> ING posts 2010 underlying net profit of EUR 3,893 million > Operational separation Bank and Insurer effectuated in 2010 > Main priorities: creation of strong businesses and repayment of the Dutch State when prudent and possible > Base case scenario: divestment of Insurance through two IPOs > Steering on sound financial performance, increased customer focus, operational excellence and good corporate citizenship
Result Banking result before taxation 5,830 –838 106 4,510 5,005 Insurance result before taxation –1,353 –687 –1,593 6,533 4,935 Result before taxation 4,477 –1,525 –1,487 11,043 9,940
Figures per ordinary share (in EUR) Basic earnings (1) 0.73 –0.57 –0.27 3.31 2.74
Further information is provided in the section ‘Capital management’ in the consolidated annual accounts.
Underlying addition to loan loss provision 1,751 2,859 –39 1,235 Underlying result before tax 5,862 1.361 331 593
EXECUTIVE BOARD Jan H.M. Hommen (67), CEO and chairman Patrick G. Flynn (50), CFO J.V. (Koos) Timmermans(1) (50), CRO
US CLOSED BLOCK VA US Closed Block VA consists of ING’s Closed Block Variable Annuity business in the US, which has been closed to new business since early 2010 and which is now being managed in run-off.
ING INVESTMENT MANAGEMENT ING Investment Management (ING IM) is a leading global asset manager and is the principal investment manager of ING Group. It has operations in 33 countries across the Americas, Asia-Pacific, Europe and the Middle East. ING IM provides retail and institutional clients with access to domestic, regional and global investment solutions.
In 2010, we were faced with changes in the regulatory environment which will have an impact on the business models of both our banking and insurance businesses and the way we manage our company. Proposals were made by the regulatory authorities to increase capital, liquidity and risk requirements for banks and insurance companies (Basel III, Solvency II). ING spent much effort to prepare for these changes in the regulatory environment.
Our employees are our human capital. Engaged and motivated employees are central to our success as they are the main point of contact with our customers.
In January 2011, Godfried van der Lugt and Jackson Tai both resigned from the Supervisory Board. In 2011, Claus Dieter Hoffmann will retire from the Supervisory Board after the General Meeting. On behalf of my colleagues in the Executive Board and Supervisory Board, I would like to take this opportunity to express my sincere gratitude and appreciation for the contribution they have made to ING. Godfried van der Lugt witnessed the beginning of ING and as a former chairman of the Executive Board of ING Group and as a member of the Supervisory Board he has played a very valuable role in the development of the company which has greatly benefited from his expertise.
We also announced changes in the structure and composition of the Management Boards for Banking and Insurance/Investment Management. On 1 January 2011, Lard Friese and Gilbert Van Hassel joined the Management Board Insurance. At the end of 2010, Tom McInerney stepped down as Insurance/Investment Management chief operating officer. William Connelly has been appointed CEO of Commercial Banking and joined the Management Board Banking, succeeding Eric Boyer who from 1 January 2011 has concentrated solely on his role as vice-chairman of the Bank.
PROFIT RETENTION AND DISTRIBUTION POLICY ING Group’s profit retention and distribution policy is determined by its internal requirements and its growth opportunities on the one hand and the capital providers’ dividend expectations on the other. ING Group’s internal needs are determined by statutory solvency requirements and capital ratios, in excess of which ING Group needs to maintain healthy buffers. An important determinant are the credit ratings which are of utmost importance to ING Group, because they directly affect the company’s financing costs and hence profitability. For their part, the capital providers expect a dividend which reflects ING Group’s financial results and is relatively predictable.
** Based on the share price at year-end and net profit per ordinary share for the financial year.
Interim dividend – – 0.74 Final dividend – – – Total – – 0.74 * Year-end 2010 figures, estimated on information provided by several large custodians.
One-year price development ING depositary receipts for shares 01/10 03/10 05/10 07/10 09/10 11/10
IMPORTANT DATES IN 2011* Publication results 1Q 2011 Thursday, 5 May 2011, 7:30 a.m.
The stress test complemented the risk management procedures and regular stress testing programmes set up in ING under the Pillar 2 framework of the Basel II and Capital Requirements Directive (CRD) requirements. The results, announced in July 2010, confirmed that ING’s focus on the strengthening of its Bank’s balance sheet since the spring of 2009 has given it sufficient resilience to endure a stressful economic scenario.
EUR 332 million. Accordingly, ING completed the sale of its Swiss Private Banking business to Julius Baer. This transaction generated an estimated net profit for ING of EUR 73 million.
The Bank’s underlying result before tax was robust in 2010 at EUR 5,862 million, a fourfold increase from the previous year. This strong improvement was driven by volume growth, strengthening of the interest margin, significant lower negative market-related impacts and a more normalised level of risk costs. Banking’s commercial performance, i.e. underlying result before tax excluding market-related impacts and risk costs, was up 8% to EUR 7,814 million from EUR 7,266 million in 2009.
Earning trust with more agile and customer-centric businesses > Create strong businesses and ensure repayment of the Dutch State when prudent and possible > Bank and Insurer operationally separate, building own culture and strategy > Earning trust through sound financial performance, increased customer focus, operational excellence and good corporate citizenship > Base case scenario: divestment of Insurance through two IPOs
ING GROUP’S PRIORITIES: CREATE STRONG BUSINESSES AND ENSURE REPAYMENT OF THE DUTCH STATE 2010 marked a significant turning point for ING. After two difficult years during which the global financial crisis had its impact on the company, we managed to structurally improve our operating and commercial performance while successfully executing the disentanglement of our banking and insurance/investment management operations. As the operational separation of the bank and the insurer/investment manager has been formalised (as of 1 January 2011), they now operate at arm’s-length from each other. We have thus achieved a first important milestone in the implementation of the Group’s strategic decision to move towards a complete separation of both businesses, which was announced in October 2009 in recognition of the need to regain trust through increased transparency and simplicity.
We are still exploring strategic options to determine the future of the insurance business in Latin America. The preference for two public offerings is driven by a number of factors. Firstly, such a scenario would facilitate optimal alignment of the timing and order of execution with the market environment in Europe and the US respectively. In addition to this increased flexibility, our preference for a two-IPO scenario relates to the uncertainty caused by the divergence in solvency regulations in the EU and the US, which will likely place European insurance companies with a presence in the US at a disadvantage vis-à-vis local US competitors. Lastly, a separate public offering of the US insurance operations is expected to improve the overall proceeds of the divestments, as US investors are generally more familiar than European investors with the US business (including variable annuities) and its valuation than European investors, given the existence of listed companies with similar business profiles in the US. The actual timing of the anticipated transactions will depend on market conditions and commercial performance.
In earning the trust of our customers, our employees are a very valuable asset. ING is therefore encouraging its employees to build sustainable, long-lasting client relationships based on operational excellence, sound business ethics and good corporate citizenship (see ‘Human Resources’ for more information on these efforts). The operating leverage in this is obvious. For only a company pursuing a strategy focused on winning the hearts and minds of its customers, employees and other stakeholders, will achieve satisfactory financial performance for its shareholders.
All in all, we are convinced that the changes we have set in motion will make us a stronger company and partner for our stakeholders that is better able to anticipate and address emerging issues. With a clearer focus on customer needs as the anchor of our business operations, we are not only building businesses that are financially sound and viable, but that also have the potential to become the supplier of choice for our customers.
REPAYMENT OF THE DUTCH STATE In December 2009, ING repurchased the first half of the core Tier 1 securities of EUR 5 billion plus a total premium of EUR 605 million. Furthermore, at the next coupon reset date on 13 May 2011, ING intends to exercise its option for early repurchase of EUR 2 billion of the remaining core Tier 1 securities. The total payment in May 2011 will amount to EUR 3 billion and includes a 50% repurchase premium. ING will fund this repurchase from retained earnings. Provided that the strong capital generation continues, ING intends to repurchase the remaining EUR 3 billion of the core Tier 1 securities ultimately by May 2012 from retained earnings. The final decision on repurchase of these core Tier 1 securities will be made before the envisaged repayment date and will be conditional upon there having been no material changes regarding ING’s capital requirements and/or ING’s outlook on external market circumstances.
In preparing for the public offerings, ING Insurance will concentrate on further improving operational performance and building strong management teams. Moreover, it intends to sharpen its strategic direction, strengthen the capital base, improve investment results and review IT and procurement procedures. The product portfolio will be managed in an integrated way with a particular focus on capital consumption, e.g. through significantly reduced sales of variable annuities products and improved hedging capabilities. To enhance commercial performance, we will strengthen and further diversify our distribution capabilities (including tied agents, bank distribution, and direct distribution). The three key elements in improving performance include improving margins, containing costs and pursuing select growth opportunities to create strong global Insurance businesses, ready for IPOs ultimately by 2013.
• Being a good corporate citizen means that we want to contribute to positive change in society. We are focused on finding innovative solutions that address the local and global challenges our customers face, like climate change, poverty or ageing of the population. We also empower our employees to make a positive contribution to society through our community investment programmes.
PROGRESS IN 2010 While the business environment continued to be challenging in 2010, our results are a testament to the hard work and improved teamwork in the field of corporate responsibility throughout the organisation.
Being a responsible financial services provider and a good corporate citizen > Social, ethical and environmental objectives used as a measure of performance in the remuneration policy for the Executive Board and senior management > 93% of our employees indicate that living up to the Business Principles is important > Sustainable assets under management increased by 5%
Where do customers go for financial advice? The internet, a professional advisor or your family, friends and colleagues? Unfortunately, the majority of consumers don’t know where to begin finding trustworthy, easy-to-understand financial information. While some rely on family and friends, only a small percentage of people actually seek professional advice. In fact, research conducted by ING shows the questions consumers have are very basic, such as “how do I start saving?” and “why do I need life insurance?”
FINANCING AND INVESTING RESPONSIBLY Assessing the risk of any financial transaction is essential for all financial institutions. ING has a long-standing commitment to managing environmental and social risks that may be associated with its business activities. We support our customers to further improve their working practices. If, however, they do not meet our minimum social, ethical and environmental standards, we cease to do business with them. This process is led by our environmental and social risk policy desk and firmly embedded in the overall risk management procedures.
Over the years we have built an extensive framework of environmental and social risk policies. These policies translate our vision on social and environmental risks and issues into practical guidelines.
(5) The 2009 figure does not reconcile with the 2009 Annual and CR Reports because of divestments in Australia.
In 2010, ING introduced a number of round-table discussions with sustainable and social entrepreneurs. These were not only organised to listen, learn from and respond to our stakeholders, but also to establish a working partnership with these entrepreneurs. ING is keen to stimulate sustainable innovation. Thereby, it also critically reviews its own role in this field. The intensified dialogue with sustainable entrepreneurs also boosted internal developments within ING. For instance, the knowledge network was extended thanks to an increased focus on the subject within ING’s Economics Department. This enabled ING to produce and publish a number of in-depth research papers on sustainability issues.
ING’s Group Capital Management department (Capital Management) is responsible for ensuring sufficient capitalisation of ING Group entities at all times in order to manage the risk associated with ING’s business activities. This involves the management, planning and allocation of capital within ING Group. ING’s Corporate Treasury is part of Capital Management. It executes capital market transactions, term (capital) funding and risk management transactions. Capital Management monitors and plans capital adequacy on a consolidated basis at three levels: ING Group, ING Insurance and ING Bank. Capital Management takes into account the metrics and requirements of regulators (EU Solvency, Tier 1 and BIS ratios and limits for hybrid capital), rating agencies (leverage ratios, Adjusted Equity) and internal models such as the economic capital and market value balance sheets approach for ING Insurance including Available Financial Resources (AFR).
The strategic planning process takes into account both available capital and the requirements from the different parts of the Group. Capital Management continuously monitors and analyses ING’s capital position, taking into consideration the potential impact of changes in the regulatory environment and assessments of ING’s capital targets in comparison with the rest of the industry. The department also advises the Executive Board and Supervisory Board on ING’s dividend policy.
PREPARING FOR THE FULL SEPARATION OF ING BANK AND INSURANCE Finally, Capital Management plays an important role in ensuring the creation of strong stand-alone companies in preparation for the full separation of the Group’s banking and insurance/investment management operations. Until completion of the restructuring process, all operating entities need to remain adequately capitalised according to all prevalent regulatory and rating agency requirements. Another important priority for the department is to reduce interdependencies to a minimum, as the various entities of the Group should be able to independently access capital markets.
Taking measured risks is part of ING’s business. As a financial services company, ING is naturally exposed to a variety of risks. To ensure measured risk-taking ING has integrated risk management in its daily business activities and strategic planning.
The commercial departments form the first line of defence. They originate loans, deposits and other products, they know our customers well and are best placed to act in both the customer’s and ING’s best interest. The second line of defence consists of the risk management organisation, headed by the chief risk officer (CRO), and the corporate legal function. The presence of the CRO on the Bank and Insurance boards ensures that risk management issues are heard and discussed at the highest level, thus establishing the appropriate tone at the top. The CRO steers a functional, independent risk organisation, which supports the commercial departments in their decision-making, but which also has sufficient countervailing power to avoid risk concentrations. The third line of defence is the corporate audit function, which oversees and assesses the functioning and effectiveness of the first two lines.
FINGER ON THE PULSE OF THE ORGANISATION HR rolled out the annual global engagement (WPC) survey reaching 107,000 employees, helping ING to keep the finger on the pulse of the organisation. Survey results are used as the starting point for a dialogue between employees and managers. This helps ING establish what we are doing well and what we can do better in terms of customer satisfaction, operational excellence, leadership behaviours and our internal and external brand value. 74% of our employees worldwide completed the survey.
Survey results reveal several areas where we have made significant progress – one of the most important trends is overall employee engagement, which was up 4% at 69%. This is driven by a higher number of employees who reported being proud to work for ING and increase in job satisfaction in 2010 versus 2009. Trust in our senior leaders was one of the most significant increases – up 8% from 2009. Opportunities for improvement were also identified and form the basis of action plans being executed throughout the company. While the survey results show us that the strategic direction of ING is clearer to our employees, events of the past few years have negatively impacted our employees’ personal confidence in their own job security, and therefore efforts must be made to strengthen this. In addition, employee engagement has also been included as a key performance indicator in the annual appraisal objectives of senior management. Overall, good progress has been made and we are continuing the dialogue with our employees to address their concerns and areas for improvement.
Becoming a top employer HR Insurance/IM and Banking continue to partner with business leaders to shape the organisation for the future in terms of culture, performance and engagement. ING’s annual engagement survey, the Winning Performance Culture (WPC) Survey, provided HR with important employee feedback on what will make ING an even better place to work. This feedback is already helping to shape one of the Bank’s key strategic objectives: becoming a top employer. Sponsored by the Executive Board, a project team has been established to further develop and implement the Top Employer programme for the Bank. The programme brings together business and HR leaders across the business globally. Likewise, ING, assisted by HR Insurance/IM, places a strong focus on talent, engagement and culture in building the new Insurance organisation. It is a strong illustration of ING’s commitment to listening and responding to employee opinions – and ultimately making the organisation a better place to work for current and new employees.
Compensation The link to national and international compensation standards is examined closely in relation to and aligned with ING’s performance management approach. Although ING has traditionally adopted a conservative and responsible approach to the remuneration of its management and employees, as evidenced by the fact that it has always aimed for compensation levels at the median level in the relevant markets, the new remuneration structure provides for a number of key amendments. More information can be found in the Remuneration section of this report.
ING’s global people database proved instrumental in managing employee movements as ING implemented the operational split. It was, among other things, invaluable when ING had to draft new legal employment letters for 32,551 employees in the Netherlands.
ING Bank is a large international player with an extensive global network in over 40 countries. It has strong established positions in the Netherlands, Belgium and Luxemburg and key positions in Poland, Romania and Turkey, the largest Central and Eastern Europe markets. ING holds strong positions in Germany, France, Italy, Spain, the UK and the US. ING has also profitable businesses in Canada and Asia/Pacific. ING Bank has an extensive international network to service and support its corporate clients. From 1 January 2011, ING Bank began operating as a stand-alone company.
In 2010, all banking operations were integrated into one banking organisation and from 1 January 2011 ING Bank began to operate as a stand-alone company. A separate Management Board Banking was installed and balance sheet integration is well under way. Balance sheet integration will play a major role in improving profit and loss and adapting to the changing regulatory requirements, particularly those relating to solvency, liquidity and balance sheet leverage. ING Bank’s prudent approach will include a continued focus on cost containment, a strong capital position in line with market expectations and a further reduction of risk.
ING Bank delivered on all of the Back to Basics objectives set in early 2009 and achieved significant commercial success in 2010. It increased the number of clients, launched new products and completed important deals.
WHERE WE OPERATE ING Bank builds on its international network, capitalising on its leadership position in gathering savings, multi-channel distribution, simple propositions, cost leadership and marketing.
The third priority is to become a global top employer. Engaged employees are the key to success as they are the main point of contact for customers. In 2010, ING Bank therefore continued to put a lot of effort into attracting and retaining staff and to enhance employee engagement. For example, staff are encouraged to move between different between business lines, developing and sharing their skills and broadening their career opportunities.
Total underlying income 11,431 8,763 Underlying operating expenses 6,552 6,209 Underlying additions to loan loss provisions 1,254 1,649 Underlying result before tax 3,625 905 Underlying cost/income ratio 57.3% 70.9% Underlying cost/income ratio (excl. market impacts) 56.8% 61.0% Client balances (EUR billion) 890 852 Net production client balances (EUR billion) 37 45 Risk-weighted assets (EUR billion) 176 167 Underlying Return on Equity** 19.9% 6.6%
FINANCIAL DEVELOPMENTS Retail Banking’s underlying result before tax rose fourfold to EUR 3,625 million from EUR 905 million in 2009 driven by higher volumes and interest margins, combined with lower impairments and risk costs, mainly in the US. Net production in client balances was EUR 37 billion, bringing the total to EUR 890 billion at year-end 2010.
In addition, as part of a Retail-wide initiative, Retail NL is establishing a framework for sharing and managing knowledge across the retail network to reduce costs and speed up projects. The efficiency and effectiveness of our IT systems, both internally and externally, was improved to enhance the customer experience.
As part of its commitment to transparency, ING gives a full overview of all its retail and corporate products and prices on its www.ing.nl web site. In 2010, ing.nl was for the third consecutive
Stakeholder trust Enhancing its reputation and regaining trust among stakeholders was one of Retail NL’s priorities in 2010. This involved several initiatives, one of which was to continue with the Financial Information Evenings, which enable customers to meet ING Board members and managers of ING Netherlands. During these meetings, customers also receive tips on how to manage their daily expenditure, home ownership finances, pensions and savings.
