Independent auditor’s report 296 Proposed appropriation of result 297 7 Additional information
Report of the Supervisory Board 58 Corporate governance 61 Report of ING Trust Office 73 Report of ING Continuity Foundation 76 Conformity statement 77 Section 404 Sarbanes-Oxley Act 78 Remuneration report 80 Works councils 88 3ING Group Annual Report 2011
Dear reader, 2011 was a challenging year with tough economic conditions. I am proud of our employees, who were able to put more focus on customer centricity in these difficult circumstances. I am grateful that our customers have remained loyal to ING and have continued to place their trust in us. At the same time, we realise that there is still quite a way to go.
investment management businesses. For the European insurance/investment management businesses, we will continue preparations for a stand-alone future, including the possibility of an IPO. As for the US, we continue to prepare for the base case of an IPO for the US insurance/investment management businesses.
Universal application The financial sector faced many challenges in 2011. These include the many regulatory changes for the banking and insurance sectors. A massive volume of new regulations needs to be implemented within a short period of time. ING recognises and endorses the importance of bolstering the stability of the financial system but we are concerned that there is no universal international application because national interests all too often prevail. Furthermore, it is essential that the impact on the economy and on customers is assessed very carefully when new regulations are introduced. It is important that financial institutions can continue to effectively carry out their fundamental role in the economy.
Against a backdrop of a deteriorating economy and increasing turmoil in the financial markets, we reported good performance in 2011. Thanks to a number of decisive strategic measures, our capital position is strong. We have sold a number of operations to simplify our portfolio. We divested ING Direct USA and the Latin American pension, insurance and investment management operations as imposed by the European Commission. With income under pressure, it is important that we maintain our competitive position by further driving down our costs and adapting to new market conditions.
We have reduced risk and significantly down-sized our position in Southern European government bonds. We have also repaid a substantial portion of the outstanding Dutch state aid. Fully repaying the State remains a top priority.
with us. We use this feedback to refine our processes and to develop products that better serve them. Online social networks are an increasingly important link in communications with our customers.
In 2012, we will make every effort to continue to deliver good performance. The customer remains pivotal to our operations. Our focus is also on continuing to manage and reduce risks and bolstering the capital position.
ING is blessed with good people who are very committed to ING and its customers. Despite the heavy workload and the uncertainty that comes with separation projects, restructuring and divestments, our people have delivered a remarkable performance in 2011. It is an honour to be their leader.
“ING is and remains an important player in the financial sector and we will shoulder the responsibility that comes with this role.”
Building stronger businesses One of ING Bank’s priorities is to generate capital and reach a core Tier 1 ratio of at least 10% by 2013. From 2013, the Bank aims for moderate balance sheet growth in line with GDP growth and a strong focus on deposits generation. ING Insurance/IM will continue to focus on its customers and distributors by providing exemplary products and service, as it restructures in preparation for a stand-alone future.
Strategic priorities Our strategic priorities are to strengthen the company’s financial position, to restructure, to streamline the business portfolio, to repay the Dutch state aid and to build stronger banking and insurance/investment management businesses, all based on sound business ethics and good corporate citizenship.
Restructuring and streamlining on track The restructuring of the Group is on track, with our banking and insurance/investment management businesses operating as stand-alone companies from January 2011. Further progress on separation projects and divestments was made throughout 2011.
Life & IIM administrative expenses / Life & IIM operating income (%)
INSURaNCE aND INvESTMENT MaNaGEMENT ING’s insurance and investment management businesses include its life and non-life insurance, pension and asset management activities.
ING Investment Management provides a broad range of investment strategies and advisory services in Europe, the Americas, Asia/Pacific and the Middle East.
(2) The current composition of the Supervisory Board Committees can be found on the Company’s website (www.ing.com).
