resilience in adverse scenarios. The strong underlying commercial performance resulting from ING Bank’s franchises helps to offset the impact of higher loan loss provisions, additional impairments across the securities portfolios and increased risk-weighted assets.
Risk models A description of the models, underlying assumptions and key principles used by ING for calculating the risk metrics are provided in the Model Disclosure section at the end of the risk management section.
The EC figures shown reflect all diversification effects within ING Bank, including risk reduction between the risk categories; while for Regulatory capital no diversification is taken into account. The ING Bank Economic Capital model is described in more detail in the Model Disclosure section.
Investment risk Investment risk is the credit default and risk rating migration risk that is associated with ING’s investments in bonds, commercial paper, securitisations, and other similar publicly traded securities. Investment risk arises when ING 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 Corporate 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.
Country risk Country risk is the risk specifically attributable to events in a specific country (or group of countries). It can occur within each of the five above described risk categories. All transactions and trading positions generated by ING include country risk which is further divided into economic and transfer risk. Economic risk is the concentration risk relating to any event in the risk country which may affect transactions and any other exposure in that country, regardless of the currency. Transfer risk is the risk incurred through the inability of ING or its counterparties to meet their respective foreign currency obligations due to a specific country event.
ING matches trades with similar characteristics to determine their eligibility for offsetting. This offsetting effect is called ‘compensation’. Subsequently, ING reduces the amount by any legal netting that may be permitted under various types of Master Agreements, such as ISDAs, GMRAs, GMSLAs, etc. Lastly, the amount is further reduced by any collateral that is held by ING under CSAs or other similar agreements.
As part of its securities financing business, ING entities actively enter into agreements to sell and buy back marketable securities. These transactions can take many legal forms. Repurchase and reverse repurchase agreements, buy/sellback and sell/buyback agreements, and securities borrowing and lending agreements are the most common. The amount of marketable securities that ING held as collateral under these types of agreements was EUR 92.0 billion at 31 December 2010 and EUR 72.7 billion at 31 December 2009. The increase is commensurate with the overall increase in open securities financing trades at year end 2010 compared to year end 2009. These amounts exclude the cash leg of the respective transactions, as well as any pledges of securities under Tri-Party agreements (as the underlying is not directly pledged to or owned by ING). As a general rule, the marketable securities that have been received under these transactions are eligible to be resold or repledged in other (similar) transactions. ING is obliged to return equivalent securities in such cases.
As part of the Back to Basics focus on core clients, ING Bank reduced its exposure to governments and the financial sector while growing the private individual and corporate portfolios. The industry Central Banks fell below the 2.0% threshold during 2010 (2009: 2.3%).
Restructuring activities for Business borrowers normally start with a watch list indication. Borrowers on the watch list maintain their rating (1–19). A watch list indication may develop into a restructuring status (18–19) or even a recovery status (20–22). Most borrowers with a watch list indication return to a regular status. For Consumer clients the watch list of ‘potential problem loan’ status is usually caused by payment arrears (more than 1 month) which are subsequently reflected in the risk rating of 18–19 (or comparable status based on an increased probability of default). Following restructuring relationship management is either transferred to the regular banking departments or terminated.
Past-due obligations ING continually measures its portfolio in terms of payment arrears. Particularly the retail portfolios are closely monitored on a monthly basis to determine if there are any significant changes in the level of arrears. Generally, an obligation is considered ‘past-due’ if a payment of interest or principal is more than one day late. In practice, the first 5–7 days after an obligation becomes past due are considered to be operational in nature for the retail loans and small businesses. After this period, letters are sent to the obligor reminding the obligor of its (past due) payment obligations. If the arrear still exists after 90 days, the obligation is transferred to one of the ‘problem loan’ units. In order to reduce the number of arrears, ING banking units encourage their obligors to set up automatic debits from their (current) accounts to ensure timely payments.
Past due for 1–30 days 4,565 5,967 Past due for 31–60 days 973 1,281 Past due for 61–90 days 100 156
There is no significant concentration of a particular type of loan structure in the past due or the impaired loan portfolio.
Increase/(decrease) in loan loss provision 497 1,211 721 728 533 1,034 1,751 2,973
The Basel Committee has proposed to supplement the current VaR regulatory capital framework for trading exposures with an Incremental Risk Charge (IRC) and Stressed VaR to cover for the shortcomings of the current risk framework. The IRC ensures that Basel II capital charges will capture default and credit migration risks which are not reflected in the current 99%, 10-day VaR model for the trading books. The Basel II requirements on the incremental risk charge will come into force in 2011. ING performs experience runs on IRC as part of the approval process with the Dutch regulator, the DNB.
Backtesting Backtesting is a technique for the ongoing monitoring of the plausibility of the VaR model in use. Although VaR models estimate potential future results, estimates are based on historical market data. In a backtest, the actual daily result is compared with the 1-day VaR. In addition to using actual results for backtesting, ING also uses hypothetical results, which measure results excluding the effect of intraday trading, fees and commissions. When the actual or hypothetical loss exceeds the VaR an ‘outlier’ occurs. Based on ING’s one-sided confidence level of 99% an outlier is expected once in every 100 business days. In 2010, like in 2009, there was no occurrence where a daily trading loss exceeded the daily consolidated VaR of ING Commercial Banking. ING reports the results of this backtesting to DNB on a quarterly basis.