The first results show that more customers than in 2009 would now recommend us to family and friends. ING is committed to further improving its NPS score through more work to lift the customer experience.
Results from the 2010 WPC Survey – ING’s global annual employee engagement survey – show that the employee engagement level at Retail NL was up from 64% in 2009 to 75% in 2010. We have used the results to identify priority areas to work on. These include improving co-operation and work processes across the organisation, improving leadership and creating stronger career prospects.
ING continues to improve opportunities for women at the highest levels. The number of female executives in the general management of ING Netherlands rose from two to three in 2010.
Record Bank Retail Belgium includes Record Bank, the third largest retail savings bank in the country, with close to 800,000 customers. Its strength is the personal approach by its 1,500-strong network of agents, credit brokers and vendors, who offer customer-centric products in savings, savings bonds, mortgages and consumer loans.
Private Banking Retail Belgium provides Private Banking services in Belgium and Luxemburg to wealthy individuals. ING is creating a strong private banking franchise in both countries and it is considered to be a growth driver.
Operational excellence Retail Belgium’s focus is on the ‘direct if possible, advice when needed’ business model. To support this strategy, it is improving operations in areas such as bank guarantees, mid-corporate lending, IT workplace services, account opening and mandates.
Both Belgium and Luxembourg (see below) operate under an integrated universal bank business model with the operating and IT platform being shared across all client segments (Retail, SME, Private Banking, Corporates and Financial Institutions).
Customer feedback Retail Belgium embraced the Net Promoter Score (NPS) methodology in August 2009. NPS is a recognised measure of customer satisfaction. It also helps to improve customer centricity. We seek and act on feedback to improve the customer experience by analysing the results and identifying areas for improvement.
Top employer In addition to the standard integrated human resources practices, the business has been developing a new human capital approach, 2 Report of the Executive Board
In Germany, ING-DiBa launched a price comparison engine, ‘BankLupe’, which allows customers easily to compare banks’ retail products and prices, and demonstrates the bank’s commitment to transparency. ING-DiBa also introduced a simple-to-use financial advice portal, the ‘finanzversteher.de’, for customers to manage their personal finances. ING Direct France launched a website called ‘monnaietime’, which helps consumers with their personal finances. It quickly became France’s third most-visited finance portal.
BUSINESS DEVELOPMENTS ING Direct offers a range of focused, easy-to-understand financial products – savings, mortgages, retail investment products, payment accounts and consumer lending products – primarily through direct channels. Its business model is based on low-cost, simplicity, transparency and offering a superior customer service. It has 23.6 million customers, and leading market positions in most markets in which it operates – Canada, Spain, Australia, France, the US, Italy, Germany, Austria and the UK.
Operational excellence All of ING’s business units focus on timely, efficient and flawless execution of customer services. Making banking easier for customers and constantly looking at new distribution channels and innovation are important principles. In 2010, ING Direct completed its 2008 initiative to deploy an end-to-end review of all customer services and processes.
In the US, a new mobile banking application was launched, which provides users with quick and easy ways to transfer money, pay bills and make purchases from their mobile phone. The application scooped the ‘Superstar’ prize in the 2010 Mobile Star Awards™, organised by the online news portal MobileVillage.com to reward excellence in wireless and mobile technology.
Turkey is an important growth market for us, and ING Bank Turkey completed various initiatives throughout 2010 to support its ambition to be the preferred bank for Turkish consumers. With 1.2 million customers, the bank is concentrating on improving customer service and offering ‘smart products’ serving specific customer needs that differentiate us from our rivals. To this end, the bank strengthened its call centre and internet offering and launched a factoring and leasing company in 2010. It also commenced international payment and cash management activities, and introduced a new mortgage product. An ‘ING Exclusive Banking’ service was introduced for a selection of customers who fit special deposit requirements. At the year-end, 5 Exclusive Banking branches had been opened and around 20 Exclusive Banking ‘corners’ opened inside ordinary branches. Finally, ING Bank Turkey opened a European Business Desk to better serve the needs of small and medium-sized enterprises (SME) engaged in international business.
In 2011, ING Bank Turkey aims to build more scale by widening its product range and distribution network and providing the necessary capital and sharing best practices with other ING units. It will launch the first variable savings account in the country, the Orange Account, to build on the success of the ING Direct savings account.
Top employer Retail CE placed a big emphasis on developing employee relations in 2010. In Romania the bank aims to become one of the Top 5 universal bank employers in the country and in Poland the bank is succeeding in attracting high calibre students and young professionals.
In 2010, ING Direct Canada and ING-DiBa Germany were both recognised as one of the best employers in the countries in which they operate. ING Direct Australia continued its run of HR awards by winning the top place in the FEMA (Fairfax Employment Marketing Awards) Best Corporate or Onsite HR Team (2009).
Top employer In addition to standard integrated HR practices, HR embarked on several initiatives to strengthen its function. It integrated its activities in Retail Banking and Commercial Banking into one, cohesive department for the region. It now takes an integrated approach to talent management and leadership development. These efforts are starting to show results. ING Vysya Bank, for example, is increasingly seen as an employer of choice among job candidates, whether they are experienced or new to the employment market. The bank’s fair and ethical work practices and a healthy mix of old and new also make it an attractive place to work, as the job offer-to-acceptance ratio of 80% demonstrates. ING Vysya Bank’s other HR initiatives during the year included the creation of a talent management process and defined career progression paths.
Results from the 2010 WPC Survey (ING’s global annual employee engagement survey) in Retail Central Europe show that the employee engagement levels in 2010 were 73% in Poland and 75% in Romania. At ING Bank Turkey, the score was up 2% at 58%. HR is facilitating a number of working groups within the bank, in order to act on the results of the 2010 survey, as this was an area identified for improvement.
As with all other banking business units, Retail Asia is working hard to become the customer’s preferred bank by focusing on operational excellence, customer centricity and being a top employer.
Operational excellence In India, ING Vysya Bank was awarded – for the second year in a row – the C10 100 Innovation Award by India’s CIO magazine for developing another customer-centric IT innovation, ‘Mobile Voice Recording Solution’. It allows customers to conduct investment and trade transactions with the bank’s relationship manager, who can now record the transactions with a handheld device instead of the customer having to sign every transaction.
FINANCIAL DEVELOPMENTS (INCLUDING REAL ESTATE) The underlying result before tax of Commercial Banking doubled to EUR 2,316 million from EUR 1,118 million in 2009. ING Real Estate recorded a loss before tax of EUR 63 million compared with a loss of EUR 988 million in 2009. The underlying result before tax of Commercial Banking excluding Real Estate increased 12.9% to EUR 2,379 million.
The increased result of Commercial Banking excluding Real Estate was largely attributable to Structured Finance, which result increased threefold to EUR 938 million thanks to higher volumes and improved margins, combined with lower risk costs. Underlying result before tax from Financial Markets declined 28.7% to EUR 919 million as a result of lower income in the client business following the normalisation of the markets, as well as higher expenses partly caused by an accrual adjustment related to the deferral of incentive compensation in 2009. The results of General Lending & Payments and Cash Management (PCM) increased by 6.8%, as lower commission income and somewhat higher expenses were more than offset by significantly lower risk costs. Result before tax in Leasing & Factoring doubled to EUR 133 million, driven by the strong improvement in the second-hand car market.
ING Real Estate reported an underlying loss before tax of EUR 63 million compared with a loss of EUR 988 million in 2009. This was mainly due to the gradual stabilisation in market conditions, which even led to ING Real Estate showing a profit in the last quarter of 2010. Negative fair value changes on the direct and indirect real estate investments as well as impairments on real estate development projects declined to EUR 434 million in 2010, compared with EUR 1,213 million in 2009. Excluding revaluations and impairments, underlying result before tax increased to EUR 371 million in 2010 from EUR 224 million in 2009, mainly driven by improved operational results within Real Estate Finance business due to lower risk costs.
Commercial Banking excl. ING Real Estate 4,949 4,957 – General Lending & PCM 1,159 1,235 – Structured Finance 1,440 1,122 – Leasing & Factoring 454 403 – Financial Markets 1,700 1,923 – Other Products 195 275 ING Real Estate 862 140 Total Commercial Banking 5,811 5,097
The SF business continued to grow in 2010. Revenues were supported by relatively high margins on business originated in 2008 and 2009. In trade and commodity finance there were sharp increases in both volumes and margins as a result of our consistent approach to the market over many years. Trade and commodity finance, with its transactional lending approach, is attractive to many banks and we expect increased competition, evidenced by the high levels of support for our commodity clients in the syndicated loan market, particularly in Asia.
SF maintained its public profile by doing well in awards and league tables during the year. The carbon emissions team won the Carbon Finance Deal of the Year award for ‘Luz Verde’ (Green Light), a pilot project for a mass scale household energy efficiency programme that will reduce CO
During 2010 ING Commercial Finance launched its reverse factoring product Supply Chain Finance which provides mutual benefits to the Bank’s clients and their suppliers through the use of factoring techniques. L&F also commenced both leasing and factoring operations in Turkey in conjunction with ING Bank Turkey.
PCM saw a large increase in outstanding balances in 2010, but the benefits were offset to some degree by lower margins due to low market interest rates.
REF has a Top 10 position in Europe for property financing. In 2010, REF was fully integrated into Commercial Banking and is in a good position to tap into synergies across the business.
ING Real Estate Development (RED) continued to reduce its risk and capital exposure. RED will concentrate on its core markets in the coming years and gradually reduce its development portfolios in non-core markets. Its asset management company in Spain, Auxideico, was sold in the third quarter.
The increase in the operating result and significantly better revaluations of investments were more than offset by higher negative market impacts, mostly related to the closed variable annuity blocks in the US and Japan. Hence, underlying results per business line diverged, with strong result recoveries in the Benelux, Latin America, and Asia/Pacific (excluding Japan variable annuities), compared with lower results in Central and Rest of Europe and the US.
Central and Rest of Europe 292 336 United States (excl. US Closed Block VA) 559 568 US Closed Block VA 49 23 Latin America 283 211 Asia/Pacific 472 365 ING Investment Management 166 201 Corporate Line insurance –754 –893 ** Operating result is underlying result before tax excluding market and other impacts.
establish a platform for future growth. In Latin America, the roll-out of a wealth management strategy in Mexico, Peru and Colombia, following its successful launch in Chile in 2009, resulted in a significant increase in new sales and inflows.
Initiatives to rejuvenate tied agency channels in Central and Rest of Europe, Latin America and Asia/Pacific began through the Tied Agency Overhaul programme. These initiatives are expected to deliver greater productivity and a lower lapse rate in the future.
In emerging markets, where ING Insurance/IM has strong market positions, initiatives were taken to stimulate new sales and to
The technical margin was EUR 243 million versus EUR 286 million in 2009 because the second quarter of 2009 included a favourable one-off item, being the release of EUR 54 million in morbidity provisions. Life expenses declined by 8.1% because of lower administrative expenses mainly reflecting lower FTE levels (7,551 at the end of 2010 compared to 8,555 at the end of 2009).
The transformation of Nationale-Nederlanden The business’s ambition is to be the most efficient and the most customer-centric large insurance company in the Benelux. The transformation of Nationale-Nederlanden under the One programme is a key part of this strategy and a major business initiative in 2010, containing many activities.
Nationale-Nederlanden, RVS and ING Verzekeren Retail (formerly Postbank Verzekeren) are being combined into one customerfocused organisation under the Nationale-Nederlanden brand to simplify the business and to reduce costs. As well as integrating all three under NN, three new business units dedicated to retail clients (NN Retail), to small and medium sized enterprises (NN SME) and to corporate clients (NN Corporate) were established.
Bancassurance NN has had a bancassurance partnership with ING Bank for many years. Given the upcoming split of insurance and banking, NN and the insurance business in Luxembourg secured a ten-year exclusive distribution contract with ING Bank in October, which came into effect 1 January 2011.
ING Life in Belgium undertook several major initiatives to stimulate cross-sales with ING Bank. It launched a new sales process for traditional insurance products through the Business Credit Centre of ING Bank. In 2011, a new variable annuity will be launched to be sold through the Bank.
> Positioned well in life insurance with strong market positions > Working towards greater efficiency in operations and more effectiveness in tied agent network > Life sales in most markets higher than in 2009
FINANCIAL DEVELOPMENTS The underlying result before tax of Insurance Central and Rest of Europe decreased by 12.7% to EUR 254 million from EUR 291 million in 2009. Gains and Losses on sales of securities and impairments were EUR –29 million in 2010 compared to EUR –45 million in 2009, mainly as a result of EUR 10 million lower impairments in Spain. Market and other impacts were EUR –10 million as a result of the EUR 10 million prepaid capitalised commission write-off in the pension fund in Hungary.
Administrative expenses were stable at EUR 266 million in 2010 from EUR 265 million in 2009, despite a EUR 16 million tax on financial institutions in Hungary and a EUR 7 million currency impact. Excluding both items, administrative expenses were EUR 22 million lower on a comparable basis.
In Hungary at the end of 2010, Parliament agreed upon some very unfavourable changes in the pension system, which amount to quasi-nationalising mandatory pensions. As a first step, for the period until January 2012, employee contributions to pension saving accounts will be used by the State to finance the Hungarian national deficit by being directed into the State pay-as-you-go system. As a second step, mandatory pension fund members had to declare by 31 January 2011 if they wanted to maintain membership of their fund. If they do maintain membership, they will not accumulate future pension rights in the State’s pay-as-yougo pension system. In this way most of the accumulated assets of the pension funds will be used to meet the budget deficit targets. In addition, in early 2010 in Poland, caps were introduced on the level of commissions Pillar II pension funds can earn. The prospect of further regulatory change in the region is a concern for ING.
In the region the operations of ING Insurance and ING Bank were very much intertwined in several countries. Much work was done across the region to achieve their operational separation by 1 January 2011 in line with ING Group’s plans to separate its banking and insurance operations.
Broadening the distribution base and developing more multichannel capacity was also a key goal in 2010. Tied agents are still the dominant distribution channel, but bancassurance and brokers are increasing in number and importance. The introduction of credit life, a life insurance product attached to new loans and mortgages of ING Bank Turkey, and introduced especially for the bancassurance channel, was very successful, selling 100,000 policies within six months.
In the Tied Agent Overhaul programme, initiatives were taken to further improve ING’s value proposition for customers and to continue professionalising its sales forces by, for example, improving agent productivity. The aim is to have smaller, but more effective sales forces. There will be more emphasis on enhanced recruiting, training and coaching of new agents and activity management. The Tied Agent Overhaul programme began in Spain in 2010 and has already proved successful. It was rolled out in Romania from January 2011, with other countries to follow.
ING took a number of measures to improve the clarity of reported results of Insurance US, and to address reserve inadequacy and earnings volatility in the Closed Block VA business. A separate business line within ING Insurance/IM was created for the US Closed Block VA business to help achieve this, ahead of the proposed IPO of the US Insurance business. (See ‘Insurance Overview’ and the ‘US Closed Block VA’ sections.)
The Individual Retirement unit was formed in 2010 to focus on meeting the financial and retirement needs of individuals.
During the year, ING Retirement Plans was selected by important plan sponsors as the sole provider of services, including managing the deferred compensation plan for the City of Austin, Texas, as well as recordkeeping, education and marketing for the Commonwealth of Kentucky’s retirement plans, which represent USD 1.6 billion in 457(b) and 401(k) assets from 75,000 participants. In the government market, ING currently services retirement plans for more than 4,100 state and local governments.
For the seventh consecutive year, ING maintained a No. 1 ranking in sales in the kindergarten to 12th grade 403(b) education market and a Top 5 sales position in the small corporate 401(k) market.
Communicating clearly with customers remained a high priority in 2010. ING’s efforts in the field were rewarded with US Retirement Marketing winning 28 communications awards. At the Pensions & Investments Eddy awards ceremony, which acknowledges excellence in providing investment education to plan participants, ING was given five, first-place and three, second-place awards.
The operating result rose markedly by 34.1% to EUR 283 million compared to EUR 211 million in 2009, mainly driven by higher fees from pension funds and to a lesser extent by increased investment and technical margins.
New sales (APE) climbed by 52.1% to EUR 683 million in 2010 from EUR 449 million in 2009. This growth is mainly related to higher volumes in mandatory pension sales in Mexico and the inclusion of tax-favoured voluntary pension sales in Colombia and mutual fund sales in Chile.
New sales (APE) of EUR 57 million was EUR 164 million lower than 2009 APE of EUR 221 million, as no new products were sold from 31 March 2010 and the APE only represents additional payments on existing policies.
This separation triggered a write-down of the business’s DAC balance of EUR 975 million before tax, under ING’s existing accounting policies. This brought reserve adequacy on the US Closed Block VA business line to the 50% level.
The long-term IFRS earnings outlook has been improved by reducing the DAC balance and the overall amortisation rate, as well as improving IFRS reserve adequacy on the US Closed Block VA business to well above the 50% confidence level.
The high net-worth segment in the region is an important market with an estimated 12 million potential customer households with total income of EUR 356 billion.
A strategic marketing campaign to support the wealth management launch was built on ING Insurance US’s successful ‘Your Number’ campaign, which prompted people to think about how much they might need in retirement and to work towards achieving it. The campaign in Latin America invited potential customers to experience an innovative goal-based advisory programme, which helps customers quantify their savings objective and to create a plan to reach it.
SulAmérica ING’s joint venture in SulAmérica is expected to contribute to growth at Insurance Latin America. SulAmérica is the largest independent multi-line insurance company in Brazil by total premiums and market capitalisation, and has posted strong earnings growth since its listing as a public company in 2007.
Asian investor sentiment as measured by the ING Investor Dashboard Survey was substantially more buoyant in 2010 when compared to the first half of 2009. By the third quarter of 2010, the Survey’s Pan-Asia index was up 100% on the financial crisis low in the fourth quarter of 2008.
operations in the country in 2009. The joint venture sells individual and group life insurance to residents of Liaoning, Anhui, Henan and Shandong provinces and the Beijing municipality. The business continued to show high-growth potential, especially in retirement services and education savings products. On 1 July, Bank of Beijing replaced Beijing Capital Group as ING’s joint venture partner by acquiring a 50% stake and the joint venture was renamed ING - BoB Life. Through this business, ING seeks to strengthen its presence in the insurance business in China.