Insurance IGD Solvency I ratio (2) 225% 230% n.a. Underlying return on equity based on IFRS-EU equity 8.7% 8.1% 3.3% Employees (FTEs, year-end, adjusted for divestments) 97,043 97,832 96,836 Market capitalisation (in EUR billion) 21 28 26
Key figures 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
(Depositary receipts for) ordinary shares of EUR 0.24 nominal value 3,831.6 3,831.6 (Depositary receipts for) own ordinary shares held by ING Group and its subsidiaries 49.3 51.3 (Depositary receipts for) ordinary shares outstanding in the market 3,782.3 3,780.3
Prices depositary receipts for ordinary shares* Euronext Amsterdam by NYSE Euronext in EUR 2011 2010 2009
InG GroUP A A1 A InG BanK – short term A-1 Prime-1 F1+ – long term A+ Aa3 A+ – financial strength C+ InG InsUrance – short term A-2 Prime-2 F2 – long term A- Baa2 A-
(3) Moody’s rating for ING Group and the long-term rating of ING Bank are under review, while the long-term ING Insurance rating carries a developing outlook.
Whilst Europe seemed to be sliding into recession in 2011, the US economy showed signs of resilience in the second half of the year. Jobs data and unemployment rates gave grounds for market confidence and even some of the housing data was less negative than anticipated. However, the rate of growth of the US economy was still low in 2011.
Reforms in the financial sector are of particular interest to ING as a cross-border financial institution with operations all over Europe and in other parts of the world. Although we actively support many of the new regulatory proposals and are implementing them to a large extent already, we have strong concerns that the ultimate and aggregated consequences of all reforms are still not fully clear. We fear that there are too many uncoordinated additions to regulation; that there is too much focus on short-term measures, and too little a focus on how the financial sector can contribute to achieving sustainable economic growth. This has a number of potential effects which should be taken into serious consideration.
Executive compensation legislation Currently a legislative proposal is under discussion in the Dutch Parliament relating to variable remuneration at financial institutions that have received state support for reasons of financial stability, such as ING. If and when entered into force, the legislation prevents these financial institutions from granting variable remuneration (in cash or otherwise) to their Executive Board members. In addition, the legislation contains certain restrictions with respect to the possibility of increasing the fixed salary of Executive Board members.
SOLVENCY II The most important regulatory issue for the insurance industry in Europe is the continued development by the European Union of the Solvency II capital adequacy framework. Solvency II is intended to be based on economic, risk-based and market-consistent principles whereby capital requirements across Europe are directly dependent on an insurer’s assets and liabilities.
Such a framework should enable insurance companies to play their fundamental role in society for consumers, corporates and the economy. Insurance companies take the risks off the shoulders
Third, as many new rules are still in development, we have some concerns about the actual implementation. There is a clear tendency for national authorities to have different and fragmented approaches to implementation, which is reflected both in the speed of introduction of new measures and the content of measures. This applies to the new capital and liquidity standards in Basel III/CRD IV, where regulators in some countries are implementing ahead of the time frames set by the Basel Committee or are setting additional requirements at the national level. It also holds for crisis management regulation (insolvency laws). While an EU framework is under discussion, several countries are considering or have already announced they will adopt their own specific measures. This is leading to a lot of uncertainty, not only for financial companies, but also for equity investors and bond investors.
EBA STRESS TEST AND CAPITAL EXERCISE In July 2011, the European Banking Authority (EBA) published the results of the second round of stress tests. The first round was conducted in 2010 by the EBA’s predecessor, the Committee of European Banking Supervisors (CEBS). The tests assessed the resilience of European banks to adverse market developments and tested their solvency levels under hypothetical stress events. The test in July 2011 again confirmed the strong capital position of ING Bank which makes us better equipped to absorb adverse shocks.
ING wants to work constructively with its colleagues in the insurance industry to advise EU policy makers and regulators to come up with concrete proposals to meet these objectives. It is important that the framework is built to last and will service society as a whole for a long time to come.