Other trading controls VaR and event risk limits are the most important limits to control the trading portfolios. Furthermore, ING uses a variety of other limits to supplement VaR and event risk. Position and sensitivity limits are used to prevent large concentrations in specific issuers, sectors or countries. In addition to this, other risk limits are set with respect to the activities in exotic derivatives trading. The market risk of these products is controlled by product specific limits and constraints.
Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Dec 10Oct 10
During 2010 the overnight VaR for the ING Commercial Banking trading portfolio ranged from EUR 17 million to EUR 30 million. No limit excess was observed in 2010.
In 2010, ING applied the CAD2 model for most of its trading activities. The standard CAD1 model is used for some trading books in smaller locations and/or products for which the internal model is not yet CAD2 compliant. The aim of ING is to receive CAD2 status for all its trading books. In 2010, several trading books were moved from the standardised model to the internal model, further reducing the number of books under the standardised model. It should be noted that due to the conservative nature of the CAD1 model the capital charge for the standardised approach is much larger than for the internal model approach.
Foreign exchange Foreign exchange US dollar –457 US dollar –266 Taiwan dollar 155 Chinese yuan 208 Chinese yuan 83 Bulgarian lev 37 South Korean won 68 Polish zloty 31 Bulgarian lev –57 South Korean won 20
Within ING Commercial Banking, FM ALM contains the strategic interest rate position. The main objective is to maximise the economic value of the book and to generate adequate and stable yearly earnings within the risk appetite boundaries set by ALCO Bank.
The ES is dominated by convexity risk and by the strategic interest rate position in FM ALM. The investment of own funds only impact the ES marginally, given the long term duration.
By currency Euro –237 –262 US dollar –114 –193 Pound sterling –15 –26
In an environment where short term rates remain at relative low levels, both in the Eurozone and the US, the ES showed a limited decrease in 2010. Interest paid on liabilities is expected to be less sensitive to market rate changes.
BPV per currency banking books amounts in thousands of euros 2010 2009
FX Translation result ING’s strategy is to protect the target core Tier 1 ratio against FX rate fluctuations, whilst limiting the volatility in the profit and loss account. Compared to 2009 the strategy has changed in 2010 from protection of the target Tier 1 ratio to protection of the target core Tier 1 ratio instead. The strategy is achieved by deliberately taking foreign currency positions equal to certain target positions, such that the target core Tier 1 capital and risk-weighted assets are equally sensitive in relative terms to changing FX rates. The following table presents the currency exposures in the banking books for the most important currencies: Net currency exposures banking books Foreign Investments Hedges Net Exposure
The US dollar Net Exposure increased significantly in 2010 due to the changed hedging strategy. The significantly decreased Net exposure in the category ‘Other currency’ is mainly caused by changed share prices of strategic equity stakes. For example, the share price of the bank’s equity stake in Bank of Beijing decreased over 30%, decreasing the Chinese renmimbi exposure.
ING Bank’s real estate exposure revaluing through P&L decreased significantly mainly caused by sales of Canadian and Australian funds. The fair value changes (EUR –0.1 billion) related to investments in funds were limited in 2010 compared with 2009.
Real Estate Exposure banking books not revalued through P&L (by geographic area and sector type)
Governance As with other bank market risks, liquidity risk falls under the supervision of the ALCO function within ING Bank, with ALCO Bank as the highest approval authority.
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 funding plans address both temporary and long-term liquidity disruptions, triggered by either a general market event or an ING specific event.
The Management Board Insurance is responsible for managing risks associated with the activities of ING Insurance. The responsibility for measurement and management of credit risk and operational risk resides with Corporate Credit Risk Management (CCRM) and Corporate Operational Risk Management (CORM) respectively. Corporate Insurance Risk Management (CIRM) is responsible for insurance risk, market risk and liquidity risk measurement and management, business risk measurement, as well as ensuring that investment mandates adequately address credit portfolio risk.
Other standards prescribe quarterly insurance risk reporting, ALM procedures and reporting, actuarial and economic assumption setting and reserve adequacy testing amongst others.
To further manage risk, ING Insurance has implemented several limit structures. Examples include but are not limited to the following: • Market Risk limits on sensitivities of Available Financial Resources, IFRS Earnings and Regulatory Capital. These limits provide the fundamental framework to manage the market and credit risks resulting from the Insurance operations’ asset/liability mismatch; • Credit risk concentration limits; • Mortality concentration limits; • Catastrophe and mortality exposure retention limits for its insurance risk; and • Investment and derivative guidelines and limits.
ING INSURANCE RISK PROFILE The risk appetite of ING Insurance is derived from the ING Group risk appetite and is aligned with how its business is being managed and anticipating regulatory developments going forward. The risk appetite of ING Insurance is bound by local regulatory restrictions and by the target ratings for both the Insurance holding companies and certain rated operating subsidiaries. • For the EurAsia and LatAm insurance business we align the Economic Capital (EC) definition with the Solvency II Capital Requirement which is based on a 99.5% confidence level. The target ratio of Available Financial Resources (AFR) over Economic Capital is set based on the business strategy and resulting risk appetite defined by the Management Board Insurance; • For the US insurance business the risk appetite is aligned with local US Regulatory Capital requirements.
• Earnings Sensitivities: the potential reduction in IFRS earnings during a moderate stress scenario. Maintaining a high quality of earnings helps ING to safeguard against being downgraded by the rating agencies.
ING Insurance’s risk metrics cover the most important aspects in terms of performance measures where risk can materialise and are representative of the regulatory constraints that our business is subject to. The sensitivities for AFR, Earnings and US Regulatory Capital are important metrics since they provide insight into the level of risk ING takes under ‘moderate stress’ scenarios. They also are the basis for internal risk management.