The business will continue to seek growth through its preferred banking partnerships and by further professionalising the agency force to become the tied agency company of choice for agents.
Fees and premium-based revenues increased by 20.6% or 15.8% excluding currency effects to EUR 895 million. The 12.8% increase in AuM was the main driver for these higher revenues, further assisted by the introduction of a fixed service fee in the third quarter which related to the transfer of funds to the Luxembourg platform. As of the third quarter of 2010, expenses of these funds were no longer recorded as negative fee income.
During 2010, ING IM continued to improve its investment performance. The percentage of AuM performing above benchmark on a one-year basis was 72% compared with 67% at year-end 2009. With 75% of rated mutual funds awarded three stars or more by ratings agency Morningstar, ING IM exceeded the market standard of 68%. Over the last 12 months, all asset classes (equity, fixed income, multi assets) outperformed their respective aggregated benchmark.
BUSINESS DEVELOPMENTS ING IM is the principal investment manager of ING Group. It helps ING Group deliver on its strategy of helping customers to manage their financial future. ING IM’s wide distribution reach and strong and unique emerging markets presence, together with its scale in fixed income, strong brand recognition and access to a global network of ING channels continued to position ING IM well in gaining new business as markets continued to recover in a volatile year, marked by intense competition. All three regions – Europe, Americas and Asia/Pacific – focused on delivering a wide range of > AuM of EUR 387 billion, making ING IM one of the top-25 asset managers in the world > 72% of AuM performed above benchmark > Moved to skills-based multi-boutique structure
In 2010, ING IM took many initiatives to offer its clients a broad, balanced and competitive fund range. The transition to BBH allows ING IM to add other major benefits, including a fixed service fee, shorter trading and settlement cycles, and the provision of more hedged-share classes.
In 2010, ING IM further sharpened its investment performance by implementing a skills-based multi-boutique structure. Boutiques pool the investment talent and skills of different regions into an internationally coordinated investment team. This structure has helped to deliver strong investment performance over the last one and-a-half to two years.
In addition, ING IM established a single research platform, bringing together internal and external research and leveraging the best research capabilities from across the regional businesses.
GENERAL SUPERVISORY BOARD MEETINGS The Supervisory Board met eight times in 2010. On average, 95% of the Supervisory Board members were present. Apart from closely monitoring the financial results in 2010, the Supervisory Board also frequently discussed the preparation and progress of the separation of the banking and the insurance operations as well as the future repayment of the Dutch State. The strategy of banking and insurance and the development of the insurance business in the US were also important topics on the agenda.
The Supervisory Board and the Executive Board met regularly in 2010. The implications of the Restructuring Plan of the European Commission as well as the strategy for the bank and the insurance/ investment management operations following the separation were important topics on the agenda. Committees of the Supervisory Board discussed a range of subjects on which the Supervisory Board received advice, the main ones being the quarterly results, risk management, corporate governance, the new remuneration policy and human resources.
REMUNERATION COMMITTEE MEETINGS The Remuneration Committee met four times in 2010. Two members were absent once at the Remuneration Committee meetings. The first two meetings focused on finalising the new remuneration policy based on the Dutch Banking Code. An independent external adviser assisted the Remuneration Committee in assessing the new remuneration policy. In February, the 2009 performance of the individual Executive Board and Management Board members was discussed on the basis of the Group performance criteria and the individual targets. The proposed 2010 performance objectives for the Executive Board and the Management Boards were decided upon as well. In April, the Remuneration Committee advised positively on the adjusted remuneration policy for senior management. In November, the Remuneration Committee discussed the possible impact of were reviewed in the year as three years had passed since acquisition of these entities.
In June, the turbulence in the eurozone was tabled for the Supervisory Board meeting and possible consequences for ING in a number of potential scenarios were discussed. Group HR presented an update of Leadership development within ING. Several senior managers and talents were introduced to the Supervisory Board during a number of dinners with the Supervisory Board, the Executive Board and the Management Boards Banking and Insurance.
COMPOSITION OF THE SUPERVISORY BOARD Piet Hoogendoorn, Harish Manwani and Karel Vuursteen did not apply for reappointment and retired from the Supervisory Board and the relevant Supervisory Board committees following the General Meeting in April 2010. No new members were appointed to the Supervisory Board in 2010. Jackson Tai resigned from the Supervisory Board as of 6 January 2011. Godfried van der Lugt resigned from the Supervisory Board as of 24 January 2011. The composition of the Supervisory Board committees did not change other than mentioned.
Claus Dieter Hoffmann contributed substantially to the Supervisory Board, the Audit Committee and later to the Corporate Governance Committee and the Risk Committee because of his knowledge of fundamental management and business topics. His insight into German and European matters has been of great value to ING. The members of the Supervisory Board, the Executive Board and the Management Boards would like to thank him for his large commitment to ING during the past eight years.
TRANSACTIONS WITH THE DUTCH STATE On 12 November 2008, ING Group issued one billion core Tier 1 securities (‘Securities) for a total consideration of EUR 10 billion to the Dutch State. Following the repurchase of 500 million Securities on 21 December 2009, another 500 million of Securities representing EUR 5 billion remain outstanding. The Securities do not form part of ING Group’s share capital; accordingly they do not carry voting rights in the General Meeting. The financial entitlements of the Securities are described in note 33 to the consolidated annual accounts.
These arrangements entail that the Dutch State may recommend two candidates (‘State Nominees’) for appointment to the Supervisory Board. Certain decisions of the Supervisory Board require approval of the State Nominees (these decisions are specified in the section on the Supervisory Board on page 66). Furthermore, in line with these arrangements a sustainable remuneration policy for the Executive Board and Senior Management was introduced in 2010, which continues certain specific arrangements in relation to the remuneration of members of the Executive Board.
For more information on the State Nominees, please refer to the section on the Supervisory Board; for more information on ING’s remuneration policy, please refer to the Remuneration report, starting on page 78.
DIFFERENCES BETWEEN DUTCH AND US CORPORATE GOVERNANCE PRACTICES In conformity with regulation from the US Securities and Exchange Commission, ING Group as a foreign private issuer whose securities are listed on the New York Stock Exchange (‘NYSE’) must disclose in its Annual Report on Form 20-F any significant differences between its corporate governance practices and those applicable to US domestic companies under the NYSE listing standards.
ISSUANCE OF SHARES ING Group’s authorised capital is the maximum amount of capital allowed to be issued under the terms of the Articles of Association. New shares in excess of this amount can only be issued if the Articles of Association are amended. For reasons of flexibility, ING Group seeks to set the authorised capital in the Articles of Association at the highest level permitted by law again in the future.
The Board of ING Trust Office currently comprises four members who are independent of ING Group. No Executive Board members or former Executive Board members, Supervisory Board members or former Supervisory Board members, ING Group employees or former ING Group employees or permanent advisors or former permanent advisors are on the Board of ING Trust Office. The Board of ING Trust Office appoints its own members, without any requirement for approval by ING Group.
ING Group may decide not to accommodate or accept any request or invitation for entering into a dialogue with (potential) investors. In considering any such invitation or request, ING Group may request disclosure of the interests in the capital of ING Group held by the person(s) seeking to enter into a dialogue with ING Group and a substantiation and explanation of their intentions with respect to their interests in ING Group.
In 2010, ING Group hosted one Investor Day in April, and presented at six industry conferences throughout the course of the year. In total, there were approximately 275 meetings with institutional investors and/or analysts, which took place in 22 different cities. The geographical distribution of ING Group’s investor base is
SHAREHOLDERS’ STRUCTURE Pursuant to the Dutch Financial Supervision Act, any person who, directly or indirectly, acquires or disposes of an interest in the voting rights and/or the capital of ING Group as a result of which acquisition or disposal the percentage of his voting rights or capital interest, whether through ownership of shares, depositary receipts, American depositary shares, options or warrants, reaches, exceeds or falls below 5%, 10%, 15%, 20%, 25%, 30%, 40%, 50%, 60%, 75% or 95%, is required to notify in writing the Dutch Authority for the Financial Markets (Autoriteit Financiële Markten) immediately after the acquisition or disposal of the triggering interest in ING Group’s share capital.
REPORTING Resolutions adopted at a general meeting shall also be published on the website of ING Group (www.ing.com) within one week after the meeting. The draft minutes of the general meeting are, in accordance with the Corporate Governance Code, made available to shareholders and holders of depositary receipts on the website of ING Group (www.ing.com) no later than three months after the meeting. Shareholders and holders of depositary receipts may react to the draft minutes in the following three months, after which the final minutes will be adopted by the chairman of the meeting in question and by a shareholder or holder of depositary receipts appointed by that meeting. The final minutes are made available on the website of ING Group (www.ing.com). In deviation of the Corporate Governance Code shareholders and holders of depositary receipts will not have the opportunity to react to the minutes of a general meeting if a notarial report is drawn up of the meeting, as this would be in conflict with the laws applicable to such notarial report.
The depositary receipts and trust office structure outlined above would prevent a small minority, which coincidentally may form the majority in a general meeting in the absence of other parties, from taking decisions purely to suit themselves.
Resources, Corporate Development, Corporate Communications & Affairs, Public & Government Affairs and Corporate Audit Services.
Members of the Supervisory Board may be suspended or dismissed at any time by a majority resolution of the General Meeting. A resolution to suspend or dismiss members of the Supervisory Board that has not been brought forward by the Supervisory Board may only be adopted by the General Meeting by an absolute majority of the votes cast which majority represents more than one-third of the issued share capital.
Certain resolutions of the Executive Board, specified in the Articles of Association of ING Group, the Executive Board Charter and in the Supervisory Board Charter, are subject to the approval of the Supervisory Board.
COMMITTEES OF THE SUPERVISORY BOARD On 31 December 2010, the Supervisory Board had five standing committees: the Audit Committee, the Risk Committee, the Remuneration Committee, the Nomination Committee and the Corporate Governance Committee.
The Risk Committee assists and advises the Supervisory Board in monitoring the risk profile of ING Group as well as the structure and operation of the internal risk management and control systems. On 31 December 2010, the members of the Risk Committee were: Peter Elverding (chairman), Tineke Bahlmann, Claus Dieter Hoffmann, Piet Klaver, Godfried van der Lugt and Jackson Tai.
Supervisory Board’s committees. However, appointment to the position of chairman of a committee is only possible if the individual in question resigned from the Executive Board at least four years prior to such appointment.
J.P. (TINEKE) BAHLMANN (Born 1950, Dutch nationality, female; appointed in 2009, term expires in 2013) Professor in Business Administration, University of Utrecht. Chairman of the Dutch Media Authority. Other business activities: vice-chairman of the Supervisory Board of N.V. Nederlandsche Apparatenfabriek ‘Nedap’ (listed company). Member of the Board of Maatschappelijk Verantwoord Ondernemen Nederland (CSR). Chairman of Stichting Max Havelaar. Member of the Board of De Baak Management Centre VNO-NCW. Member of the Board of Toneelgroep Amsterdam (theatre).
More information can be found in the convocation for the 2011 annual General Meeting, available on the website of ING Group (www.ing.com) from 24 March 2011.
The external auditor may only provide audit and non-audit services to ING Group and its subsidiaries with the permission of the Audit Committee. The Audit Committee generally pre-approves certain types of audit, audit-related, tax and non-audit services to be provided by the external auditor on an annual basis. Services that have not been generally pre-approved by the Audit Committee should not be provided by the external auditor unless they are specifically pre-approved by the Audit Committee at the recommendation of local management.
The Audit Committee also sets the maximum annual amount that may be spent for pre-approved services. Throughout the year the external auditor and ING monitor the amounts paid versus the pre-approved amounts. The external auditor provides the Audit Committee with a full overview of all services provided to ING, including related fees, supported by sufficiently detailed information. This overview is periodically evaluated by the Audit Committee during the year.
FINANCIAL REPORTING A description of the main features of ING Group’s internal control and risk management systems in relation to the financial reporting process is included in the statement with respect to Section 404 Sarbanes-Oxley Act on page 76 which is deemed to be incorporated by reference herein.
SEVERANCE PAYMENTS TO MEMBERS OF THE EXECUTIVE BOARD The employment contracts with the members of the Executive Board provide for severance payments, which become due on termination of the contract in connection with a public bid as defined in section 5:70 of the Dutch Financial Supervision Act. For the amounts due, it is not relevant whether or not termination of the contract is related to a public bid. In accordance with the terms of the issuance of the Securities, severance payments to the members of the Executive Board have been limited to a maximum of one year’s fixed salary, in line with the Corporate Governance Code.
On 31 March 2010 the Board met again to discuss the position of ING Trust Office, as well as to prepare for the AGM. Prior to this meeting the Board met with the chairmen of the Executive Board and the Supervisory Board of ING Group. During this meeting the Board asked for an explanation of, among other things, the activities and performance of ING Group over 2009 on the basis of the press release of 18 March 2010 and the 2009 figures, the split of the banking and insurance business and several items on the agenda of the AGM as published on 18 March 2010.
In view of the above, ING evaluated the position of ING Trust Office and the depositary-receipts structure, the outcome of which was discussed in the AGM. On the basis of this evaluation, ING concluded that it would be premature to change or abolish the depositary-receipts structure in 2010 and that it would be more appropriate to reconsider this as part of a re-evaluation of ING Group’s entire governance structure following the current restructuring and the completion of the divestments approved in the extraordinary General Meeting in 2009.
During this meeting the Board also discussed, among other things, the position of ING Trust Office in general and prepared for the AGM. After this meeting the Board met with the chairmen of the Executive Board and the Supervisory Board of ING Group. During this meeting the Board asked for an explanation of, among other things, the implementation by ING Group of the revised Dutch Corporate Governance Code.
On 27 September 2010 the Board convened to discuss the procedure of appointment of members of the Board and to prepare for the meeting of holders of depositary receipts.
The composition of the Board is currently as follows: Bas Kortmann, chairman of the Board, who was reappointed as of 13 May 2010, Rob van den Bergh, appointed as of 10 February 2011, Allard Metzelaar and Wim van Vonno.
The Executive Board assessed the effectiveness of our internal control over financial reporting as of 31 December 2010. In making this assessment, the Executive Board performed tests based on the criteria of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on the Executive Board’s assessment and those criteria, the Executive Board concluded that the Company’s internal control over financial reporting is effective as of 31 December 2010.
ING Group has long-established Business Principles and a strong internal control culture, which all staff must adhere to. SOX 404 activities are organised along the lines of the governance structure, and involve the participation of senior management across ING. Following the SOX 404 process, ING is in the position to publish an unqualified statement which denotes that the Company’s internal control over financial reporting is effective as of 31 December 2010. The SOX 404 statement by the Executive Board is included below, followed by the report of the external auditor.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of ING Groep N.V. as of 31 December 2010, the consolidated profit and loss account, consolidated statement of comprehensive income, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended. Our report dated 14 March 2011 expressed an unqualified opinion thereon.
This chapter sets out the remuneration for the Executive Board and the Supervisory Board. The remuneration policy for the Executive Board was adopted by the annual General Meeting (AGM) on 27 April 2010. As set out on page 80, the Supervisory Board proposes to amend the remuneration policy in order to comply with the Capital Requirements Directive III (CRD III) issued by the European Union. This amendment will be submitted to the AGM on 9 May 2011. Following adoption of this amendment, the amended remuneration policy will become effective as of compensation year 2011. The Remuneration report also provides an outline of how the Remuneration Committee is applying the new policy in 2011. In addition, the Remuneration report provides information on the remuneration paid for 2010. Furthermore, information is included on loans and advances to the Executive Board and Supervisory Board members as well as ING depositary receipts for shares held by members of both Boards.
REMUNERATION POLICY FOR THE EXECUTIVE BOARD ADOPTED IN 2010 According to the remuneration policy of the Executive Board as adopted by the annual General Meeting on 27 April 2010, remuneration of Executive Board members consists of a combination of fixed compensation (base salary) and variable compensation (together ‘total direct compensation’), pension arrangements and benefits as described below.
Total direct compensation: moderation and reduced emphasis on variable remuneration Total direct compensation levels are based on market data that include peers both inside and outside the financial sector in the international context in which ING operates. Total direct compensation is benchmarked against a peer group of companies that, in the opinion of the Supervisory Board, are comparable with ING in terms of size and scope. In line with the foregoing, the Supervisory Board has determined that the peer group consists of the companies in the Dow Jones EURO STOXX 50 Index. These are 50 companies, in a range of financial and non-financial industries, which are based in countries within the economic and monetary union of the European Union. In accordance with the Dutch Banking Code, ING’s new remuneration policy for the Executive Board aims for total direct compensation levels slightly below market median levels for comparable positions in the relevant markets.
OTHER ITEMS FOR SUPERVISORY BOARD DISCRETION Claw back and adjustments The Supervisory Board has the authority to reclaim variable remuneration allocated to a member of the Executive Board based on inaccurate data and/or behaviour that led to significant harm to the company. The Supervisory Board also has the authority to adjust variable remuneration if application of the predetermined performance criteria results in undesired outcomes. Accordingly, the Supervisory Board has decision authority in situations not addressed in the policy.
The allocation of variable compensation is conditional on the achievement of a number of performance objectives. The shortterm component, at maximum 50% of total variable compensation, is paid in cash the year following the performance year. The other 50% of the total variable compensation is deferred. This long-term component is allocated in stock in order to ensure alignment of the Executive Board’s interests with the interests of shareholders. It also intends to serve the objective of retaining the members of the Executive Board for a longer period of time. The value of the stock award is set such that total variable compensation at the time that the maximum number of shares to be granted is determined stays within the 100% limit.
The Capital Requirements Directive III has been implemented in most European Union Members States. However, due to the short timeframe, not everything has been clarified yet at this moment. The proposed amendments to the Executive Board remuneration policy as set out above are based on the current interpretation of the Directive. Should it become clear, after everything has been clarified that further amendments are mandatory, the policy is amended accordingly.
There will be financial parameters for each Executive Board member to measure the performance at Bank and Insurance levels. These financial parameters include for Bank: underlying net result, underlying net ROE, cost/income ratio, risk weighted assets, core Tier 1 ratio, loan-to-deposit ratio; and for Insurance: underlying net result, operating result, financial leverage ratio, sales, administrative expenses and net pension & asset management inflow. The quantitative elements of the targets are considered stock price sensitive and competition sensitive; accordingly these are not disclosed.
To ensure the autonomy of the individual, financial performance metrics will depend on objectives determined at the divisional level (i.e. not at the level of the relevant business unit). In addition, performance assessments will not only be determined by business unit management, but also by the functional line.