In 2011, ING’s remuneration policies for the Executive Board and Identified Staff were amended in line with the CRD III requirements. The amended policy for the Executive Board was adopted by the annual General Meeting of Shareholders in May 2011. Our remuneration policies continue to have an increased focus on long-term value creation, risk and non-financial performance measures to improve sustainable business practices.
Commission’s decision of 18 November 2009 which approved the state aid received and ING’s restructuring plan. ING requested the Court to annul the decision of the European Commission insofar: • as it states that the agreement between ING and the Dutch
DECISIVE EXECUTION OF DIVESTMENTS We took decisive steps to meet the other restructuring demands which are part of the restructuring plan, which we submitted to the European Commission (EC) in late 2009 in order to obtain retroactive EC approval of state aid received. In June 2011 we reached an agreement to sell ING Direct USA, meeting one of the principal restructuring requirements. In February 2012 the regulatory approval process was concluded and the sale was closed. ING Direct USA was sold for approximately USD 9 billion (consisting of a combination of cash and shares) to Capital One Financial Corporation (Capital One), a leading US-based financial holding company. In connection with this sale, ING reached an agreement with the Dutch State to adjust the structure of the Illiquid Assets Back-up Facility (IABF).
environment. In the short-term the Bank’s priorities are to generate capital and reach a core Tier 1 ratio of at least 10% by 2013. With respect to Basel III our focus is also on the liquidity requirements to be met from 2013. After this transition period, ING Bank aims for moderate balance sheet growth in line with GDP growth and a strong focus on deposits generation. It wants to evolve ING Direct units into full banks and develop selected growth markets.
Our long-term ambition is to be a strong Northern European Bank with a low-risk balance sheet producing a competitive Return on (IFRS-EU) Equity of 10% to 13% through low costs and low risk. ING Bank has a good starting position with a competitive edge, with leading banking positions in its home markets of the Netherlands, Belgium, Luxembourg, Germany and Poland. Furthermore, ING has key positions in other western, central and eastern European countries and Turkey. This is coupled with options outside of Europe which will give ING Bank interesting growth potential in the long-term. It has strong deposit gathering capabilities and a strong funding mix. It has a well-known brand and it uses the Net Promoter Score (NPS) methodology as a tool to increase customer centricity. The Bank is used to operating in lean, competitive markets which has made us leaders in innovative distribution. It has a leading position in internet banking with a ‘direct first, advice when needed’ model and a relationship-driven commercial bank offering competitive products in terms of price, efficiency and effectiveness. Going forward, the Bank will focus on restoring trust and customer centricity, on operational excellence and optimising its balance sheet to meet its strategic goals.
INSURANCE/INVESTMENT MANAGEMENT The main priorities for the insurance and investment management businesses are improving performance and optimising returns and value. In 2011 the businesses made good progress on these priorities. Going forward, ING Insurance/IM will continue to focus on its customers and distributors by providing exemplary products and service, as it restructures in preparation for a stand-alone future.
The operating profit for the insurance/investment management businesses increased compared with the previous year, as measures taken to improve returns continued to gain momentum. An NPS programme used in the insurance/investment management businesses has improved customer service levels in the Benelux, Central and Rest of Europe, and Asia/Pacific as well as in the sold Latin American businesses. For more information on NPS, see ‘Earning Trust’ below.
For further explanation on how ING is building stronger banking and insurance/investment management businesses see the ‘Banking overview’ and ‘Insurance overview’ sections of this Annual Report.
EARNING TRUST Building stronger banking and insurance/investment management businesses is also about earning trust and increasing customer centricity in both banking and insurance/investment management.
We aim to repay the remaining EUR 3 billion principal of capital support to the Dutch State as soon as possible on terms acceptable to all stakeholders. Ideally we would like to complete the state repayment as soon as possible; however, given the current challenging financial environment in the eurozone and increasing regulatory capital requirements we will take a cautious approach and maintain strong capital ratios as we build towards Basel III and satisfy other regulatory requirements.