The ING Insurance Economic Capital model is described in more detail in the Model Disclosure section.
Economic Capital disclosures include diversification benefits that arise within ING Insurance (EurAsia and LatAm). Although the diversification benefits in 2010 are very similar to those in 2009 it is important to point out that this is the result of two offsetting impacts. Firstly, the 2010 Economic Capital no longer includes the US business which results in a higher diversification benefit between risk types and business units. Secondly, the 2010 Economic Capital has a lower recognition of market risk diversification due to an updated method to define market risk correlations which results in a lower diversification benefit between risk types and business units.
The change in confidence interval from 99.95% to 99.5% reduced our 2010 Economic Capital for the EurAsia and LatAm business by 24% across risk types (25% for 2009). For market risk, insurance risk and other risks the reduction due to this change is in the same order of magnitude. For credit risk the reduction is more significant due to its fat tailed distribution.
As we no longer include the US business in our Economic Capital, we provide for 2009 the numbers for both the EurAsia and LatAm and US insurance business. The 2009 US figures are provided in the table below.
Economic Capital break-down ING Insurance US (99.5%) by risk category (1) (2)
Economic Capital break-down by ING Insurance business line for EurAsia and LatAm Business
Regulatory Capital Sensitivities – US Insurance Business For the capital adequacy assessment of ING’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 defined by the National Association of Insurance Commissioners (NAIC). Commonly in the US an insurer’s financial strength and ability to meet policyholder obligations is measured in terms of the amount of statutory capital held in relation to the ‘Company Action Level’ RBC defined by the NAIC framework. Note that the level of capital required by rating agencies to maintain an acceptable claims paying ability rating is well above the regulatory minimum defined by Company Action Level RBC. Consequently the US Insurance business manages its available capital primarily with respect to capital metrics that are aligned with the models of the various ratings agencies.
Statutory capital in the US domiciled regulated insurance entities ended 2010 with an estimated EUR 4,009 million in excess of Company Action Level RBC. The Capital Management section describes the ratio of available statutory capital over required capital at the Company Action Level.
ING INSURANCE – MARKET RISKS ING Insurance is exposed to market risk to the extent to which the market value of surplus can be adversely impacted due to movements in financial markets; these include interest rates, credit spreads, equity prices, Real Estate prices, implied volatilities of options and foreign exchange rates. Changes in financial market prices impact the market value of ING’s current asset portfolio and hedging derivatives directly as well as the calculated market value of ING’s insurance liabilities.
Interest Rate Up 329 –626 Interest Rate Down –1,538 –291 Equity –1,822 –988 Real Estate –813 –842 FX –1,547 –1,332 Credit Spread –1,746 n/a Implied Volatility –468 –427
Foreign exchange sensitivity is small in the business units. The main exposure is at the corporate level and relates to the FX translation risk which increase due to a change in the market value surplus of non-Euro businesses and a lower recognition of diversification.
Earnings sensitivities for insurance market risks – EurAsia and LatAm Insurance Business
Interest Rate Up –205 –291 Interest Rate Down 285 317 Equity –137 –172 Real Estate –806 –812 FX –152 –181 Credit Default –258 n/a
Real Estate Real Estate price risk arises from the possibility that the value of Real Estate assets fluctuate because of a change in earnings related to Real Estate activities and/or a change in required investor yield.
ING Insurance has two different categories of Real Estate exposure on its insurance books. First, ING Insurance owns buildings it occupies. Second, ING Insurance has invested capital in several Real Estate funds and direct Real Estate assets. A decrease in Real Estate prices will cause the value of this capital to decrease and as such ING Insurance is exposed to Real Estate price shocks.
Real Estate Exposure (Insurance) recorded as fair value through P&L (by geographic area and sector type)
For the main non-life units (in the Benelux) the risk tolerance for property and casualty (P&C) business is derived from the total Non-Life earnings of 2009. For 2010, this translated into an aggregated (pre-tax) risk tolerance level of EUR 180 million for the Benelux (2009: EUR 190 million).
For insurance risk the EC is shown by risk type above. The tables below show Earnings sensitivities for both EurAsia/LatAm and US Insurance business. The EC are based on a 99.5% confidence level. The change in confidence level from 99.95% to 99.5% reduced the 2010 Economic Capital for insurance risks by 25% (29% for 2009).
(1) Based on credit risk measurement contained in lending, pre-settlement, money market and investment activities. (2) Economic sectors below 2% are not shown separately but grouped in ‘Other’.
Where overall risk concentrations within ING Insurance shifted towards Central Governments in 2009, this was partially reversed in 2010 again. The upward shift in Real Estate for Insurance EurAsia and LatAm is related to real estate investments in The Netherlands.
ING GROUP – NON-FINANCIAL RISKS In addition to the above financial risks (credit, market, insurance and liquidity risk) the next paragraphs describe the non-financial risks, being operational and compliance risks.
Non-financial Risk Dashboard The Non Financial Risk Dashboard (NFRD) is a report that is standard on the agenda for the meetings of the Management Boards Banking and Insurance and the Risk Committee. NFRD provides management at all organisational levels with information on their key Operational, Compliance and Legal Risks. NFRD is based on their risk tolerance within their business and a clear description of the risks and responses enabling management to prioritise and to manage operational, compliance and legal risks.
The CORM 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 CORM function is responsible for developing and communicating ING’s operational risk framework, policies, minimum standards and guidelines. The corporate function advises the Management Boards Banking and Insurance and senior management, supports the business line ORM staff, monitors the quality of operational risk management and leads the group-wide reporting of operational risks to the Management Boards Banking and Insurance and the Risk Committee.