SENIOR MANAGEMENT REMUNERATION STRUCTURE 2011 Given the differences in the regulatory requirements for banking and insurance and the separation of ING’s banking and insurance activities, the remuneration structures for senior management in ING’s banking and insurance operations were determined separately in 2010.
Moreover, compensation packages related to control functions (such as risk management functions) will be structured such that they provide for a reduced emphasis on variable compensation.
(2) Jan Hommen was appointed to the Executive Board on 27 April 2009. Jan Hommen has been remunerated as of 27 April 2009 in accordance with the ‘new’ remuneration policy adopted by the General Meeting in 2010. The figure for 2009 reflects a partial year as Executive Board Member and was paid in 2010 after the ‘new’ remuneration policy was adopted. Jan Hommen did not receive variable remuneration for 2009.
(1) The number of options and the strike prices of these options reflect the number and strike prices adjusted for the effects of the rights issue of December 2009.
Patrick Flynn received a conditional grant of restricted stock in 2009 to a maximum of 130,230 shares. The cumulative value of the conditional share award is capped at EUR 1.3 million. The first vesting in the amount of 39,069 shares occurred on 27 April 2010. The value at vesting amounted to EUR 288,329. A second vesting of 39,069 shares will occur at the annual General Meeting in 2011, and the remaining 52,092 shares will vest at the annual General Meeting in 2012, subject to satisfactory performance and the aforementioned cumulative value cap of EUR 1.3 million. The number of shares reflects the number adjusted for the effects of the rights issue of December 2009.
Loans and advances to the individual members of the Executive Board Amount outstanding 31 December
Compensation of the members of the Supervisory Board amounts in thousands of euros 2010 (1) 2009 (1) 2008 (1)
Compensation of former members of the Supervisory Board who are not included in the above table amounted to nil in 2010, EUR 83 thousand in 2009 and EUR 269 thousand in 2008.
Independent auditor’s report 266 Proposed appropriation of result and Subsequent events 267 7 Additional information
Debt securities in issue 15 135,604 119,981 Other borrowed funds 16 22,291 23,151 Insurance and investment contracts 17 270,582 240,858 Amounts due to banks 18 72,852 84,235 Customer deposits and other funds on deposit 19 511,362 469,508 Financial liabilities at fair value through profit and loss 20 – trading liabilities 108,050 98,245 – non-trading derivatives 17,782 20,070 – designated as at fair value through profit and loss 12,707 11,474 Liabilities held for sale 11 424 4,890
Investment result for risk of policyholders –10,492 –17,742 32,408 Reinsurance recoveries –1,741 –1,714 –1,754
The Unrealised revaluations after taxation comprises EUR –2 million (2009: EUR 15 million; 2008: EUR 218 million) related to the share of other comprehensive income of associates.
The Exchange rate differences comprises EUR 251 million (2009: EUR 131 million; 2008: EUR –214 million) related to the share of other comprehensive income of associates.
– deferred acquisition costs and value of business acquired 1,296 –1,131 –444 – increase in provisions for insurance and investment contracts 3,860 3,829 16,363 – addition to loan loss provisions 1,751 2,973 1,280
Proceeds from issuance of subordinated loans 2,721 Proceeds from borrowed funds and debt securities 412,804 437,772 391,915 Repayments of borrowed funds and debt securities –405,120 –425,182 –354,015 Issuance of ordinary shares 7,276 448 Issuance of non-voting equity securities 10,000 Repayment of non-voting equity securities –5,000 Payments to acquire treasury shares –136 –101 –2,388 Sales of treasury shares 92 118 252 Dividends paid (1) –1,030 –3,207 Net cash flow from financing activities 7,640 13,853 45,726
Consolidated statement of cash flows of ING Group for the years ended 31 December
Other revaluations –9 –9 Total amount recognised directly in equity 10,600 10,600 –13 10,587
Reserves include Revaluation reserve of EUR 4,752 million (2009: EUR 2,466 million; 2008: EUR –8,502 million), Currency translation reserve of EUR 105 million (2009: EUR –2,008 million; 2008: EUR –1,918 million) and Other reserves of EUR 19,745 million (2009: EUR 16,452 million; 2008: EUR 18,077 million). Changes in individual components are presented in Note 13 ‘Shareholders’ equity (parent)/non-voting equity securities’.
In this document the term ‘IFRS-EU’ is used to refer to International Financial Reporting Standards as adopted by the EU, including the decisions ING Group made with regard to the options available under International Financial Reporting Standards as adopted by the EU.
Price testing is performed to assess whether the process of valuation has led to an appropriate fair value of the position and to an appropriate reflection of these valuations in the profit and loss account. Price testing is performed to minimise the potential risks for economic losses due to materially incorrect or misused models.
Impairment reviews with respect to goodwill and intangible assets are performed at least annually and more frequently if events indicate that impairment may have occurred. Goodwill is tested for impairment by comparing the book value (including goodwill) of the reporting unit to the best estimate of the recoverable amount of that reporting unit. The book value is determined as the IFRS-EU net asset value including goodwill. The recoverable amount is estimated as the higher of fair value less cost to sell and value in use. Several methodologies are applied to arrive at the best estimate of the recoverable amount. A reporting unit is the lowest level at which goodwill is monitored. Intangible assets are tested for impairment by comparing the book value with the best estimate of the recoverable amount.
The determination of the defined benefit plan liability is based on internal and external actuarial models and calculations. The defined benefit obligation is calculated 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. The assumptions are based on available market data and the historical performance of plan assets, and are updated annually.
PRINCIPLES OF VALUATION AND DETERMINATION OF RESULTS CONSOLIDATION ING Group (‘the Group’) comprises ING Groep N.V. (‘the Company’), ING Verzekeringen N.V., ING Bank N.V. and all other subsidiaries. The consolidated financial statements of ING Group comprise the accounts of ING Groep N.V. and all entities in which it either owns, directly or indirectly, more than half of the voting power or over which it has control of their operating and financial policies through situations including, but not limited to: • Ability to appoint or remove the majority of the board of directors; • Power to govern such policies under statute or agreement; and • Power over more than half of the voting rights through an agreement with other investors.
Derecognition of financial assets Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. If the Group neither transfers nor retains substantially all the risks and rewards of ownership of a financial asset, it derecognises the financial asset if it no longer has control over the asset. In transfers where control over the asset is retained, the Group continues to recognise the asset to the extent of its continuing involvement. The extent of continuing involvement is determined by the extent to which the Group is exposed to changes in the value of the asset.
Available-for-sale financial assets Available-for-sale financial assets include available-for-sale debt securities and available-for-sale equity securities. Available-for-sale financial assets are initially recognised at fair value plus transaction costs. For available-for-sale debt securities, the difference between cost and redemption value is amortised. Interest income is recognised using the effective interest method. Available-for-sale financial assets are subsequently measured at fair value. Interest income from debt securities classified as available-for-sale is recognised in Interest income from banking operations and Investment income in the profit and loss account using the effective interest method. Dividend income from equity instruments classified as available-for-sale is generally recognised in Investment income in the profit and loss account when the dividend has been declared. Unrealised gains and losses arising from changes in the fair value are recognised in equity. When the securities are disposed of, the related accumulated fair value adjustments are included in the profit and loss account as investment income. For impairments of available-for-sale financial assets reference is made to the section ‘Impairments of other financial assets’. Investments in prepayment sensitive securities such as Interest-Only and Principal-Only strips are generally classified as available-for-sale.
INVESTMENTS IN ASSOCIATES Associates are all entities over which the Group has significant influence but not control. Significant influence generally results from a shareholding of between 20% and 50% of the voting rights, but also is the ability to participate in the financial and operating policies through situations including, but not limited to one or more of the following: • Representation on the board of directors; • Participation in the policymaking process; and • Interchange of managerial personnel.
The valuations are based on the assumption that the properties are let and sold to third parties based on the actual letting status. Valuations drawn up earlier in the year are updated if necessary to reflect the situation at year end. The fair values are based on market
Accounting policies for the consolidated annual accounts of ING Group continued values, being the estimated amount for which the property could be exchanged on the date of valuation between a willing buyer and willing seller in an at-arm’s-length transaction after proper marketing wherein the parties each acted knowledgeably, prudently and without compulsion. Market values are based on appraisals using valuation methods such as: comparable market transactions, capitalisation of income methods or discounted cash flow calculations, based on calculations of the future rental income and expenses in accordance with the terms in existing leases and estimations of the rental values when leases expire.
Accounting policies for the consolidated annual accounts of ING Group continued
For other types of flexible life insurance contracts DAC is amortised over the lives of the policies in relation to the emergence of estimated gross profits. Amortisation is adjusted when estimates of current or future gross profits, to be realised from a group of products, are revised. The estimates and the assumptions are reassessed at the end of each reporting period. For DAC on flexible insurance contracts the approach is that in determining the estimate of future gross profits ING Group assumes the short-term and long-term separate account growth rate assumption to be the same. Higher/lower expected profits (e.g. reflecting stock market performance or a change in the level of assets under management) may cause a lower/higher balance of DAC due to the catch-up of amortisation in previous and future years. This process is known as DAC unlocking. The impact of the DAC unlocking is recognised in the profit and loss account of the period in which the unlocking occurs.
TAXATION Income tax on the net result for the year comprises current and deferred tax. Income tax is recognised in the profit and loss account but it is charged or credited directly to equity if the tax relates to items that are credited or charged directly to equity.
Insurance provisions on traditional life policies are calculated using various assumptions, including assumptions on mortality, morbidity, expenses, investment returns and surrenders. Assumptions for insurance provisions on traditional life insurance contracts, including traditional whole life and term life insurance contracts, are based on best estimate assumptions including margins for adverse deviations. The assumptions are set initially at the policy issue date and remain constant throughout the life of the policy, except in the case of loss recognition.
In 2009, the methodology for determining the liability for insurance contracts in Japan was revised. The liability for certain guarantees is now measured at the fair value. The impact of this change in accounting policy (at 1 January 2009 and on prior year comparatives) was not material to shareholders’ equity and the net result of ING Group.
Claims provision The Claims provision is calculated on a case-by-case basis or by approximation on the basis of experience. Provisions have also been made for claims incurred but not reported (IBNR) and for future claims handling expenses. The adequacy of the Claims provision is evaluated each year using standard actuarial techniques. In addition, IBNR reserves are set to recognise the estimated cost of losses that have occurred but which have not yet been notified to the Group.
Deferred profit sharing For insurance contracts with discretionary participation features a deferred profit sharing amount is recognised for the full amount of the unrealised revaluation on allocated investments. Upon realisation, the profit sharing on unrealised revaluation is reversed and a deferred profit sharing amount is recognised for the share of realised results on allocated investments that is expected to be shared with policyholders. The deferred profit sharing amount is reduced by the actual allocation of profit sharing to individual policyholders. The change in the deferred profit sharing amount on unrealised revaluation (net of deferred tax) is recognised in equity in the Revaluation reserve.
Provisions for life insurance for risk of policyholders For insurance contracts for risk of policyholders the provisions are generally shown at the balance sheet value of the associated investments.
A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation.
For the purposes of the statement of cash flows, Cash and cash equivalents comprise balances with less than three months’ maturity from the date of acquisition, including cash and non-restricted balances with central banks, treasury bills and other eligible bills, amounts due from other banks and amounts due to banks. Investments qualify as a cash equivalent if they are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.
As at 31 December 2010, Amounts due from banks included receivables with regard to securities which have been acquired in reverse repurchase transactions amounting to EUR 4,621 million (2009: EUR 2,458 million) and receivables related to finance lease contracts amounting to EUR 82 million (2009: EUR 64 million).
As at 31 December 2010, the non-subordinated receivables amounted to EUR 51,788 million (2009: EUR 43,396 million) and the subordinated receivables amounted to EUR 40 million (2009: EUR 1 million).
No individual amount due from banks has terms and conditions that materially affect the amount, timing or certainty of consolidated cash flows of the Group. For details on significant concentrations see ‘Risk management’ section.
Derivatives used in: – fair value hedges 4,127 2,727 – cash flow hedges 4,440 5,521 – hedges of net investments in foreign operations 81 38 Other non-trading derivatives 3,074 3,346
Available-for-sale – equity securities 9,754 8,853 – debt securities 212,793 188,850
Carrying value as at 31 December 1,592 Fair value as at 31 December 1,565 Unrealised fair value losses recognised in shareholders’ equity (before tax) as at 31 December –971 –192 –79 Effect on shareholders’ equity (before tax) if reclassification had not been made n/a n/a –28 Effect on result (before tax) if reclassification had not been made n/a n/a nil Effect on result (before tax) after the reclassification until 31 December (mainly interest income) n/a n/a 9 Recognised impairments (before tax) nil nil nil Recognised provision for credit losses (before tax) n/a n/a nil
Available-for-sale equity securities by banking and insurance operations Listed Unlisted Total
Available-for-sale investments 212,793 188,850 Held-to-maturity investments 11,693 14,409 Loans and advances to customers 34,251 38,391 Due from banks 8,122 8,720 Available-for-sale investments and Assets at amortised cost 266,859 250,370
Loans guaranteed by credit institutions 308 468 5,460 6,228 5,768 6,696
– more than 1 year but less than 5 years 8,294 8,088 – more than 5 years 4,864 4,707
ING Dutch Retail Master Fund C.V. 15 201 1,643 267 146 34 ING Dutch Office Master Fund C.V. 16 195 1,480 268 67 24 ING Retail Property Fund Iberica LP 29 144 1,635 1,122 149 86 ING Dutch Residential Master Fund C.V. 13 111 1,004 180 52 20 ING Real Estate Asia Retail Fund 28 107 782 450 51 53 ING Dutch Office Master Fund II C.V. 16 101 755 129 45 29 ING Lionbrook Property Partnership LP 21 96 620 171 77 19
ING Real Estate French Residential Fund C.V. 45 76 233 63 20 8 ING Property Fund Central Europe LP 25 74 806 510 66 37 Steadfast Capital Fund II LP 68 74 145 3 2 ING Retail Property Fund France Belgium C.V. 15 70 1,382 916 102 56
For the above associates in which the interest held is below 20%, significant influence exists based on the combination of ING Group’s financial interest for own risk and its role as investment manager. For the above associates in which the interest held is above 50%, control is held by other parties through agreements. ING Group can exercise significant influence over such investments.
Notes to the consolidated annual accounts of ING Group continued 7 REAL ESTATE INVESTMENTS
Gross carrying amount as at 31 December 2,487 2,574 Accumulated depreciation as at 31 December –700 –764 Accumulated impairments as at 31 December –145 –124 Net book value 1,642 1,686
Property in own use by year of most recent appraisal by independent qualified valuers in percentages 2010
Most recent appraisal in 2010 51 Most recent appraisal in 2009 14 Most recent appraisal in 2008 25 Most recent appraisal in 2007 2 Most recent appraisal in 2006 8
Changes in the composition of the group –4 –9 –7 –88 –11 –97 Disposals –12 –13 –41 –32 –53 –45 Depreciation –167 –155 –262 –261 –429 –416
Gross carrying amount as at 31 December 1,707 1,593 2,642 3,084 4,349 4,677 Accumulated depreciation as at 31 December –1,330 –1,249 –1,583 –1,986 –2,913 –3,235 Accumulated impairments as at 31 December –1 –1 Net book value 376 344 1,059 1,098 1,435 1,442
Gross carrying amount as at 31 December 2,449 2,518 3,370 3,136 2,557 2,217 1,013 1,007 9,389 8,878 Accumulated amortisation as at 31 December –1,129 –1,016 –1,751 –1,393 –426 –308 –3,306 –2,717 Accumulated impairments as at 31 December –605 –65 –52 –21 –54 –54 –711 –140
As a first step of the impairment test, the best estimate of the recoverable amount of reporting units to which goodwill is determined separately for each relevant reporting unit based on Price to Earnings, Price to Book, and Price to Assets under management ratios. The main assumptions in this valuation are the multiples for Price to Earnings, Price to Book and Price to Assets under management; these are developed internally but are either derived from or corroborated against market information that is related to observable transaction in the market for comparable businesses. Earnings and book values are equal to or derived from the relevant measure under IFRS-EU. If the outcome of this first step indicates that the difference between recoverable amount and book value may not be sufficient to support the amount of goodwill allocated to the reporting unit, an additional analysis is performed in order to determine a recoverable amount in a manner that better addresses the specific characteristics of the relevant reporting unit.
Retail Central Europe For the reporting unit Retail Central Europe the recoverable amount is determined as the sum of the recoverable amounts of the most important components. For certain components, a market price is available based on listed equity securities. In such case, the listed market price is used to determine the recoverable amount. For certain components, a full internal valuation was performed upon acquisition. In such case, the recoverable amount is determined by updating the acquisition model for business and market related developments. The most important assumptions in the acquisition model are the estimated short term expected profit, the terminal growth rate (3.5% approximately) and the discount rate (between 10.8% and 12.8%). Based on this determination of recoverable amount, it was concluded that the goodwill allocated to Retail Central Europe is not impaired.
Amortisation and unlocking in 2010 includes a EUR 975 million DAC write-off as explained in Note 51 ‘Operating segments’. The remaining amount includes unlocking of EUR –538 million (2009: EUR –461 million), which mainly relates to Insurance US and amortisation of EUR –1,321 million (2009: EUR 3 million).
Reinsurance and insurance receivables 2,201 2,125 Deferred tax assets 3,425 3,969 Property development and obtained from foreclosures 2,153 2,515 Income tax receivable 527 836 Accrued interest and rents 16,194 18,306 Other accrued assets 2,888 2,497 Pension assets 3,458 3,143
Receivables on account of direct insurance from: Reinsurance receivables 821 569
The allowance for uncollectible reinsurance and insurance receivables amounted to EUR 52 million as at 31 December 2010 (2009: EUR 47 million). The allowance is deducted from this receivable.
Property under development 821 1,438 Property developed 1,024 917 Property obtained from foreclosures 308 160
Revaluation reserve 4,752 2,466 –8,502 Currency translation reserve 105 –2,008 –1,918
On these non-voting equity securities a coupon was and is payable of the higher of: • EUR 0.85 per security, payable annually in arrears, with a first coupon of EUR 0.425 per security paid on 12 May 2009; and • 110% of the dividend paid on each ordinary share over 2009 (payable in 2010); • 120% of the dividend paid on each ordinary share over 2010 (payable in 2011); • 125% of the dividend paid on each ordinary share over 2011 onwards (payable in 2012 onwards).