CONCLUSIONS AND AMBITIONS In a challenging environment ING’s earnings remained resilient in 2011, and our strong funding position enabled us to continue to increase lending to support our customers in these uncertain times. We were also able to make good progress on our strategic priorities, which are strengthening the financial position, restructuring, streamlining the portfolio, repayment of state aid and building stronger banking and insurance/investment management businesses. We continued to build our banking and our insurance businesses based on sound business ethics and good corporate citizenship.
ING will make further efforts to divest businesses to meet the restructuring demands imposed by the European Commission, to simplify the company, to focus on core activities, to further improve our risk profile and to bolster the capital base. It is one of ING’s priorities to repay the remaining EUR 3 billion of capital support to the Dutch State as soon as possible, but as discussed above, ING recognises the need to proceed in a prudent manner in light of the current challenging and changing financial and regulatory environment.
> ING active participant in the public debate on the future of finance > Scores 72 out of 100 in DJSI World > Stepping up financing efforts in renewable energy > Record employee participation in ING Global Challenge
AN INCLUSIVE PLACE TO WORK ING strives to build a healthy relationship with its customers based on trust and integrity and has strongly embedded this objective in its people strategy. We continuously work to create the right environment and strengthen our performance culture based on our Business Principles. To help achieve this, we have set up a number of development and training programmes, one of which is part of the ING International Talent Programme. In particular, we aim to increase the diversity of our workforce by creating an inclusive corporate culture that embraces the differences of our employees.
ING applies its ESR Framework to manage potentially negative socio-environmental risks of the transaction or the client 21ING Group Annual Report 2011
engagement. Policy refinement is a continuous process. By enforcing these standards, ING has been indirectly helping its clients improve their overall risk profile. All ING activities are within the scope of the ESR framework, so management of ESR is embedded in ING’s mainstream financial risk management practice.
Energy use in MWh per FTE (3) 7.9 8.3 Business travel by air in km per FTE 3,041 2,639 Paper consumption in kg per FTE (4) 72.8 51.6
(1) More details including coverage of data can be found in the ING Sustainability Report 2011. We report on energy and paper use and business travel as this contributes to 99% of ING’s direct environmental footprint.
(4) For 2011 we are reporting on the percentage of ‘overall employee engagement scores’. The 2010 score does not reconcile with the score mentioned in the 2010 Annual Report because it was based on one of the four questions of employee engagement: ‘I am proud to work for ING’. The 2010 percentage in this report is based on the ‘overall employee engagement score’. The research was carried out by Kenexa.
(6) The ING company score is the underlying SAM’s corporate sustainability assessment (1–100).
MAINTAINING A WELL-DIVERSIFIED FUNDING BASE Capital Management is also responsible for ING’s strategy on long-term funding and other capital markets transactions. In order to achieve a well-diversified funding base, these transactions can take place in several currencies, jurisdictions, maturities and formats (subordinated, senior unsecured, etc.) with either fixed or floating interest rates. Other transactions include hybrid capital and, if expedient, the issuance of contingent capital.
DEVELOPMENTS IN 2011 In 2011, ING’s capital position improved, driven mainly by strong capital generation at ING Bank. In December 2011, ING successfully completed a liability management transaction (the exchange of existing subordinated debt securities for new senior debt securities or cash at a discount to nominal value), with an average participation of 60%. This transaction proactively addressed uncertainty regarding future call options on capital securities and generated EUR 0.7 billion net profit for ING Group. The net impact of this transaction on ING Group’s consolidated balance sheet was a EUR 2 billion debt decrease.
Distribution and communication channels are becoming more direct and internet-based. This increases the speed and convenience with which our customers can reach us to access their funds and our services. ING is committed to providing this convenience without compromising security or liquidity management standards.
A more detailed section in the annual accounts provides further insight into the risk management practices and exposures for ING Group.
ING highly values its people and realises that they are crucial to the business. Motivated and engaged employees are essential in enhancing customer satisfaction and assuring our success.