Operational risk framework ING has developed a comprehensive framework supporting and governing the process of identifying, mitigating, measuring and monitoring operational risks thus reflecting the stages described in the Enterprise Risk Management model of COSO (Committee of Sponsoring Organisations of the Treadway Commission).
• Disentanglement – The ORM function monitored during 2010 the operational risks around the disentanglement process of ING Bank and ING Insurance (project Readiness). The Readiness project completed the Day-1 sign off in which CEO’s confirmed to be operating at arm’s length.
The Compliance Risk Management function The Chief Compliance Officer (CCO) reports directly to the Chief Risk Officer who is a member of the Executive Board. The CCO is responsible for developing and establishing the company-wide Compliance Risk Management Charter & Framework, establishes the Minimum Standards for managing Compliance Risks and assists and supports the Executive Board in managing ING’s Compliance Risks.
Compliance Risk Management Framework The Framework consists of three key components: the Compliance Risk Management process, an Advisory component and the Scorecard.
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); E. Compliance Risk Reporting (includes Incident Management).
3. Scorecard The Compliance Risk Management function works with the Operational Risk Management Scorecard process to evaluate how well the Compliance Risk Management Framework is embedded in each business. Scoring is based on the ability of the business unit to demonstrate that the required policies and procedures are implemented. The scoring indicates the level of control within the business units and the result is integrated with the Operational Risk Management results into ING’s Dutch Central Bank approved regulatory capital model.
As a result of our frequent evaluation of all businesses from economic, strategic and risk perspectives ING continues to believe that for business reasons doing business involving certain specified countries should be discontinued, which includes that ING has a policy not to enter into new relationships with clients from these countries and processes remain in place to discontinue existing relationships involving these countries. At present these countries include Myanmar, North Korea, Sudan, Syria, Iran and Cuba. Each of these countries is subject to a variety of EU, US and other sanctions regimes. Cuba, Iran, Sudan, and Syria are identified by the US as state sponsors of terrorism and are subject to US economic sanctions and export controls.
Economic Capital for market risk for the mortgage portfolios within ING Retail Banking (Benelux, Direct and International Banking) and ING Commercial Banking is calculated for embedded option risk (e.g. the prepayment option and offered rate option in mortgages). The embedded options are hedged using a delta-hedging methodology, leaving the mortgage portfolio exposed to convexity and volatility risk. The Economic Capital model for market risk is based on the estimated 99% confidence adverse interest rate change.
OPERATIONAL RISK (ING BANK AND ING INSURANCE) 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 the risk of reputation loss, as well as legal risk, whereas strategic risks are not included. While operational risk can be limited through management controls and insurance, operational risk incidents may have a substantial impact on the profit and loss account of financial institutions.
Loss Distribution approach The main objective of the LDA approach is to derive an objective capital amount based on the size and the risk appetite of an institution and its business units. This approach estimates the likely (fat-tailed) distribution of operational risk losses over some future horizon for each combination of business line and loss event type. The main characteristic of the LDA is the explicit derivation of a loss distribution, which is based on separate distributions for event frequency (Poisson) and severity (Inverse Gaussian). The model uses both external and internal loss data above one million EUR.
The calculation of operational risk capital for the units follows five basic principles: • Principle 1: If the world gets riskier, the business units need more Economic Capital; • Principle 2: If a business unit’s size increases, so does its capital; • Principle 3: If the business of a business unit is more complex, it needs more capital; • Principle 4: If the level of control of a business unit is higher, it needs less capital; • Principle 5: If the business units’ losses from internal incidents exceed the level of expected loss accounted for in the first four framework principles, it needs more capital.
Scorecard approach (principle 4) The scorecard adjustment reflects the level of quality of control in a specific institution. Scorecards aim to measure the quality of key operational risk management processes. The scorecard procedure concerns questions that require quantitative data, qualitative judgements or simple yes/no questions (e.g. indicating compliance with certain group policies). The scorecards are completed by all business units using self-assessment and reviewed by an expert panel who determines the final score. The set of scorecards lead to an increase or decrease of the capital of the specific unit.
Illiquidity is also reflected through Interest Rate Risk, (adding the liquidity spread to the discount curve effectively reduces the duration of our liabilities and therefore reduces the duration mismatch between our assets and liabilities resulting in a reduced interest rate risk); through Credit Spread Risk (the Economic Capital model stresses both the asset spreads and the illiquidity spread: the netting of asset spread risk with illiquidity liability spread risk results in a lower credit spread risk) and through Foreign Exchange Risk (the adjustment of the MVS for illiquidity results in a reduced net exposure to foreign currency movements and in particular the US dollar: this results in a lower foreign exchange risk).
The MVL consists of the Financial Component of Liabilities (FCL) and a Market Value Margin (MVM) for non-hedgeable risks (e.g. insurance risk). The MVM is calculated using a Cost-of-Capital approach based on an estimate of required shareholder return on Economic Capital.
ING quantifies the impact of the following types of risk in its Economic Capital model: • Market risk • Credit risk (including transfer risk) • Business risk • Operational risk • Life risk (both catastrophe and non-catastrophe) • Morbidity risk (both catastrophe and non-catastrophe) • P&C risk (both catastrophe and non-catastrophe) Strategic business risk has been excluded from the EC calculations of ING Insurance.