Cumulative preference shares Pursuant to the Articles of Association of ING Groep N.V. as amended on 8 October 2008, the authorised cumulative preference share capital consists of 4.5 billion cumulative preference shares, of which none have been issued. The par value of these cumulative preference shares is EUR 0.24.
Groep N.V. or may be the result of minimum capital requirements that are imposed by industry regulators in the countries in which the subsidiaries operate, or other limitations which may exist in certain countries.
Notes to the consolidated annual accounts of ING Group continued 15 DEBT SECURITIES IN ISSUE Debt securities in issue relate to debentures and other issued debt securities with either fixed interest rates or interest rates based on floating interest rate levels, such as certificates of deposit and accepted bills issued by ING Group, except for subordinated items. Debt securities in issue do not include debt securities presented as Financial liabilities at fair value through profit and loss. ING Group does not have debt securities that are issued on terms other than those available in the normal course of business. The maturities of the debt securities are as follows: Debt securities in issue – maturities
Changes in the composition of the group –24 –2,887 –2 23 –65 –26 –2,929
– effect of changes in discount rate assumptions 5 –2 5 –2 – effect of changes in
Premiums earned during the year –1,702 –1,704 –65 –68 –1,767 –1,772
– for prior years –35 –361 –11 –6 –46 –367 – interest accrual of provision 46 277 46 277
ING Group had an outstanding balance of EUR 41 million as at 31 December 2010 (2009: EUR 42 million) relating to environmental and asbestos claims of the insurance operations. In establishing the liability for unpaid claims and claims adjustment expenses related to asbestos related illness and toxic waste clean-up, the management of ING Group considers facts currently known and current legislation and coverage litigation. Liabilities are recognised for IBNR claims and for known claims (including the costs of related litigation) when sufficient information has been obtained to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, liabilities are reviewed and updated regularly.
Savings accounts 324,581 304,104 Credit balances on customer accounts 127,177 110,087 Corporate deposits 55,024 53,272
Trading liabilities 108,050 98,245 Non-trading derivatives 17,782 20,070 Designated as at fair value through profit and loss 12,707 11,474
The change in the fair value of financial liabilities designated as at fair value through profit and loss attributable to changes in the credit risk of that liability during 2010 was EUR 28 million (2009: EUR –191 million) and EUR 67 million (2009: EUR 39 million) on a cumulative basis. This change has been determined as the amount of change in fair value of the financial liability that is not attributable to changes in market conditions that gave rise to market risk (i.e. mainly interest rate risk based on yield curves).
Deferred tax liabilities 2,618 2,399 Income tax payable 1,210 1,225 Pension benefits 543 589 Post-employment benefits 172 175 Other staff-related liabilities 1,248 735 Other taxation and social security contributions 885 1,001 Deposits from reinsurers 1,007 870 Accrued interest 13,220 16,789 Costs payable 2,873 2,654 Amounts payable to brokers 111 200 Amounts payable to policyholders 2,130 2,182 Reorganisation provision 434 644 Other provisions 533 747 Share-based payment plan liabilities 40 24 Prepayments received under property under development 173 120 Amounts to be settled 5,553 5,167
Other staff-related liabilities include vacation leave provisions, bonus provisions, jubilee provisions and disability/illness provisions.
Deferred taxes are calculated on all temporary differences under the liability method using tax rates applicable in the jurisdictions in which the Group is liable to taxation.
Financial assets and liabilities at fair value through profit and loss 28 –1 –324 –21 10 –4 –312 Deferred acquisition costs and VOBA 3,481 –568 169 –12 –174 71 2,967
The deferred tax asset includes balances for which the utilisation is dependent on future taxable profits whilst the related entities have incurred losses in either the current year or the preceding year. The aggregate amount for the most significant entities where this applies is EUR 1,009 million (2009: EUR 1,754 million).
Releases –77 –89 Charges –461 –604 Exchange rate differences 6 –2 Other changes –6 59 Closing balance 434 644
As at 31 December 2009, the provision for reorganisation, of which EUR 433 million relates to termination benefits, mainly related to the reorganisation of Postbank, Postkantoren, Nationale Nederlanden, RVS and Insurance US.
As at 31 December 2009 Other provisions includes the provision for the industry-wide deposit guarantee scheme in the Netherlands due to the bankruptcy of DSB Bank. In 2010 Dutch banks provided financing for the further dissolution of DSB. ING’s share is recognised, net of the 2009 provision, under amounts due from banks at its fair value at issue. The provision for the estimated cost of the agreement with regard to unit-linked policies is included in ‘Insurance and investment contracts’ as disclosed in Note 17.
Certain group companies sponsor defined contribution pension plans. The assets of all ING Group’s defined contribution plans are held in independently administered funds. Contributions are generally determined as a percentage of pay. These plans do not give rise to balance sheet provisions, other than relating to short-term timing differences included in current liabilities. The amount incurred in 2010 was EUR 67 million (2009: EUR 81 million).
Participants contributions 3 3 Benefits paid –634 –640 –6 –6 Actuarial gains and losses 1,396 –100 2 –10 Past service cost 18 –27 Changes in the composition of the group and other changes –20 –372 –1 –10 Effect of curtailment or settlement –7 –96 Exchange rate differences 143 27 4 –3
Opening balance 15,310 13,366 Expected return on plan assets 886 842 Employer’s contribution 631 1,632 Participants contributions 2 3 Benefits paid –625 –600 Actuarial gains and losses 1,085 387 Changes in the composition of the group and other changes –19 –374 Exchange rate differences 94 54 Closing balance 17,364 15,310
Expected rates of salary increases (excluding promotion increases) 2.70 2.80 2.70 3.10 Medical cost trend rates 6.10 6.10
– designated as at fair value through profit and loss 412 169 626 1,244 1,577 1,489 5,517 Investments
For the year ended 31 December 2010, ING Group recognised EUR 475 million (2009: EUR –805 million) after tax in equity as effective fair value changes on derivatives under cash flow hedge accounting. As a consequence, the balance of the cash flow hedge reserve in equity as at 31 December 2010 was EUR 1,110 million (2009: EUR 442 million) gross and EUR 847 million (2009: EUR 372 million) after deferred tax. This cash flow hedge reserve will fluctuate with the fair value changes of the underlying derivatives and will be reflected in the profit and loss account under Interest income/expense over the remaining term of the underlying hedged items. The cash flow hedge reserve relates to a large number of derivatives and hedged items with varying maturities, up to 46 years for insurance operations and 59 years for banking operations, with the largest concentrations in the range of 1 to 3 years for insurance operations and 1 to 12 years for banking operations. Accounting ineffectiveness on derivatives designated under cash flow hedge accounting resulted in a loss of EUR 7 million (2009: EUR 10 million loss) which was recognised in the profit and loss account.
As at 31 December 2010, the fair values of outstanding derivatives designated under cash flow hedge accounting was EUR –824 million (2008: EUR –947 million), presented in the balance sheet as EUR 4,440 million (2009: EUR 5,521 million) positive fair values under assets and EUR 5,264 million (2009: EUR 6,468 million) negative fair values under liabilities.
Accounting ineffectiveness recognised in the profit and loss account for the year ended 31 December 2010 on derivatives and non-derivatives designated under net investment hedge accounting was EUR 5 million (2009: EUR 1 million).
Cash and balances with central banks 13,072 15,390 Amounts due from banks – loans and advances to banks 49,035 39,696 – cash advances, overdrafts and other balances 2,793 3,701 Trading assets – debt securities 27,979 25,287 – loans and receivables 49,445 41,975
Non-trading derivatives 11,722 11,632 Designated as at fair value through profit and loss 6,016 5,517 Available-for-sale debt securities 212,793 188,850 Held-to-maturity debt securities 11,693 14,409 Loans and advances to customers – policy loans 3,227 2,903 – to, or guaranteed by, public authorities 55,950 51,079 – secured by mortgages 346,851 319,174 – guaranteed by credit institutions 5,768 6,696 – unsecured loans 4,325 4,193 – personal lending 21,076 19,270 – asset backed securities 24,990 27,954 – corporate loans 149,868 146,613
Off-balance sheet credit commitments – discounted bills – Bank 3 1 – guarantees – Bank 21,711 21,545 – irrevocable letters of credit – Bank 15,540 12,352 – other – Bank 428 202 – irrevocable facilities 90,027 85,835 – commitments – Insurance 1,990 1,646 – guarantees – Insurance 678 955 Maximum credit exposure off balance sheet 130,377 122,536
27 CONTINGENT LIABILITIES AND COMMITMENTS In the normal course of business the Group is a party to activities whose risks are not reflected in whole or part in the consolidated financial statements. In response to the needs of its customers, the Group offers financial products related to loans. These products include traditional off-balance sheet credit-related financial instruments.
Acquisitions and disposals announced and occurring or expected to occur in 2011 ING announced in February 2011 that it has reached agreement with CB Richard Ellis Group, Inc., to sell ING REIM Europe, ING REIM Asia and Clarion Real Estate Securities (CRES), ING REIM’s US-based manager of listed real estate securities, as well as part of ING’s equity interests in funds managed by these businesses. The proceeds for these REIM businesses and the equity interests amount to approximately USD 1.0 billion. ING REIM Europe, ING REIM Asia and CRES combined have EUR 44.7 billion in assets under management as of 31 December 2010. In a separate transaction, ING has agreed to sell the private market real estate investment manager of its US operations, Clarion Partners, to Clarion Partners management in partnership with Lightyear Capital LLC for USD 100 million. Clarion Partners has EUR 16.5 billion in assets under management as of 31 December 2010. The Real Estate Investment Management business in Australia (ING REIMA), with EUR 4.8 billion in assets under management as of 31 December 2010, is not included in these transactions. Within the context of the previously announced evaluation, ING finalised the review of the strategic options and implementation has commenced. As a result ING will undertake a phased withdrawal from its Australian real estate investment management activities in a timely and controlled manner. In the transaction with CB Richard Ellis, ING Insurance has agreed to continue its asset management mandate with CB Richard Ellis as the new manager of the funds. ING Bank will continue to have an equity interest in some REIM funds in Europe, Asia, the US and Australia. The equity stakes held by the Bank will be monetised over time as it continues to steadily reduce its exposure to real estate. Combined, the transactions are expected to result in an after-tax gain on disposal of approximately EUR 500 million at current exchange rates. The final terms are subject to potential adjustments at closing, customary for this kind of transaction. ING Real Estate Development and ING Real Estate Finance are not impacted by the transactions and will continue to be part of ING Bank. Both transactions are expected to close in the second half of 2011 and are subject to approvals by certain stakeholders including various regulators.
(1) Goodwill recognised in 2008 on immaterial acquisitions and real estate portfolios was EUR 133 million, resulting in total Goodwill recognised in 2008 of EUR 1,329 million as disclosed in Note 9 ‘Intangible assets’.
Liabilities Insurance and investment contracts 210 1,497 1,707 Miscellaneous other liabilities 10 274 284
Gain/loss on disposal (2) –144 182 38 (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 January 2008 ING completed the sale of its health business in Chile, ING Salud, to Said Group and Linzor Capital Partners, resulting in a gain on disposal of EUR 55 million.
In November 2006, the issue of amongst others the transparency of unit-linked products (commonly referred to as ‘beleggingsverzekeringen’) has received attention both in the Dutch public media and from the Dutch regulator for the insurance industry and consumer protection organisations. In mid-November 2008 ING reached an outline agreement with consumer organisations in the Netherlands to resolve a dispute regarding individual unit-linked products sold to customers in the Netherlands by ING’s Dutch insurance subsidiaries. It was agreed that ING’s Dutch insurance subsidiaries would offer compensation to policyholders where individual unit-linked policies have a cost charge in excess of an agreed maximum. The costs of the settlement have been valued at EUR 365 million. Although the agreement is not binding for policyholders, ING believes a significant step was made towards resolving the issue. Implementation will start in 2011. However, no agreement about implementation could be reached with one consumer protection organisation.
33 RELATED PARTIES In the normal course of business, ING Group enters into various transactions with related companies. Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party in making financial or operating decisions. Transactions have taken place on an arm’s length basis and include rendering or receiving of services, leases, transfers under finance arrangements and provisions of guarantees or collateral.
The valuation method of the 20% Alt-A securities in the IFRS-EU balance sheet is not impacted by the IABF. The methodology used to determine the fair value for these assets in the balance sheet under IFRS-EU is disclosed in Note 34 ‘Fair value of financial assets and liabilities’.
ING Groep N.V. has the right to repurchase all or some of the non-voting equity securities at EUR 15 per security at any time, together with the pro-rata coupon accrued to such date. ING Groep N.V. and the Dutch State have agreed in October 2009 that up to EUR 5 billion of the EUR 10 billion non-voting equity securities could be repurchased at any time until 31 January 2010 at the original issue price of EUR 10 per non-voting equity security, plus a repurchase premium and accrued interest.
European Commission Restructuring Plan In 2009, ING Groep N.V. submitted a Restructuring Plan to the European Commission as part of the process to receive approval for the government support measures. The Restructuring Plan has formally been approved by the European Commission. The main elements of the Restructuring Plan as announced on 26 October 2009 are as follows: • ING will eliminate double leverage and significantly reduce its balance sheet; • ING will divest all Insurance and Investment Management activities; • ING needs to divest ING Direct USA by the end of 2013; • ING will create a new company in the Dutch retail market composed of Interadvies (including Westland Utrecht and the mortgage activities of Nationale-Nederlanden) and the existing consumer lending portfolio of ING Retail in the Netherlands. This business, once separated, will be divested; • ING will not be a price leader in any EU country for certain retail and SME banking products and will refrain from the acquisition of financial institutions or other businesses that would delay the repayment of the non-voting equity securities. These restrictions will apply for the shorter period of three years or until the non-voting equity securities have been repaid in full to the Dutch State; • ING will agree with the Dutch State to alter the repayment terms of 50% of the non-voting equity securities; • EUR 5 billion of the non-voting equity securities issued in November 2008 to the Dutch State will be repurchased; • additional Illiquid Assets Back-up Facility payments as part of the overall agreement with the European Commission will have to be made to the Dutch State in the form of fee adjustments relating to the Illiquid Assets Back-Up Facility which resulted in a one-off pre-tax charge to ING of EUR 1.3 billion in the fourth quarter of 2009; • ING would launch a EUR 7.5 billion rights issue, in order to finance the repayment of 50% of the non-voting equity securities and to mitigate the capital impact of the additional Illiquid Assets Back-up Facility payment as part of the overall agreement with the European Commission to the Dutch State of EUR 1.3 billion; • ING will execute the Restructuring Plan before the end of 2013; • ING will refrain from acquisitions of financial institutions for a certain period; • Whenever the overall return on the (remaining) non-voting equity securities (core Tier 1 securities) issued to the Dutch State is expected to be lower than 10% p.a., the European Commission may consider the imposition of additional behavioural constraints; and • The calling of Tier 2 capital and Tier 1 hybrids will in the future be proposed case by case to the Commission for authorisation, for the shorter period of three years starting from the date of the Commission decision or up to the date on which ING has fully repaid the non-voting equity securities (core-Tier 1 securities) to the Dutch State (including the relevant accrued interest of core Tier 1 coupons and exit premium fees).
25 billion, on market conforming terms; • ING agreed to pro-actively use EUR 10 billion of the Dutch Guarantee Scheme over 2009; • ING has committed itself to maintaining the Dutch payment system PIN on its payment debit cards as long as other market participants, representing a substantial market share, are still making use of this payment system; and • appointment of the Chief Executive Officer of the Executive Board requires approval of the State Nominees.
34 FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES The following table presents the estimated fair values of ING Group’s financial assets and liabilities. Certain balance sheet items are not included in the table, as they do not meet the definition of a financial asset or liability. The aggregation of the fair values presented below does not represent, and should not be construed as representing, the underlying value of ING Group.
Loans and advances to customers For loans and advances that are repriced frequently and have had no significant changes in credit risk, carrying amounts represent a reasonable estimate of fair values. The fair values of other loans are estimated by discounting expected future cash flows using interest rates offered for similar loans to borrowers with similar credit ratings.
Customer deposits and other funds on deposit The carrying values of customer deposits and other funds on deposit with no stated maturity approximate their fair values. The fair values of deposits with stated maturities have been estimated based on discounting future cash flows using the interest rates currently applicable to deposits of similar maturities.
Methods applied in determining fair values of financial assets and liabilities 2009 Level 1 Level 2 Level 3 Total
Financial liabilities designated as at fair value through profit and loss 4,460 4,425 2,589 11,474 Investment contracts (for contracts carried at fair value) 3,040 2,327 39 5,406
Level 3 – Valuation technique supported by unobservable inputs This category includes financial instruments whose fair value is determined using a valuation technique (e.g. a model) for which more than an insignificant part of the inputs in terms of the overall valuation are not market observable. This category also includes financial assets and liabilities whose fair value is determined by reference to price quotes but for which the market is considered inactive. Level 3 Availablefor -sale investments include mainly asset backed securities in the US as described above under ‘Debt securities’. Level 3 Trading assets, Non-trading derivatives and Assets designated at fair value through profit and loss account and Level 3 Financial liabilities at fair value through profit and loss include financial instruments with different characteristics and nature, which are valued on the basis of valuation techniques that feature one or more significant inputs that are unobservable. An instrument in its entirety is classified as valued using significant unobservable inputs if a significant portion of the instrument’s fair value is driven by unobservable inputs. Unobservable in this context means that there is little or no current market data available from which the price at which an arm’s length transaction would be likely to occur can be derived. More details on the determination of the fair value of these instruments is included above under ‘Derivatives’, ‘Debt securities’ and ‘Loans and advances to customers’.
The change to the 2009 comparatives resulted in assets in Level 3 of the fair value hierarchy increasing from 2.1% to 2.6% of total assets measured at fair value. Liabilities in Level 3 of the fair value hierarchy increased from 1.0% to 3.6% of total liabilities measured at fair value.
Main changes in fair value hierarchy (2009 compared to 2008) As a result of changes in portfolios and/or markets during 2009, the following main changes in the fair value hierarchy occurred: • Decrease in Level 1 and Level 2 – reclassifications from Available-for-sale investments to Loans and advances and Amounts due from banks: The reclassification in the first quarter from Available-for-sale investments to Loans and advances (EUR 17.2 billion) and Amounts due from banks (EUR 5.6 billion) resulted in a reduction in Level 2 of approximately EUR 22.8 billion. Furthermore, certain asset backed securities (approximately EUR 6.1 billion) were reclassified from Level 2 to Level 3 during the first quarter because the relevant markets had become inactive; subsequently these were reclassified to Loans and advances during the second quarter. After reclassification to Loans and advances and Amounts due from banks these are no longer recorded at fair value and therefore no longer subject to disclosure in the fair value hierarchy; • Decrease in Level 3 – derecognition of asset backed securities in the US: The Illiquid Assets Back-up Facility agreed with the Dutch State resulted in the derecognition of asset backed securities in the United States that were classified in Level 3. As a result of this transaction, financial assets in Level 3 (Available-for-sale investments) decreased by approximately EUR 15.2 billion. This decrease includes the sale proceeds of EUR 22.4 billion and revaluation recognised in equity of EUR 7.2 billion; ING Group Annual Report 2010174
Amounts recognised in profit and loss during the year –64 –87 124 2 –25
Amounts recognised in profit and loss during the year (Level 3)
Sensitivities of fair values in Level 3 Reasonably likely changes in the non observable assumptions used in the valuation of Level 3 assets and liabilities would not have a significant impact on equity and net result, other than explained below for investments in asset backed securities in the United States.
Asset backed securities in the United States Level 3 assets include EUR 3.4 billion at 31 December 2010 and EUR 6.4 billion at 31 December 2009 for investments in asset backed securities in the United States. These assets are valued using external price sources that are obtained from third party pricing services and brokers.
In 2010, the growth in average total assets led to an increase of the interest result amounting to EUR 90 million (in 2009 the decline in average total assets led to a decrease of the interest result of EUR 929 million; in 2008 the growth in average assets led to an increase of the interest result of EUR 811 million). The increase of the interest margin by 10 basis points led to an increase of the interest result with EUR 915 million (in 2009 the increase of the interest margin by 25 basis points led to an increase of the interest result with EUR 2,406 million; in 2008 the increase of the interest margin by 15 basis points led to an increase of the interest result with EUR 1,440 million).
Reinsurance assumed gross premiums written 23 26 23 1,164 1,299 1,382 1,187 1,325 1,405
Income from real estate investments 128 157 196 71 63 75 199 220 271
Income from investments in debt securities and loans 7,284 6,786 8,080 7,284 6,786 8,080
Change in fair value of real estate investments –50 –588 –350 –48 –125 –50 –98 –713 –400
Asian Private Banking business 332 Swiss Private Banking business 73 ING Summit Industrial Fund LP –26 Other –69
ING Australia and New Zealand 337 ING Canada –38 Annuity and Mortgage business in Chile –23 Other –12
Asset management fees related to the management of investments held for the risk of policyholders of EUR 358 million (2009: EUR 825 million; 2008: EUR 1,174 million) are included in Commission income.
Net operating lease income comprises income of EUR 1,000 million (2009: EUR 967 million; 2008: EUR 961 million) and depreciation of EUR 787 million (2009: EUR 792 million; 2008: EUR 766 million).
Expenditure from life underwriting Reinsurance and retrocession premiums 2,041 1,867 1,802
ING Group transferred part of its life insurance business to Scottish Re in 2004 by means of a co-insurance contract. A loss amounting to EUR 160 million was recognised in Underwriting expenditure in 2004 on this transaction. This loss represented the reduction of the related deferred acquisition costs. In addition, an amount of EUR 240 million is being amortised over the life of the underlying business, starting in 2005 and gradually decreasing in subsequent years as the business tails off. The amount amortised in 2010 was EUR 17 million (2009: EUR 13 million; 2008: EUR 12 million). The cumulative amortisation as at 31 December 2010 was EUR 132 million (2009: EUR 107 million; 2008: EUR 96 million). On 23 January 2009, Hannover Re and Scottish Re announced that Hannover Re has agreed to assume the ING individual life reinsurance business originally transferred to Scottish Re in 2004.
ING Group transferred its U.S. group reinsurance business to Reinsurance Group America Inc. in 2010 by means of a reinsurance agreement. The transaction resulted in EUR 70 million ceding commission which is required to be recorded as a deferred gain and amortised over the life of the underlying business, starting in 2010 and gradually decreasing in subsequent years as the business tails off. The amount amortised in 2010 was EUR 52 million. The cumulative amortisation as at 31 December 2010 was EUR 52 million.
Software and other intangible assets 31 9 71 31 9 71
In 2010, impairments on Property development are recognised on a large number of Real Estate development projects in The Netherlands, Spain and the US. Although the expectation is that the Real Estate markets will not further deteriorate, the unfavourable economic circumstances in all regions resulted in lower expected sales prices.
In 2009, impairments on Property development are recognised on a large number of Real Estate development projects in Europe, Australia and the US. Circumstances that have led to these impairments are unfavourable economic circumstances in all regions that have resulted into lower expected sales prices, changes in strategy of ING Real Estate Development whereby certain projects are not developed further and operational inefficiencies in a limited number of projects.
Share-based compensation arrangements includes EUR 91 million (2009: EUR 65 million; 2008: EUR 98 million) relating to equity-settled share-based payment arrangements and EUR 29 million (2009: EUR 31 million; 2008: EUR 26 million) relating to cash-settled share-based payment arrangements.
Expected return on assets –886 –842 –886 1 1 –885 –841 –886 Amortisation of unrecognised past service cost –5 –1 –1 –5 –1 –1 Amortisation of unrecognised actuarial (gains)/losses 62 106 –23 –9 –5 1 5 54 106 –23 Effect of curtailment or settlement –7 –96 –140 –7 –96 –140
Exposure arising from the share plan is not hedged. The obligations with regard to these plans will in the future be funded either by cash, newly issued shares or remaining shares from the delta hedge portfolio at the discretion of the holder.
In December 2009 ING Groep N.V. completed a rights issue of EUR 7.5 billion. Outstanding stock options and share awards have been amended to reflect the impact of the rights issue through an adjustment factor that reflects the fact that the exercise price of the rights issue was less than the fair value of the shares. As a result, exercise prices and outstanding share options and share awards have been amended through an adjustment factor of approximately 1.3.
On 8 September 2010 ING Groep N.V. announced that it has sold 3,590,000 (depositary receipts for) ordinary shares of its delta hedge portfolio, which was used to hedge employee options and facilitate employee share programmes. The shares were sold in the open market on 7 and 8 September 2010 at an average price of EUR 7.39 per share.
Due to timing differences in granting option rights and buying shares to hedge them, an equity difference can occur if shares are purchased at a different price than the exercise price of the options. However, ING Group does not intentionally create a position and occurring positions are closed as soon as possible. If option rights expire, the results on the (sale of) shares which were bought to hedge these option rights are recognised in Shareholders’ equity.
Notes to the consolidated annual accounts of ING Group continued 47 OTHER OPERATING EXPENSES
The effective tax rate in 2010 equals almost the weighted average statutory tax. This is caused by an off-setting effect of the write-down of deferred tax assets (mainly in the United States) against the tax exempt income from associates.
ING Group has adopted IFRS 8 ‘Operating Segments’, including the amendment following the issue of ‘Improvements to IFRSs’ in 2009, with effect from 1 January 2009.
Retail Netherlands Income from retail and private banking activities. The main products offered are current and savings accounts, mortgages and other consumer lending in the Netherlands.
Insurance Benelux Income from life insurance, non-life insurance and retirement services in the Benelux. Insurance CRE Income from life insurance, non-life insurance and retirement services in Central and Rest of Europe. Insurance US * Income from life insurance and retirement services in the US. Insurance US Closed Block VA Consists of ING’s Closed Block Variable Annuity business in the US, which has been closed to new business since early 2010 and which is now being managed in run-off.
– Total investment and other income 1,218 7,582 8,800 –243 8,557
– Other interest expenses 1,128 1,128 –336 792 – Additions to loan loss provision 1,751 1,751 1,751
– Total investment and other income –1,562 3,202 1,640 –171 1,469
– Other interest expenses 1,269 1,269 –292 977 – Additions to loan loss provision 1,235 1,235 1,235
Insurance US Closed Block VA 42,582 39,708 39,827 36,532 33,871 30,901
Notes to the consolidated annual accounts of ING Group continued 52 INFORMATION ON GEOGRAPHICAL AREAS ING Group’s business lines operate in seven main geographical areas: the Netherlands, Belgium, Rest of Europe, North America, Latin America, Asia and Australia. The Netherlands is ING Group’s country of domicile. Geographical distribution of income is based on the origin of revenue. A geographical area is a distinguishable component of the Group engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments. The geographical analyses are based on the location of the office from which the transactions are originated.
Eliminations Total 53 NET CASH FLOW FROM INVESTING ACTIVITIES Information on the impact of companies acquired or disposed of is presented in Note 30 ‘Companies acquired and companies disposed’.
During 2010 strengthening of ING balance sheet continued. In 2010 ING continued to reduce the exposure on the ABS portfolio by means of sales (primarily sales of CMBS) and limiting the reinvestments in ABS to agency paper only. Because of the strengthening of the US Dollar and the improvements in the revaluation reserve this policy does not result in a lower balance sheet amount for this asset class.
Pressurised Government and Financial Institution bonds for both Greece and Ireland (2) 1,633 –564 –439 –1,700 3,772 –125
In 2009, certain ABS (US Subprime RMBS, Alt-A RMBS, CMBS and CDO/CLOs) were considered pressurised asset classes. As of 2010, Greek and Irish Government and Financial Institution bonds are also considered pressurised asset classes. Ireland and Greece are the only countries that used the European Financial Stability Fund (EFSF) during 2010, only the government and financial institution unsecured bonds for these countries are considered as pressurised assets by ING.
For ING Bank, the bonds portfolio includes Government and Financial Institutions unsecured bonds exposures in Greece and Ireland classified as available-for-sale of EUR 570 million (fair value), with a related negative revaluation reserve in equity of EUR –285 million. Furthermore it includes, for ING Bank, similar exposures classified as loans and advances of EUR 358 million (amortised cost).
The mission of ING Group’s risk management function is to build a sustainable competitive advantage by fully integrating risk management into daily business activities and strategic planning. This mission is fully embedded in ING Group’s business processes. The following principles support this objective: • Products and portfolios are structured, underwritten, priced, approved and managed appropriately and compliance with internal and external rules and guidelines is monitored; • ING’s risk profile is transparent, managed to avoid surprises, and is consistent with delegated authorities; • Delegated authorities are consistent with the overall Group strategy and risk appetite; • Transparent communication to internal and external stakeholders on risk management and value creation.
RISK GOVERNANCE ING’s risk management framework is based on the ‘three lines of defence’ concept which ensures that risk is managed in line with the risk appetite as defined by the Management Boards for ING Bank and ING Insurance (and ratified by the Supervisory Board) and is cascaded throughout ING. This concept provides a clear allocation of responsibilities for the ownership and management of risk, to avoid overlaps and/or gaps in risk governance. Business line management and the regional and local managers have primary responsibility for the day-to-day management of risk and form the first line of defence. The risk management function, both at corporate and regional/local level, belongs to the second line of defence and has the primary responsibility to align risk taking with strategic planning e.g. in limit setting. Risk managers in the business lines have a functional reporting line to the Corporate Risk General Managers described below. The internal audit function provides an ongoing independent (i.e. outside of the risk organisation) and objective assessment of the effectiveness of internal controls, including financial and operational risk management and forms the third line of defence.
Chief Risk Officer The Chief Risk Officer (CRO), who is an Executive Board member, bears primary overall responsibility for the Risk management function. The CRO is responsible for the management and control of risk on a consolidated level to ensure that ING’s group risk profile is consistent with its financial resources and the risk appetite. The CRO is also responsible for establishing and maintaining a robust organisational basis for the management of risk throughout the organisation.
The risk organisation is structured independently from the business lines and is organised through five risk departments: • Corporate Credit Risk Management (CCRM) is responsible for credit risk management for ING Bank and ING Insurance; • Corporate Market Risk Management (CMRM) is responsible for market and liquidity risk management of ING Bank; • Corporate Insurance Risk Management (CIRM) is responsible for insurance, market and liquidity risk management of ING Insurance; • Corporate Operational Risk Management (CORM) is responsible for the operational risk management of ING Bank and ING Insurance; • Group Compliance Risk Management (GCRM) is responsible for (i) identifying, assessing, monitoring and reporting on the compliance risks faced by ING, (ii) supporting and advising management on fulfilling its compliance responsibilities, and (iii) advising employees on their (personal) compliance obligations.
Group Risk Committees The Group risk committees described below are also part of the second line of defence. They act within the overall risk policy and delegated authorities granted by the Executive Board and have an advisory role to the CRO. To ensure a close link between the business lines and the risk management function, the business line heads and the respective Corporate Risk General Managers are represented on each committee (except for the Operational and Residual Risk Committee where the business is not represented). An important element of the Group Risk Committee Governance is that the Chairman of each committee is responsible for making decisions after advice from other committee members. Each committee is chaired by a senior risk representative.
Group risk policies ING has a framework of risk management policies, procedures and standards in place to create consistency throughout the organisation, and to define minimum requirements that are binding on all business units. The governance framework of the business units aligns with the Group level framework and meets local (regulatory) requirements. Senior Management is responsible to ensure policies, procedures and standards are implemented and adhered to. Policies, procedures and standards are regularly reviewed and updated via the relevant risk committees to reflect changes in markets, products and emerging best practices.
The Executive Board uses the risk appetite frameworks to monitor and manage the actual risk profile in relation to the Bank and Insurance risk appetite, which are derived from the Group risk appetite in line with the Group target AA rating. It enables the Executive Board to identify possible risk concentrations and to support strategic decision making. The risk appetite levels are reported to the Executive Board on a quarterly basis and are subsequently presented to the Risk Committee.
ING Group’s risk appetite is defined by the Executive Board as part of the strategic planning process. As a next step, strict boundaries are established with regard to acceptable risk types and levels for ING Bank and ING Insurance. In 2010 the revised risk appetite frameworks were implemented, after approval by the Executive Board. As a result the Group risk appetite level is replaced by separate Bank and Insurance risk appetite frameworks, which closely align the risk appetite setting with capital management targets.
The overall ING Group risk appetite is translated (through the bank and insurance risk appetite frameworks) into specific limits which are cascaded down into the organisation, e.g. • Credit risk limits for bank and insurance business; • ALM/Value at Risk limits for bank operations; • Mortality and concentration limits for insurance operations.
Several stress tests are produced both scheduled and ad hoc, both in the form of sensitivity or scenario analysis, either for a specific risk type or for ING Bank or ING Insurance as a whole. The stress test can represent various economic situations from mild recession to extreme shock. In addition to regulatory required stress tests like those required by the Dutch Central Bank (De Nederlandsche Bank (DNB)) and the Committee for European Banking Supervision (CEBS; which per 1 January 2011 became the European Banking Authority (EBA)), several ad hoc tests have been conducted.
ING BANK RISK PROFILE Risk appetite For financial risks, ING expresses its risk appetite as the tolerance to allow key capital ratios to deviate from their target levels. Therefore the risk appetite is closely aligned to Capital Management activities and policies. ING has expressed tolerances for its risk weighted solvency metrics (core Tier 1 ratio), for non-risk weighted solvency metrics (leverage ratio) and for more value based metrics (economic capital). The metrics that are presented in the following sections relate to each of these metrics and present earnings sensitivity, economic and regulatory capital.
Economic capital is a non accounting measure which is inherently subject to dynamic changes and updates as a result of ING Bank’s portfolio mix and general market developments. ING Bank has been and will continue recalibrating the underlying assumptions to its economic capital models, which may have a material impact on the economic capital values going forward.
Retail Banking Direct & International 8,881 7,417 8,587 7,977 * Corporate Line includes funding activities at ING Bank level, internal transactions between business units and the Corporate Line, and is managed by Capital Management.
Risk categories for credit risk Lending risk Lending risk arises when ING grants a loan to a customer, or issues guarantees on behalf of a customer. This is the most common risk category, and includes term loans, mortgages, revolving credits, overdrafts, guarantees, letters of credit, etc. The risk is measured at the notional amount of the financial obligation that the customer has to repay to ING, excluding any accrued and unpaid interest, discount/ premium amortisations or impairments.
Pre-settlement risk Pre-settlement risk arises when a counterparty defaults on a transaction before settlement and ING has to replace the contract by a trade with another counterparty at the then prevailing (possibly unfavourable) market price. The pre-settlement risk (potential or expected risk) is the cost of ING replacing a trade in the market. This credit risk category is associated with dealing room products such as options, swaps, and securities financing transactions. Where there is a mutual exchange of value, the amount of credit risk outstanding is generally based on the replacement value (mark-to-market) plus a potential future volatility concept, using a 3–7 year historical time horizon and a 97.5% (1.96 standard deviations) confidence level.
For those transactions where DVP settlement is not possible, ING establishes settlement limits through the credit approval process. Settlement risk is then monitored and managed by the credit risk management units. Risk is further mitigated by operational procedures requiring trade confirmations to counterparties with all transaction details, and by entering into internationally accepted documentation, such as International Swaps and Derivatives Association (ISDA) Master Agreements for derivative transactions. Additionally, ING regularly participates in projects with other financial institutions to improve and develop new clearing systems and clearing mechanisms to further reduce the level of settlement risk. Due to the very short term nature of settlement exposure (daily or intra-day), settlement risks do not attract economic or regulatory capital and are excluded from risk reporting disclosures.
Compensation and Master agreements ING uses various market pricing and measurement techniques to determine the amount of credit risk on pre-settlement activities. These techniques estimate ING’s potential future exposure on individual and portfolios of trades. Master agreements and collateral agreements are frequently entered into to reduce these credit risks.
Neither past due nor impaired 822,445 790,377 Past due but not impaired (1–90 days) (1) 5,638 7,404
In line with ING’s de-risking strategy, the portfolio developments in most countries mirrored the developments in the portfolio as a whole. The depreciated Euro versus the Australian and the US dollar had an upward effect of the exposure to the Americas and Asia/Pacific and therewith also to the Retail Banking Direct and International and Commercial Banking portfolios.
Business loans Consumer and mortgage loans Total Business loans Consumer and mortgage loans Total
From restructuring (18–19) to regular (1–17) status 4,365 4,365 2,737 2,737 From recovery (20–22) to regular or restructuring status (1–19) 2,744 3,209 5,953 2,895 3,210 6,105
Impaired loans and provisions The credit portfolio is under constant review. A formal analysis takes place quarterly to determine the provisions for possible bad debts, using a bottom-up approach. Conclusions are discussed by the ING Provisioning Committee (IPC), which advises the Executive Board on specific provisioning levels. ING Bank identifies as impaired loans those loans for which it is probable, based on current information and events that the principal and interest amounts contractually due will not be collected in accordance with the contractual terms of the loan agreements.