Model disclosures 3. Replicating Portfolio Definition • Capture the risk profile of the financial component of insurance liabilities by mapping onto a finite set of standard financial instruments • Standard instruments contain zero coupon bonds, swaptions, callable bonds, CMS options, equity forwards/options and FX options.
Replicating Portfolios Definition To handle the full complexity of calculating diversification by Monte Carlo simulation, ING maps its assets and liabilities to a 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. Assets and the financial components of the liabilities are represented by a portfolio of this standard set of instruments. A user interface allows the selection of different types of replicating instruments for different cash flow types. Then an optimal replicating portfolio is created that matches the risk profile on a net present value of the stochastically generated cash flows as closely as possible. The resulting replicating portfolio is used in the calculation of Economic Capital.
The quality of the replicating portfolio 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. High quality replicating portfolios are important in several ways. First, they ensure a good reflection of the actual risk profile and an accurate calculation of Economic Capital. Second, they assist business units in hedging strategies and management of Economic Capital. Third, the process of replicating portfolio calculations increases the understanding of the complex nature of insurance liabilities in a market consistent environment.
The asset positions data used for the AFR credit spread shocks and Earnings credit default scenarios is for a large part based on third quarter 2010 positions.
Equity implied volatility up by 80% for tenors less than 1 year, up 30% for tenors between 1 and 3 years, up 20% for tenors between 3–7 years and up 10% for tenors of 7 years and above.
The table below provides an overview of the shock scenarios applied for Statutory Surplus sensitivities.
ING applies the following main capital definitions: • Adjusted Equity (ING Group) – This rating agency concept is defined as shareholders’ equity plus core Tier 1 securities, hybrid capital and prudential filters and certain adjustments. See ‘Capital Base’ disclosures in this section. This capital definition is applied in comparing available capital to core debt/financial leverage for ING Group/ING Insurance respectively; • Insurance Group Directive (ING Insurance) –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. This measurement of available capital is different from previous years. In previous years we treated fixed income revaluations similar to ING Bank to allow adding up Bank and Insurance on a consistent basis. However with the upcoming separation and hence the decreased importance of Bank and Insurance consistency we changed the IGD to align with European Insurance peers.
• Core Tier 1 capital, Tier 1 capital and total BIS capital (ING Bank) – Tier 1 capital is defined as shareholders’ equity including core Tier 1 securities plus hybrid capital less certain prudential filters and deductible items. Tier 1 and BIS capital divided by risk-weighted assets equal the Tier 1 and BIS ratio respectively. Core Tier 1 capital is equal to Tier 1 capital excluding hybrid capital; • AFR (ING Insurance other than the US) – This is a market value concept, defined as market value of assets (MVA) less the market value of liabilities (MVL) on the balance sheet. The liabilities do not include perpetual hybrid capital which is included in AFR. The valuation of ING Insurance includes an adjustment for portfolio illiquidity. AFR is used as the measure of available capital in comparison with Economic Capital employed.
DEVELOPMENTS In 2010 Capital Management’s main focus was to strengthen the capital position of ING Group, ING Bank and ING Insurance. ING’s capital positions are well placed to deal with the uncertain financial environment, increasing regulatory requirements and the ambition to repurchase the remaining outstanding Core Tier 1 securities. In March 2011, ING announced that it has informed the Dutch State of its intention to early repurchase EUR 2 billion of the non-voting equity securities (core Tier 1 securities) on 13 May 2011. The Dutch Central Bank has approved the intended repurchase. The total payment will amount to EUR 3 billion and includes a 50% repurchase premium. In order to fund the repayment, it is probable that ING Bank will pay, in 2011, a dividend out of retained earnings to ING Group for a similar amount. ING disclosed to the market that based on our capital position at that date the intended repurchase in May would reduce the core Tier 1 ratio by 90 basis points and the ratio is expected to remain above 8.5%.
Revaluation reserves fixed income & other –3,425 –1,291 –1,025 –1,040 –2,992 –2,783 Revaluation reserves excluded from Tier 1 (4) –2,212 –3,111 Insurance hybrid capital (5) 2,094 1,944
Deductions Tier 1 –1,069 –1,073 Tier 1 capital for Bank 39,332 34,015
(1) Tier 1 instruments issued by ING Group (e.g. perpetual debt securities and preference shares) at nominal value. Group hybrid Tier 1 instruments other than preference shares are provided as hybrid capital to ING Bank or ING Insurance.
(5) Qualifying dated subordinated debt issued by ING Insurance at nominal value. (6) Consists of EUR 10,882 million (2009: EUR 11,789 million) Tier 2 capital and no Tier 3 (2009: nil), offset by EUR 1,069 million (2009: EUR 1,073 million) of regulatory deductions. (7) An adjustment for the Dutch Financial supervision act. A ‘test-of-adequacy’ has to be included in the available capital measurement. The revaluation reserve debt securities and revaluation reserve crediting to life policyholders are not reversed out of the IGD capital definition.
BASEL II As of 2008 ING Bank publishes risk-weighted assets (RWA), Tier 1 and BIS capital and the accompanying capital ratios based on Basel II data only. In addition, ING publishes the minimum required capital level according to Basel II and according to the Basel I floor. As of 2009 the Basel I floor is based on 80% of Basel I RWA. The minimum requirements according to Basel II and Basel I are both compared to total BIS available capital according to Basel II.
Subordinated loans qualifying as Tier 1 capital (2) 8,438 8,057 Goodwill and intangibles deductible from Tier 1 (1) –1,645 –1,636 Deductions Tier 1 –1,069 –1,073 Revaluation reserve (3) –1,592 –2,515 Available capital – Tier 1 39,332 34,015
(1) According to the regulatory definition. (2) Subordinated loans qualifying as Tier 1 capital have been placed by ING Groep N.V. with ING Bank N.V. (3) Includes revaluation debt securities, revaluation reserve cash flow hedge and revaluation reserves equity and real estate
Shareholders’ equity (parent) 20,811 15,887 Revaluation reserve debt securities –1,164 2,334 Revaluation reserve crediting to life policyholders 1,488 –156 Revaluation reserve cashflow hedge –1,567 –926 Goodwill –1,425 –1,857 Minority interests 111 80 Capital base 18,254 15,362
(1) Hybrids issued by ING Group at amortised cost value consistent with IFRS carrying value. (2) Hybrids issued by ING Insurance at amortised cost value consistent with IFRS carrying value. (3) Includes net internal borrowings from the operating subsidiaries, net of cash and current tax liability of the holding companies, mainly ING Verzekeringen NV and
ING GROUP The debt/equity ratio of ING Group as at year-end 2010 was 13.30% (2009: 12.35%).
BIS ratio (Bank) Year-end actual BIS ratio 15.30% 13.46% Regulatory minimum BIS ratio 8.00% 8.00% Target minimum BIS ratio 10.00% 10.50%
Debt/Equity ratio (Group) Debt/Equity ratio 13.30% 12.35% Target maximum Debt/Equity ratio 15.00% 15.00%
Parent company profit and loss account of ING Group for the years ended 31 December amounts in millions of euros 2010 2009
(1) Other reserves includes Retained earnings, Treasury shares, Other reserves and Unappropriated result. (2) The 2009 amount of EUR 605 million includes the coupon (EUR 259 million) and repayment premium (EUR 346 million) on the repayment of EUR 5 billion non-voting equity securities.
Other includes certain intercompany eliminations between ING Bank N.V. and ING Verzekeringen N.V.
The Share of associates reserve includes the following components: Reserve for non-distributable profit of associates of EUR 907 million (2009: EUR 645 million) and Revaluation reserve of associates of EUR 5,732 million (2009: EUR 1,340 million).
As at 31 December 2010, the Share of associates reserve included an amount of EUR 741 million (2009: EUR 645 million) related to the former Stichting Regio Bank that cannot be freely distributed.
The number of debentures held by group companies as at 31 December 2010 was 131,680 with a balance sheet value of EUR 13 million (2009: 114,760 with a balance sheet value of EUR 11 million).
Notes to the parent company annual accounts of ING Group continued 264 ING Group Annual Report 2010 5 Parent company annual accounts
REMUNERATION OF SENIOR MANAGEMENT, EXECUTIVE BOARD AND SUPERVISORY BOARD The information on share-based payment plans and remuneration of the members of the Executive Board and the Supervisory Board is included in the Consolidated annual accounts (page 164 up to and including page 165).
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 Executive 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.
Opinion with respect to the parent company annual accounts In our opinion, the parent company annual accounts give a true and fair view of the financial position of ING Groep N.V. as at 31 December 2010 and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code.
For 2010, 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.
Net result 3,220 Addition to reserves pursuant to Article 37 (4) of the Articles of Association 3,220 At the disposal of the General Meeting of Shareholders pursuant to Article 37 (5) of the Articles of Association 0
RISKS RELATED TO FINANCIAL CONDITIONS, MARKET ENVIRONMENT AND GENERAL ECONOMIC TRENDS. Because we are a financial services company conducting business on a global basis, our revenues and earnings are affected by the volatility and strength of the economic, business and capital markets environments specific to the geographic regions in which we conduct business. The ongoing turbulence and volatility of such factors have adversely affected, and may continue to adversely affect, the profitability of our insurance, banking and asset management business.
In light of current conditions in the global financial markets and the global economy, regulators have increased their focus on the regulation of the financial services industry. Most of the principal markets where we conduct our business have adopted, or are currently considering, major legislative and/or regulatory initiatives in response to the financial crisis. In particular, governmental and regulatory authorities in the Netherlands, the United Kingdom, the United States and elsewhere are implementing measures to increase regulatory control in their respective financial markets and financial services sectors, including in the areas of prudential rules, capital requirements, executive compensation, crisis and contingency management, bank levies and financial reporting, among others. For example, the EC has agreed upon a full scale revision of the solvency framework and prudential regime applicable to insurance and reinsurance companies known as ‘Solvency II’, which was adopted on 25 November 2009. Each member state of the EEA, including the Netherlands, is required to implement Solvency II by 1 January 2013. Significant efforts towards establishing a more cohesive and streamlined European supervisory framework, including establishing a European Systemic Risk Board and a European Insurance and Occupational Pensions Authority, may also affect the Group’s operations.