Changes in the composition of the group –3 –3 Write-offs –337 –520 –454 –468 –375 –229 –1,166 –1,217
Within ING Bank, market risk (including liquidity risk) falls under the supervision of the ALCO function with ALCO Bank as the highest approval authority. ALCO Bank determines the overall risk appetite for market risk. The ALCO function is regionally organised with the exception of ING Direct, which has a separate ALCO. The business lines Retail Banking and Commercial Banking are represented within the respective regional and local ALCO’s. The ALCO structure within ING Bank facilitates top-down risk management, limit setting and the monitoring and control of market risk. This ensures a correct implementation of the ING Bank risk appetite.
Market risk in trading books Organisation Within the trading portfolios, positions are maintained in the professional financial markets for the purpose of benefiting from short term price movements. Market risk arises in the trading portfolios through the exposure to various market risk factors, including interest rates, equity prices and foreign exchange rates.
Measurement CMRM uses the Value at Risk (VaR) methodology as its primary risk measure. The VaR for market risk quantifies, with a one-sided confidence level of 99%, the maximum overnight loss that could occur due to changes in risk factors (e.g. interest rates, foreign exchange rates, equity prices, credit spreads, implied volatilities) if positions remain unchanged for a time period of one day. The impact of historical market movements on today’s portfolio is estimated, based on equally weighted observed market movements of the previous year. ING uses VaR with a 1-day horizon for internal risk measurement, control and backtesting, and VaR with a 10-day horizon for determining regulatory capital. ING’s VaR model has been approved by De Nederlandsche Bank (DNB: the Dutch Central Bank) to be used for the regulatory capital calculation of its most important trading activities.
More details on the VaR of the ING Commercial Banking trading portfolio for 2010 and 2009 are provided in the table below: Consolidated VaR trading books: ING Commercial Bank Minimum Maximum Average Year end
(1) The total VaR for the columns Minimum and Maximum can not be calculated by taking the sum of the individual components since the observations for both the individual markets as well as total VaR may occur on different dates. Note: the above categories are consistent with those used for internal risk management purposes and do not relate to financial statement captions.
REGULATORY CAPITAL According to the Dutch regulation, regulatory capital for trading portfolios can be calculated using the standardised approach (CAD1) or an internal model approach (CAD2). In 1998, ING received approval from the DNB to use an internal Value-at-Risk (VAR) model to determine the regulatory capital for the market risk in most trading books of ING Bank. Market risk capital of CAD2 trading books is calculated according to the internal VaR model, where diversification is taken into account. On the other hand, market risk capital of CAD1 books is calculated using standardised fixed risk weights.
(1) The FX exposure under the Standardised Approach contains FX exposures on both trading and banking books
(1) The total VaR for the columns Minimum and Maximum can not be calculated by taking the sum of the individual components since the observations for both the individual markets as well as total VaR may occur on different dates. Note: the above categories are consistent with those used for internal risk management purposes and do not relate to financial statement captions
ING Group Annual Report 2010 219ING Group Annual Report 2010 219
Interest rate risk in banking books Interest rate risk in the banking books is defined as the potential negative impact that moving interest rates have on earnings or market value. The management of interest rate risk follows the Asset & Liability Management (ALM) framework as approved by ALCO Bank. Main goal of this framework is to transfer interest rate risks out of commercial books in order to manage it centrally. This allows for a clear demarcation between commercial business results and results on unhedged interest rate positions.
In the risk transfer process, client behavioural characteristics play an important role. The behaviour in relation to mortgages, loans, savings and demand deposits is modelled by CMRM, following extensive research. Models and parameters are back-tested regularly and updated when deemed necessary. In the modelling of savings and current accounts different elements play a role: pricing strategies, outstanding and expected volumes and the level and shape of the yield curve. The analyses result in an investment rule for the various portfolios. With respect to mortgages and loans, prepayment behaviour and the interest sensitivity of the embedded offered rate options are modelled.
Earnings Sensitivity (ES) ES measures the impact of changing interest rates on (pre tax) IFRS earnings. The ES figures in the table below reflect an instantaneous shock up of 1% and a time horizon of one year. Management interventions are not incorporated in these calculations; balance sheet dynamics (e.g. new business) where significant.
The full value impact cannot be directly linked to the balance sheet or profit and loss account, as fair value movements in banking books are generally not reported through the profit and loss account or through equity. The largest part, namely the value mutations of the amortised cost balances, is neither recognised in the balance sheet nor directly in the profit and loss account. The value mutations are expected to materialise over time in the profit and loss account, if interest rates develop according to forward rates throughout the remaining maturity of the portfolio.
Basis Point Value (BPV) BPV measures the impact of a 1 basis point increase in interest rates on value. To a large extent the BPV and NPV at Risk reflect the same risk − the difference being that BPV does not reflect convexity risk, given the small shift in interest rates.
ING Group Annual Report 2010 223ING Group Annual Report 2010 223
ING Bank has three different categories of real estate exposure on its banking books. First, ING Bank owns buildings it occupies. Second, ING Bank has a Real Estate Development company for which results are dependent on the overall real estate market. The general policy is to mitigate this risk by pre-sale agreements where possible. Third, ING Bank has co-invested seed capital and bridge capital to support the launch of various real estate funds. A decrease in real estate prices will cause the value of this seed and bridge capital to decrease and will lower the level of third party assets under management, which in turn will reduce the fee income from this activity.
ING BANK – LIQUIDITY RISK Definition Liquidity risk is the risk that ING Bank or one of its subsidiaries cannot meet its financial liabilities when they come due, at reasonable cost and in a timely manner. Liquidity risk can materialise both through trading and non-trading positions.
This committee which consists of key representatives from Corporate Market Risk Management, Capital Management and Financial Markets focuses on all liquidity risk aspects from a going concern perspective. The main objective of the committee is to maintain a sound liquidity profile through: • Maintaining a well diversified mix of funding sources in terms of instrument types (e.g. unsecured deposits, commercial paper, long term bonds or repurchase agreements), fund providers (e.g. professional money market players, wholesale and retail clients), geographic markets and currencies; • Actively managing access to the capital markets by regularly issuing public debt in all material markets and the maintenance of investor relations; • Holding a broad portfolio of eligible assets that can be utilised to obtain secured funding, e.g. from the repo market or (E)CB; in this respect the total eligible collateral position amounts to EUR 156.6 billion (nominal); • Management of liquidity gaps, taking into account the asset mix and both the secured and unsecured funding opportunities of ING Bank; • Maintaining a funds transfer pricing policy in which ING Bank’s cost of liquidity is adequately reflected both under a going concern and a contingency perspective.
A critical aspect of risk management is that all new products are designed, underwritten and priced appropriately. This is explicitly covered by the Standard of Practice for the Product Approval and Review Process (PARP). This standard includes requirements related to risk profile, traditional and value-oriented pricing metrics and targets and documentation. Customer Suitability is integral part of the PARP requirements since December 2009. In addition to insurance and market risks, the requirements refer to credit risks, operational risks, compliance and legal risks. For these risks, the IRM network works closely together with the other relevant risk departments. The PARP also includes requirements to assess sensitivities to changes in financial markets, insurance risk (e.g. mortality and claims development), compliance risks, legal risks and operational risks, as well as assessment of the administration and accounting aspects of the product.
The EurAsia and LatAm business includes the Benelux, Central & Rest of Europe, Asia Pacific and Latin America business lines. For the risk profile it is currently not yet feasible to show the Latin America business separately from the EurAsia business. The US business includes the Insurance US and US Closed Block VA business lines. The risk of ING Investment Management (IIM) business line for EurAsia and LatAm has no material impact and is therefore incorporated in the numbers of EurAsia and LatAm. The same applies to the risk of IIM for the US, which is therefore incorporated in numbers of the US.
Economic Capital ING Insurance – EurAsia and LatAm Insurance Business The objective of the ING Insurance Economic Capital framework is to achieve an advanced risk and capital measurement and management structure that: • Covers all identified risks in the business units and is applied consistently across all risks and business units within its scope, i.e. EurAsia and LatAm; • Facilitates and encourages adequate risk- and capital management, including the proper pricing of products and sound capital allocation decisions.
The following table provides an Economic Capital break down by risk category with diversification benefits allocated to the risk types: Economic Capital break-down ING Insurance EurAsia and LatAm (99.5%) by risk category (1) (2)
Credit risk (including Transfer risk) 394 325 Market risk (including credit spread risk) 7,079 4,228 Insurance risk 1,283 982
(1) The Economic Capital outcomes do not reflect any potential tax benefit resulting from the loss that occurs under the specified circumstances. (2) Other risk includes operational risk as well as business risk (covering expense risk and lapse risk).
(1) Corporate Line includes funding activities at ING Insurance (EurAsia and LatAm) level, explicit internal transactions between business unit and Corporate Line, managed by Capital Management, and corporate reinsurance. The responsibility (and risk) of free assets located within the business line for which there is no explicit transfer via a Corporate Line transaction remain at the business unit level.
The AFR sensitivities are only applicable for the EurAsia and LatAm insurance business as these sensitivities drive the ratio of Available Financial Resources over Economic Capital. The capital management section discusses the AFR over Economic Capital ratio.
Earnings sensitivities are defined on moderate stress scenarios for pre-tax IFRS earnings. The tables below present figures before diversification between risks and business units. Interest rates are shocked 30% upwards and downwards relative to the ten year swaps rate. The credit sensitivity in the table below is based on new method introduced in 2010 such that there is no comparable 2009 number available. Equity and Real estate are based on a 25% and 15% downward shock respectively. The FX shock is based on a 10% up or down movement for each currency. Implied volatilities for swaptions are shocked by 30%. More details on the stress scenarios can be found in the Model Disclosure section.
In the US there is no significant earnings sensitivity to Foreign Exchange Rates as the US is managed on a local currency basis and therefore there is no translation risk to the group reporting currency included. There is no significant earnings exposure to non US currencies.
Per year end 2010 ING Insurance has EUR 3.8 billion of Real Estate related investments (excluding leverage). ING Insurance’ Real Estate exposure (i.e. including leverage) is EUR 5.9 billion of which EUR 4.3 billion is recognised as fair value through P&L and EUR 1.6 billion is not revalued through P&L, but is either booked at cost or is revalued through equity (with impairments going through P&L). In total, Real Estate exposure decreased by EUR 179 million mainly as a result of negative fair value changes (EUR 71 million), impairments (EUR 22 million) and divestments (EUR 140 million) compensated by net investments (EUR 16 million) and FX appreciation (EUR 32 million).
Earnings sensitivities are defined on a shock scenario at the 90% confidence level on IFRS pre-tax earnings. The table below shows the impact on earnings over a one year horizon.
Earnings sensitivities for Insurance risks – EurAsia and LatAm Insurance Business
The US portfolio stayed constant in terms of local currency, but increased in Euro terms due to the appreciation of the US Dollar against the Euro. The relative concentration in the US has diminished, however, due to faster growth in other regions. The portfolio in the Netherlands mainly increased due to investments in state bonds. There were no other significant shifts in the portfolio concentration.
GENERAL Policy implementation To ensure robust non-financial risk management, ING monitors the full implementation of ING’s Risk Policies and Minimum Standards. Business units have to demonstrate that the appropriate steps have been taken to control their operational and compliance risk. ING applies scorecards to measure the quality of the internal control within a business unit. Scoring is based on the ability to demonstrate that the required risk management processes are in place and effective within the business units.
OPERATIONAL RISKS Operational Risk 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 related risk of reputation loss, as well as legal risk whereas strategic risks are not included. Effective operational risk management leads to more stable business processes (including IT systems) and lower costs. Generic mandatory controls are described in the Operational Risk Management (ORM) policy house.
At least once a year business units and departments perform an integrated risk assessment with involvement of other departments such as Operational Risk, Compliance, Legal and Finance.
Based on the results of the risk assessment, response measures must be determined for the identified risks beyond the risk appetite. Risk response actions balance the expected cost for implementing these measures with the expected benefits regarding the risk reduction. Risk response can be achieved through several combinations of mitigation strategies, for example reducing likelihood of occurrence, reducing impact, risk avoidance, risk acceptance or through the transfer of risk. Tracking takes place through a global Action Tracking system.
Certain operational risks can best be transferred to the insurance market if risks are high but difficult to mitigate internally. In order to protect ING against financial consequences of uncertain operational events ING has acquired insurance policies issued by third-party insurers for Crime, Professional Liability, Directors and Officers Liability through its Risk Management & Transfer Programmes.
The yearly objective setting process for both business management and ORM professionals aims to keep improving the management of operational risk throughout ING to ensure that ING stays in control of its current and future operational risks. ING’s ORM Framework is further maturing towards an integrated controls framework according to pre-agreed requirements and development stages in the individual business units. This development is measured through the scorecard process.
• Operational Risk Committees – Following the changes in the organisation and governance of ING and regulatory requirements, ING has installed a periodic Bank Operational Risk Committee (ORC) in December 2010, consisting of the members of the Bank management board, the CEO’s of the Regions and Functions, and the General Managers of ORM, Legal and Compliance. The mandate of the Bank ORC has been approved in the Bank Management Board. The responsibility of the Bank ORC is to monitor and manage the operational risks of the bank. Below the Bank ORC six Region/Function ORC’s were set up which are responsible for the regional and functional operational risk oversight in their area of responsibility: ORC Netherlands, ORC Belgium, ORC ING Direct, ORC International/ Commercial Banking, ORC Financial Markets and ORC OIB.
COMPLIANCE RISKS Compliance Risk is defined as the risk of damage to ING’s integrity as a result of failure (or perceived failure) to comply with relevant laws, regulations, internal policies, procedures and ethical standards. In addition to reputational damage, failure to effectively manage Compliance Risk could expose ING to fines, civil and criminal penalties, and payment of damages, court orders and suspension or revocation of licenses, which would adversely impact customers, staff and shareholders of ING.
Communications & Affairs, created and launched the Promoting Integrity Programme (PIP), a global employee education programme focusing on ING’s values (including the ING Business Principles) and the role they play in the business and workplace. A short e-learning course was developed and was followed by manager-led dialogue sessions, where employees discussed what integrity means for them and how the Business Principles can be applied in their daily work.
• Learning – Continuous education and awareness training was provided through face-to-face training sessions and online learning tools on topics such as Ultra High Risk Countries & Export Trade, Financial Economic Crime, Competition Law and Customer Suitability. Compliance Risk Management also continued its mandatory global Compliance Officer Training programme for all compliance officers new to ING.
This model disclosure section explains the models applied in deriving the disclosed metrics. The methodologies used to determine Economic Capital for ING Bank and ING Insurance are described, as are the methodologies for sensitivities for ING Insurance. The risk models for the Economic Capital calculations are reviewed on a periodic basis and validated by the internal Model Validation department. The ING Bank Economic Capital calculation is also used as part of the Basel II Pillar 2 Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) that is performed regularly by the Dutch Central Bank.
ECONOMIC CAPITAL (ING BANK) Economic Capital is defined as the amount of capital that a transaction or business unit requires in order to support the economic risks it originates. In general Economic Capital is measured as the unexpected loss above the expected loss at a given confidence level. This Economic Capital definition is in line with the net market value (or surplus) definition. The process of Economic Capital modelling enables ING Bank to allocate Economic Capital to the business units and support risk-adjusted performance measurement (RAROC).
CREDIT AND TRANSFER RISK (ING INSURANCE) For the determination of Economic Capital for credit and transfer risk within the ING Insurance entities the methodology used is the same methodology as used for ING Bank, with the exception that the Economic Capital is reported on the 99.5% confidence level in line with the requirements for Solvency II.
Real estate price risk includes both the market risks in both the investment portfolio and the development portfolio of ING Real Estate. The real estate price risk for the investment portfolio is calculated by stressing the underlying market variables. The stress scenarios at a portfolio level take into account all diversification effects across regions and real estate sectors. Also, the leverage of participations in the real estate investment funds is taken into account.
For the Real Estate development process, in addition to market sale price risk, the risk drivers of market rent, investor yield and construction delays are taken into account. Furthermore the risk model differs for each development phase (i.e., research, development, and construction) to appropriately reflect the risk taken in each phase. Using correlations, all risk drivers, and stages are used to calculate a possible market value loss representing the Economic Capital for market risk for the development portfolio.
The capital model, an actuarial model, consists of a combination of three techniques: • Loss Distribution approach (LDA), which applies statistical analysis to historical loss data; • Scorecard approach, which focuses on the quality of risk control measures within a specific business unit; • ‘Bonus/Malus’ approach, which focuses on the actual operational incidents of a specific business unit.
The capital calculated according to the first three is ‘generic’: if two business units operate in the same markets and have the same size, the resulting capital will be the same. The specific capital adjustments mentioned below adjust the generic capital of a specific institution to its specific operational risk capital.
BUSINESS RISK (ING BANK) Business Risk for ING Bank has been defined as the exposure to value loss due to fluctuations in volumes, margins and costs, as well as client behaviour risk. It is the risk inherent to strategy decisions and internal efficiency. The calculation of Business Risk Capital is done by calculation of two components, (i) Expense risk relates to the (in)flexibility to adjust expenses, when that is needed.
ECONOMIC CAPITAL (ING INSURANCE) In 2007, ING Insurance introduced ECAPS as an intranet-based Economic Capital reporting system utilising replicating portfolio techniques. Since then, ECAPS has been constantly enhanced to improve its robustness, usability and accuracy. Since 2010 Economic Capital is only reported for EurAsia and LatAm businesses.
The ECAPS system provides a well controlled and automated basis for Economic Capital and risk sensitivity measurement. Each business unit enters the risk characteristics of its assets and liabilities into the ECAPS system on a regular basis. These risk characteristics are then translated to a uniform basis in the form of replicating portfolios of standardised financial instruments. Based on the constellation of replicating portfolios (including representations of non-market risks), the ECAPS system then is capable of calculating Economic Capital at every level of aggregation.
ING continues to adjust Available Financial Resources to reflect the illiquidity in its insurance portfolios as reporting AFR with MVLs discounted at the swap rates results in an asymmetry between the assets and liabilities.
The following fundamental principles have been established for the model: • All identified sources of risk should be considered; • The best estimate actuarial assumptions should be as objective as possible and based on a proper analysis of economic, industry, and company-specific data. There is one set of best-estimate assumptions per product to be used for all purposes at ING; • Valuation of assets and liabilities is based on fair value principles. Where complete and efficient markets exist, fair value is equal to market value; • The Economic Capital and valuation calculations should reflect the embedded options in insurance contracts; • The Economic Capital and valuation calculations are on a pre-tax basis and do not consider the effect of local regulatory accounting and solvency requirements on capital levels. Capital is assumed to be fully transferable between legal entities; • The framework does not include any franchise value of the business. It does, however, include the expense risk associated with the possibility of reduced sales volume in the coming year.
Economic Capital calculation ECAPS uses Monte-Carlo simulation to determine diversification benefits for the complete ‘portfolio hierarchy’, from business unit level up to an ING Insurance level. All diversification calculations are done within ECAPS and are driven by the Gaussian copula of all risk drivers using the underlying distributions applicable for each risk type. Diversification benefit allocation to business units, business lines and risk types is done outside ECAPS.
Using Monte-Carlo simulation, ING’s Economic Capital model generates 20,000 possible ‘states-of-the-world’, by randomly simulating all risk drivers – simultaneously. For each state-of-the-world, the market value of assets and liabilities are recalculated and the change in value of the Market Value Surplus (MVS) is stored. All these changes in MVS are then sorted, and the 99.5% worst-case change in MVS is identified, to provide the Economic Capital level for the given level of aggregation.
AFR SENSITIVITIES AND EARNINGS SENSITIVITIES (ING INSURANCE) Scenarios for AFR sensitivities and Earnings sensitivities The sensitivities shown for AFR and Earnings are based on simple to explain shocks to underlying risk factors. The following risk factors are taken into account: • Interest rates; • Credit (including spread changes, liquidity premium and default); • Equity; • Real Estate; • Foreign exchange; • Implied volatility (of both equity and interest rates).
Interest Rates Up and down parallel shock equal to 30% of the 10 year swap rate. Shock is floored at 50bps and capped at 150bps. Credit For AFR we apply a credit spread shock based on the rating of the debt security (e.g. single A shock 110bps).
Home government bonds (e.g. KRW government bonds in Korea) are excluded. The liquidity premium is shocked by 50bps. For financial capital securities the underlying assumption is that they are called at their legal maturity and not at earlier call-dates. For structured credit we increase credit spread shocks by 50%.
The Regulatory Capital Sensitivity in aggregate is calculated by combining the joint impact of the various market stress events calculated by taking into account the correlations between risk types.
Other qualifying capital (6) 9,813 10,716 Insurance Group Directive adjustments (7) –1,213 651 Group leverage (core debt) –8,462 –6,913 Total capital (Adjusted Equity for Group, BIS capital for Bank and IGD capital for Insurance) 55,169 49,050 49,145 44,731 20,906 19,189
ING Insurance continues to ensure that all operating entities are adequately capitalised based on local regulatory and rating agency requirements and that on a consolidated basis, the financial leverage (hybrids, sub-debt and net financial debt) of ING Insurance is appropriate.
At the end of 2009 the AFR for ING Insurance other than the US was EUR 19.0 billion. As described in the Risk Paragraph. EC, based on 99.5% confidence interval was EUR 7.0 billion, which leads to excess of AFR over EC for 2009 of EUR 12.0 billion. For 2010 the AFR is EUR 19.7 billion, EC is EUR 10.4 billion and the excess of AFR over EC is EUR 9.4 billion. The EC for 2010 does not include the potential adjustment between one and two billion, as described in the previous paragraph.
BIS capital 49,145 44,731 IGD capital 20,906 19,188 Group leverage (core debt) -8,462 -6,913 Regulatory capital 61,589 57,006
Main credit ratings of ING at 31 December 2010 Standard & Poor’s Moody’s Fitch
SUBSEQUENT EVENTS ING changed its accounting policy for the insurance provisions for Guaranteed Minimum Withdrawal Benefits for Life (GMWBL) on the Insurance US Closed Block VA book as of 1 January 2011. The revised accounting will better reflect the economic value of these guarantees and more closely align accounting practice with US peers. Under the revised accounting, the insurance provisions will reflect current market interest rates and current estimates for other assumptions, except for volatility and correlation (which remain unchanged). ING substantially increased hedging of interest rate risk in the Insurance US Closed Block VA book; the results from these hedging derivatives are expected to largely mirror the effect of interest changes on the guarantees in future periods. Implementation of the revised accounting for GMWBL represents a change in accounting policy under IFRS, with a transitional impact being reflected in shareholders’ equity. Comparative periods’ results will be restated. The estimated combined impact on shareholders’ equity as at 1 January 2011 will be EUR 0.7 billion (lower equity), of which EUR 0.4 billion and EUR 0.1 billion will be reflected in the restated 2010 and 2009 net result after tax (lower net result). This impact reflects the revised accounting for the GMWBL retrospectively, but does not reflect the additional hedging of interest rate risk.
Result of group companies after taxation 3,414 167 Other results after taxation 6 –194 –1,102 Net result 3,220 –935
Transfer to share of associates reserve –76 76 Issuance costs incurred –222 –222 Repayment of non-voting equity securities –5,000 –5,000 Dividend and repayment premium (2) –605 –605 Proceeds from right issue 424 7,074 7,498 Purchases/sales of treasury shares 129 129
258 ING Group Annual Report 2010 5 Parent company annual accounts
Changes in ING Groep N.V. shares held by group companies –10 –9 Closing balance 55,245 46,006 2 OTHER ASSETS
As at 31 December 2010 an amount of EUR 11,524 million (2009: EUR 12,397 million) is expected to be settled after more than one year from the balance sheet date.
The total amount of non-distributable reserves is EUR 7,578 million (2009: EUR 2,940 million).
The Subordinated loans rank subordinated to the Other liabilities in a winding-up of ING.
The interest rate on the Amounts owed to group companies as at 31 December 2010 was 2.850% (2009: 2.850%).
7 OTHER Guarantees As at 31 December 2010, ING Group had no guarantees given on behalf of third parties (2009: nil). ING Group has issued statements of liabilities in connection with Section 403, Book 2 of the Dutch Civil Code and other guarantees for a number of group companies.
THE SUPERVISORY BOARD THE EXECUTIVE BOARD Peter A.F.W. Elverding, chairman Jan H.M. Hommen, CEO and chairman Jeroen van der Veer, vice-chairman Patrick G. Flynn, CFO J.P. (Tineke) Bahlmann J.V. (Koos) Timmermans, CRO Henk W. Breukink Claus Dieter Hoffmann Piet C. Klaver Aman Mehta Joan E. Spero Lodewijk J. de Waal
REPORT ON THE ANNUAL ACCOUNTS We have audited the accompanying annual accounts 2010 of ING Groep N.V., Amsterdam (as set out on pages 88 to 265). The annual accounts include the consolidated annual accounts and the parent company annual accounts. The consolidated annual accounts comprise the consolidated balance sheet as at 31 December 2010, the profit and loss account, statement of comprehensive income, statement of cash flows and statement of changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory notes. The parent company annual accounts comprise the parent company balance sheet as at 31 December 2010, the parent company profit and loss account for the year then ended and the notes, comprising a summary of significant accounting policies and other explanatory notes.
In the course of 2008 and 2009, governments around the world, including the Dutch government, implemented unprecedented measures to provide assistance to financial institutions, in certain cases requiring (indirect) influence on or changes to governance and remuneration practices. In certain cases governments nationalised companies or parts thereof. The measures adopted in the Netherlands include both liquidity provision and capital reinforcement, and a Dutch Credit Guarantee Scheme. The liquidity and capital reinforcement measures expired on 10 October 2009, and the Credit Guarantee Scheme of the Netherlands expired on 31 December 2010. Our participation in these measures has resulted in certain material restrictions on us, including those agreed to with the European Commission (‘EC’) as part of our Restructuring Plan. See ‘Risks Related to the Restructuring Plan – Our agreements with the Dutch State impose certain restrictions regarding the issuance or repurchase of our shares and the compensation of certain senior management positions’, ‘Risks Related to the Restructuring Plan – The implementation of the Restructuring Plan and the divestments anticipated in connection with that plan will significantly alter the size and structure of the Group and involve significant costs and uncertainties that could materially impact the Group’. The Restructuring Plan as well as any potential future transactions with the Dutch State or any other government, if any, or actions by such government regarding ING could adversely impact the position or rights of shareholders, bondholders, customers or creditors and our results, operations, solvency, liquidity and governance.
In addition, and as discussed further below under ‘Risks Related to the Group’s Business, Operations, and Regulatory Environment– Operational risks are inherent in our business’, because unforeseeable and/or catastrophic events can lead to an abrupt interruption of activities, our banking and insurance operations may be subject to losses resulting from such disruptions. Losses can relate to property, financial assets, trading positions, insurance and pension benefits to employees and also to key personnel. If our business continuity plans are not able to be put into action or do not take such events into account, losses may further increase.
• Dodd−Frank establishes a Federal Insurance Office (‘FIO’) within the Department of the Treasury to be headed by a director appointed by the Secretary of the Treasury. While not having a general supervisory or regulatory authority over the business of insurance, the director of this office would perform various functions with respect to insurance (other than health insurance), including participating in the FSOC’s decisions regarding insurers (potentially including the Group and its subsidiaries), to be designated for stricter regulation. The FIO may recommend enhanced regulations to the states. As of this writing, a director for FIO has not been named.
Governments in the Netherlands and abroad have also intervened over the past few years on an unprecedented scale, responding to stresses experienced in the global financial markets. Some of the measures adopted subject us and other institutions for which they were designed to additional restrictions, oversight or costs. For restrictions related to the Core Tier 1 Securities and the IABF, as further described in ‘Our agreements with the Dutch State impose certain restrictions regarding the issuance or repurchase of our shares and the compensation of certain senior management positions’. As a result of having received state aid through the Dutch State Transactions, we were required to submit our Restructuring Plan to the EC in connection with obtaining final approval for the Dutch State Transactions. See ‘Risks Related to the Group – The implementation of the Restructuring Plan and the divestments anticipated in connection with that plan will significantly alter the size and structure of the Group and involve significant costs and uncertainties that could materially impact the Group’.
Because we operate in highly competitive markets, including our home market, we may not be able to increase or maintain our market share, which may have an adverse effect on our results of operations. There is substantial competition in the Netherlands and the other countries in which we do business for the types of insurance, commercial banking, investment banking, asset management and other products and services we provide. Customer loyalty and retention can be influenced by a number of factors, including relative service levels, the prices and attributes of products and services, and actions taken by competitors. If we are not able to match or compete with the products and services offered by our competitors, it could adversely impact our ability to maintain or further increase our market share, which would adversely affect our results of operations. Such competition is most pronounced in our more mature markets of the Netherlands, Belgium, the Rest of Western Europe, the United States, Canada and Australia. In recent years, however, competition in emerging markets, such as Latin America, Asia and Central and Eastern Europe, has also increased as large insurance and banking industry participants from more developed countries have sought to establish themselves in markets which are perceived to offer higher growth potential, and as local institutions have become more sophisticated and competitive and have sought alliances, mergers or strategic relationships with our competitors. The Netherlands and the United States are our largest markets for both our banking and insurance operations. Our main competitors in the banking sector in the Netherlands are ABN AMRO Bank/Fortis and Rabobank. Our main competitors in the insurance sector in the Netherlands are Achmea, ASR and Aegon. Our main competitors in the United States are insurance companies such as Lincoln National, Hartford, Aegon Americas, AXA, Met Life, Prudential, Nationwide and Principal Financial. Increasing competition in these or any of our other markets may significantly impact our results if we are unable to match the products and services offered by our competitors. Over time, certain sectors of the financial services industry have become more concentrated, as institutions involved in a broad range of financial services have been acquired by or merged into other firms or have declared bankruptcy. These developments could result in our competitors gaining greater access to capital and liquidity, expanding their ranges of products and services, or gaining geographic diversity. We may experience pricing pressures as a result of these factors in the event that some of our competitors seek to increase market share by reducing prices. In addition, under the Restructuring Plan we have agreed to certain restrictions imposed by the EC, including with respect to our price leadership in EU banking markets and our ability to make acquisitions of financial institutions and other businesses. See ‘– 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’.
ING Insurance has a significant exposure to the take up of policy options by policyholders. The exposure is greatest for variable annuity business with guarantees deeply in-the-money, policyholder behaviour is difficult to predict and small changes in the proportion of
policyholders taking up an option can have a significant financial impact. Furthermore, assumptions about policyholder behaviour are sometimes made for new insurance business without a substantial amount of experiential data. These assumptions may prove imperfect, which can have a material impact on results.
Because we are continually developing new financial products, we might be faced with claims that could have an adverse effect on our operations and net result if clients’ expectations are not met. When new financial products are brought to the market, communication and marketing aims to present a balanced view of the product (however there is a focus on potential advantages for the customers). Whilst we engage in a due diligence process when we develop products, if the products do not generate the expected profit, or result in a loss, or otherwise do not meet expectations, customers may file claims against us. Such claims could have an adverse effect on our operations and net result.
A significant and sustained increase in inflation has historically also been associated with decreased prices for equity securities and sluggish performance of equity markets generally. A sustained decline in equity markets may (1) result in impairment charges to equity securities that we hold in our investment portfolios and reduced levels of unrealised capital gains available to us which would reduce our net income and negatively impact our solvency position, (2) negatively impact performance, future sales and surrenders of our unit-linked products where underlying investments are often allocated to equity funds, and (3) negatively impact the ability of our asset management subsidiaries to retain and attract assets under management, as well as the value of assets they do manage, which may negatively impact their results of operations.
Our business may be negatively affected by adverse publicity, regulatory actions or litigation with respect to us, other well-known companies or the financial services industry in general. Adverse publicity and damage to our reputation arising from our failure or perceived failure to comply with legal and regulatory requirements, financial reporting irregularities involving other large and well known companies, increasing regulatory and law enforcement scrutiny of ‘know your customer’ anti-money laundering, prohibited transactions with countries subject to sanctions, and bribery or other anti-corruption measures and anti-terrorist-financing procedures and their effectiveness, regulatory investigations of the mutual fund, banking and insurance industries, and litigation that arises from the failure or perceived failure by us to comply with legal, regulatory and compliance requirements, could result in adverse publicity and reputation harm, lead to increased regulatory supervision, affect our ability to attract and retain customers, maintain access to the capital markets, result in cease and desist orders, suits, enforcement actions, fines and civil and criminal penalties, other disciplinary action or have other material adverse effects on us in ways that are not predictable.
Whenever the overall return on the (remaining) Core Tier 1 securities issued to the Dutch State is expected to be lower than 10% p.a., the European Commission may consider the imposition of additional behavioural constraints. As stated in the decision of the European Commission of 12 November 2008 (in State aid N 528/2008 – The Netherlands), the Core Tier 1 state-aid measure must be (re)notified to the European Commission by the Dutch authorities whenever the overall return on the Core Tier 1 Securities is expected to be lower than 10% p.a. Such (re)notification by the Dutch authorities is particularly required (i) when ING abstains from paying dividend on its shares for a period of two consecutive years or for three years in the five years following the date of the aforementioned decision or (ii) if after a transition period of one year following the date of the aforementioned decision, the share price over a period of two consecutive years remains on average below EUR 13. In such cases, the European Commission may require additional behavioural constraints as a condition of the compatibility of the measure.
The remaining Core Tier 1 Securities issued to the Dutch State may be converted into ordinary shares or bearer depositary receipts and dilute existing shareholders. The terms of the Core Tier 1 Securities permit us, on or after 12 November 2011, to convert any or all of the remaining Core Tier 1 Securities (EUR 5 billion per year end 2010) into ordinary shares or bearer depositary receipts on the basis of one core Tier 1 security for 1,335 ordinary shares or bearer depositary receipts. Any such conversion would dilute existing shareholders. If we exercise our conversion right, the Dutch State may opt to require us to redeem the Core Tier 1 Securities on the conversion date at the original issue price of EUR 10 per Core Tier 1 Security, together with the pro rata coupon, if due, accrued to such date.
ASSOCIATE An entity over which the Group has significant influence, generally accompanying a shareholding of between 20% and 50% of the voting rights, and that is not a subsidiary not a joint venture.
COLLATERALISED DEBT OBLIGATION (CDO) A type of asset-backed security which provides investors exposure to the credit risk of a pool of fixed income assets.
CONTINGENT LIABILITIES Possible obligations that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or a present obligation that arises from past events but is not recognised because: • it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or • the amount of the obligation cannot be measured with sufficient reliability.
ECONOMIC CAPITAL The minimum amount of capital that is required to absorb unexpected losses in times of severe stress. Given ING Group’s A target rating, ING calculates economic capital requirements for ING Bank at a 99.95% level of confidence. This confidence level is derived from the historical default frequency of AA-rated companies (probability of default of 1 in 2000 years or 0.05%). For ING Insurance the economic capital is calculated based on a confidence level of 99.5%, which is aligned with the Solvency II.
LEGAL RISK Legal risk is the risk related to: • a failure (or perceived failure) to adhere to applicable laws, regulations and standards; • contractual liabilities or contractual obligations that are defaulted or cannot be enforced as intended, or are enforced in an unexpected or adverse way; and
MONEY MARKET RISK Money market risk arises when ING Group places short term deposits with a counterparty in order to manage excess liquidity, as such, money market deposits tend to be short term in nature (1–7 days is common). In the event of a counterparty default, ING Group may lose the deposit placed. Money market risk is therefore measured simply as the notional value of the deposit, excluding any accrued and unpaid interest or the effect of any impairment.
NON-VOTING EQUITY SECURITIES Core Tier 1 securities issued to the Dutch State in November 2008 for a total consideration of EUR 10 billion. In December 2009 EUR 5 billion was paid back to the Dutch State. This capital injection qualifies as core Tier 1 capital for regulatory purposes.
PREFERENCE SHARE Similar to an ordinary share but carries certain preferential rights. These rights usually concern the guarantee of a fixed (cumulative) return to the shareholder or a guaranteed return on the investment.
VARIANCE-COVARIANCE A model to calculate Value at Risk, assuming that changes in risk factors are (jointly) normally distributed and that the change in portfolio value is linearly dependent on all risk factor changes.
TIER 1 RATIO Reflecting the Tier 1 capital of ING Bank as a percentage of its total risk weighted assets. The minimum set by the Dutch central bank is 4%.