Risk factors continued 270 ING Group Annual Report 2010 7 Additional information
Turbulence and volatility in the financial markets have adversely affected us, and may continue to do so. Our results of operations are materially impacted by conditions in the global capital markets and the economy generally. The stress experienced in the global capital markets that started in the second half of 2007 continued and substantially increased throughout 2008 and, although market conditions have improved, volatility continued in 2009, particularly the early part of the year. The crisis in the mortgage market in the United States, triggered by a serious deterioration of credit quality, led to a revaluation of credit risks. While certain conditions have improved over 2009 and 2010, these conditions have generally resulted in greater volatility, widening of credit spreads and overall shortage of liquidity and tightening of financial markets throughout the world. In addition, prices for many types of asset-backed securities (‘ABS’) and other structured products have significantly deteriorated. These concerns have since expanded to include a broad range of fixed income securities, including those rated investment grade, sovereign debt, the international credit and interbank money markets generally, and a wide range of financial institutions and markets, asset classes, such as public and private equity, and real estate sectors. As a result of these and other factors, sovereign governments across the globe, including in regions where the Group operates, have also experienced budgetary and other financial difficulties, which have resulted in austerity measures, downgrades in credit rating by credit agencies, planned or implemented bail-out measures and, on occasion, civil unrest. As a result, the market for fixed income instruments has experienced decreased liquidity, increased price volatility, credit downgrade events, and increased probability of default. In addition, the confluence of these and other factors has resulted in volatile foreign exchange markets. Securities that are less liquid are more difficult to value and may be hard to dispose of. International equity markets have also been experiencing heightened volatility and turmoil, with issuers, including ourselves, that have exposure to the real estate, mortgage, private equity and credit markets particularly affected. These events and market upheavals, including extreme levels of volatility, have had and may continue to have an adverse effect on our revenues and results of operations, in part because we have a large investment portfolio and extensive real estate activities around the world. In addition, the confidence of customers in financial institutions is being tested. Consumer confidence in financial institutions may, for example, decrease due to our or our competitors’ failure to communicate to customers the terms of, and the benefits to customers of, complex or high-fee financial products. Reduced confidence could have an adverse effect on our revenues and results of operations, including through an increase of lapses or surrenders of policies and withdrawal of deposits. Because a significant percentage of our customer deposit base is originated via Internet banking, a loss of customer confidence may result in a rapid withdrawal of deposits over the Internet.
As a result of the ongoing and unprecedented volatility in the global financial markets in 2007 and 2008, we have incurred substantial negative revaluations on our investment portfolio, which have impacted our shareholders’ equity and earnings. During 2009 and 2010, the revaluation reserve position improved substantially, positively impacting shareholders’ equity. Although we believe that reserves for insurance liabilities are generally adequate at the Group, inadequacies in certain product areas have developed.
Reinsurers Our insurance operations have bought protection for risks that exceed certain risk tolerance levels set for both our life and non-life businesses. This protection is bought through reinsurance arrangements in order to reduce possible losses. Because in most cases we must pay the policyholders first, and then collect from the reinsurer, we are subject to credit risk with respect to each reinsurer for all such amounts. As a percentage of our (potential) reinsurance as of 31 December 2010, the greatest exposure after collateral to an individual external reinsurer was approximately 24%, approximately 40% related to four other external reinsurers and the remainder of the reinsurance exposure related to various other reinsurers. The inability or unwillingness of any one of these reinsurers to meet its financial obligations to us, or the insolvency of our reinsurers, could have a material adverse effect on our net results and our financial results.
We may incur further liabilities in respect of our defined benefit retirement plans if the value of plan assets is not sufficient to cover potential obligations, including as a result of differences between results and underlying actuarial assumptions and models. ING Group companies operate various defined benefit retirement plans covering a significant number of our employees. The liability recognised in our consolidated balance sheet in respect of our defined benefit plans is the present value of the defined benefit obligations at the balance sheet date, less the fair value of each plan’s assets, together with adjustments for unrecognised actuarial gains and losses and unrecognised past service costs. We determine our defined benefit plan obligations based on internal and external actuarial models and calculations using the projected unit credit method. Inherent in these actuarial models are assumptions including discount rates, rates of increase in future salary and benefit levels, mortality rates, trend rates in health care costs, consumer price index, and the expected return on plan assets. These assumptions are based on available market data and the historical performance of plan assets, and are updated annually. Nevertheless, the actuarial assumptions may differ significantly from actual results due to changes in market conditions, economic and mortality trends and other assumptions. Any changes in these assumptions could have a significant impact on our present and future liabilities to and costs associated with our defined benefit retirement plans.
Our risk management policies and guidelines may prove inadequate for the risks we face. The methods we use to manage, estimate and measure risk are partly based on historic market behaviour. The methods may, therefore, prove to be inadequate for predicting future risk exposure, which may be significantly greater than what is suggested by historic experience. For instance, these methods did not predict the losses seen in the stressed conditions in recent periods, and may also not adequately allow prediction of circumstances arising due to the government interventions and stimulus packages, which increase the difficulty of evaluating risks. Other methods for risk management are based on evaluation of information regarding markets, customers or other information that is publicly known or otherwise available to us. Such information may not always be correct, updated or correctly evaluated.
In addition, as a result of our operations in certain countries, we are subject to risks of possible nationalisation, expropriation, price controls, exchange controls and other restrictive government actions, as well as the outbreak of hostilities, in these markets. In addition, the current economic environment in certain of these countries in which we operate may increase the likelihood for regulatory initiatives to protect homeowners from foreclosures. Any such regulatory initiative could have an adverse impact on our ability to protect our economic interest in the event of defaults on residential mortgages.
Other factors that may impede our ability to implement the Restructuring Plan successfully include an inability of prospective purchasers to obtain funding due to the deterioration of the credit markets, insufficient access to equity capital markets, a general unwillingness of prospective purchasers to commit capital in the current market environment, antitrust concerns, any adverse changes in market interest rates or other borrowing costs and any declines in the value of the assets to be divested. Similarly, it may also be difficult to divest all or part of our insurance or investment management business through one or more initial public offerings. There can also be no assurance that we could obtain favourable pricing for a sale of all or part of our insurance or investment management business in the public markets or succeed in turning the relevant subsidiaries into viable standalone businesses. A divestment may also release less regulatory capital than we would otherwise expect.
The limitations agreed with the EC on our ability to compete and to make acquisitions or call certain debt instruments could materially impact the Group. As part of our Restructuring Plan, we have undertaken with the EC to accept certain limitations on our ability to compete in certain retail, private and direct banking markets in the European Union and on our ability to acquire (i) financial institutions and (ii) businesses insofar this would delay our repurchase of the remaining Core Tier 1 Securities held by the Dutch State. These restrictions apply until the earlier of (1) 18 November 2012, and (2) the date upon which we repurchase all remaining Core Tier 1 Securities held by the Dutch State. We have also agreed to limitations on our ability to call Tier 2 capital and Tier 1 hybrid debt instruments. If the EC does not approve the calling of Tier 2 capital and Tier 1 hybrid debt instruments in the future, this may have adverse consequences for us, result in additional payments on these instruments and limit our ability to seek refinancing on more favourable terms. The limitations described above will impose significant restrictions on our banking business operations and on our ability to take advantage of market conditions and growth opportunities. Such restrictions could adversely affect our ability to maintain or grow market share in key markets, as well as our results of operations.
Because we are a Dutch company and because the Stichting ING Aandelen holds more than 99.9% of our ordinary shares, the rights of our shareholders may differ from the rights of shareholders in other jurisdictions or companies that do not use a similar trust structure, which could affect your rights as a shareholder. While holders of our bearer depositary receipts are entitled to attend and speak at our General Meeting of Shareholders (‘General Meeting’), voting rights are not attached to the bearer depositary receipts. The Trust holds more than 99.9% of our ordinary shares, and exercises the voting rights attached to the ordinary shares (for which bearer depositary receipts have been issued). Holders of bearer depositary receipts who attend – in person or by proxy – the General Meeting must obtain and are entitled to voting rights by proxy from the Trust. Holders of bearer depositary receipts and holders of the ADSs (American depositary shares) representing the bearer depositary receipts who do not attend the General Meeting may give binding voting instructions to the Trust. The Trust is entitled to vote on any ordinary shares underlying the bearer depositary receipts for which the Trust has not granted voting proxies, or voting instructions have not been given to the Trust. In exercising its voting discretion, the Trust is required to be guided primarily by the interests of the holders of bearer depositary receipts, while also taking into account: • our interests, and • the interests of our affiliates.
Risk factors continued 280 ING Group Annual Report 2010 7 Additional information
There can be no assurance that we will pay dividends on our ordinary shares in the future. It is ING’s policy to pay dividends in relation to the long-term underlying development of cash earnings. Dividends can only be declared by shareholders when the Executive Board considers such dividends appropriate, taking into consideration the financial conditions then prevailing and the longer-term outlook. Given the uncertain financial environment, ING will not pay a dividend over 2010 and there can be no assurance that we will pay dividends in the future.
ALT-A RESIDENTIAL MORTGAGE BACKED SECURITY (ALT-A RMBS) A type of US residential mortgage which is considered riskier than ‘prime’ and less risky than ‘sub-prime’ mortgages. Parameters generally taken into account are borrower credit scores, residential property values and loan-to-value ratios. Alt-A mortgages are further characterised by a limited degree of income and/or asset verification.
BUSINESS RISK The exposure to value loss due to fluctuations in volumes, margins and costs. These fluctuations can occur because of internal, industry, or wider market factors. It is the risk inherent to strategy decisions and internal efficiency.
EMPLOYEE BENEFITS All forms of consideration given by a company in exchange for service rendered by (current and former) employees.
PRIVATE LOAN Loans to governments, other public bodies, public utilities, corporations, other institutions or individuals with a loan agreement as the only instrument of title.
RECOGNITION The process of incorporating in the balance sheet or profit and loss account an item that meets the definition of an element and satisfies the following criteria for recognition: • it is probable that any future economic benefit associated with the item will flow to or from the enterprise; and • the item has a cost or value that can be measured reliably.
RISK-WEIGHTED ASSETS (‘RWA‘ UNDER BASEL I) Assets which are weighted for credit risk according to a formula used by the Dutch central bank (De Nederlandsche Bank), which conforms to the capital adequacy guidelines of the BIS (Bank of International Settlements). On and off-balance-sheet items are weighted for risk, with off-balance-sheet items converted to balance-sheet equivalents (using credit-conversion factors) before being allocated a risk weight.
TREASURY BILLS Generally short-term debt certificates issued by a central government. Dutch Treasury Certificates are regarded as Dutch Treasury bills.
Disclaimer Certain of the statements contained in this Annual Report that 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 expressed or implied in such statements due to, without limitation: (1) changes in general economic conditions, in particular economic conditions in ING’s core markets, (2) changes in performance of financial markets, including developing markets, (3) the implementation of ING’s restructuring plan to separate banking and insurance operations, (4) 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, (5) the frequency and severity of insured loss events, (6) changes affecting mortality and morbidity levels and trends, (7) changes affecting persistency levels, (8) changes affecting interest rate levels, (9) changes affecting currency exchange rates, (10) changes in general competitive factors, (11) changes in laws and regulations, (12) changes in the policies of governments and/or regulatory authorities, (13) conclusions with regard to purchase accounting assumptions and methodologies, (14) changes in ownership that could affect the future availability to us of net operating loss, net capital and built-in loss carry forwards, (15) ING’s ability to achieve projected operational synergies, and (16) the move towards fair value accounting for Guaranteed Minimum Withdrawal Benefits for the Insurance US Closed Block VA business line. ING assumes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information or for any other reason.