In 2011, a number of activities were sold. Group HR facilitated the retention of staff to ensure future viability of the businesses.
The ING Business School merged with the Commercial Banking Academy to form the ING Bank Academy. Its three-pillar focus is on strategic leadership, banking and professional skills, and project-based activities. The Academy increased its emphasis on online programmes – 4,800 online trainings were completed.
dditional inform ation with employees, drafting action plans and improving identified areas on a continuous basis.
To this end, ING – working with people from all parts of the bank – developed 22 standards that set the internal benchmark for becoming a top employer. These standards are based on five dimensions spanning an employee’s career, from joining the bank to their work environment, high-performing teamwork, developing each employee’s talent and becoming proud ING ambassadors. The 22 standards are global but will be implemented locally. Every country faces different challenges in becoming a top employer and has different priorities. Following a number of workshops, every country has created their own local action plan based on their strengths, challenges and priorities. Progress will be measured both globally and locally.
At Insurance/IM, the HR functions will continue to assist the businesses in preparing for the future. Focal areas for EurAsia include enhancing accountability, talent and engagement, whereas in the US, HR will help the organisation focus on full separation from the Group through a base case IPO, staff retention and talent management.
ManageMent Board Banking on 31 December 2011 28 ING Group Annual Report 2011
Retail Banking 10,903 11,402 Commercial Banking 5,023 5,349 Corporate Line banking –72 65
FinanCiaL deVeLoPMentS Underlying result before tax (excluding the impact of divestments and special items) dropped 17.4% to EUR 4,740 million from EUR 5,738 million in 2010, mainly reflecting the impact of the sovereign debt crisis in Europe. The decline was mainly due to EUR 588 million of impairments on Greek government bonds and EUR 181 million of losses on selective de-risking at ING Direct, while the previous year included EUR 275 million of capital gains on the sale of two Asian equity stakes. Excluding these items, underlying result before tax rose slightly by 0.8%.
ING Direct is active in Austria, France, Germany, Italy, Spain and the UK
In 2011, ING Group proved its ability to generate capital by making a net profit of EUR 5.8 billion. Capital generation is needed to repay the Dutch State and to improve capital ratios while making selective investments to improve services to our clients.
For more information see the chapters ‘Capital management’ and ‘Financial and regulatory environment’.
Retail Banking Netherlands, for example, is taking steps to further cut costs and improve efficiency through operational excellence. Unfortunately this leads to substantial job cuts. We will effectuate these with the utmost care. The strategic measures are focused on further process improvements by reducing complexity and streamlining workflow.
CUStoMer CentriCitY Customers’ needs are constantly evolving, so it is crucial to keep close to them, anticipate their every requirement and provide new products and services.
Mobile banking and social media initiatives are on the increase. In several countries mobile banking has been introduced, including in the Netherlands where we launched a mobile banking app for private customers. ING uses social media like Facebook, Twitter and blogs to get closer to customers, to run special promotions, and to gather feedback to improve existing products and services and develop new ones.
As an employer, we play an important role in driving engagement. However, we are operating in a very challenging environment and the financial sector as a whole, and ING in particular, is going through many changes. Staff therefore must handle a lot of concerns and uncertainties. It is of the utmost importance to us that our employees feel engaged and motivated, especially in these challenging times.
Several initiatives were taken in 2011 to enhance employee engagement, stimulate personal development and manage talent. ING Bank Slaski, for instance, developed an online programme to help staff map out their career opportunities. The programme is linked in with succession planning, the recruitment process and performance appraisals. As a result ING Bank Slaski has received Top Employer awards and continues to enjoy a strong standing in the Polish labour market.
Across ING Bank as a whole, the ING Commercial Bank Academy and ING Business School provide a coherent global learning and development strategy for staff around the world.
In the short-term the Bank’s priorities are to manage through the crisis, limiting balance sheet and risk-weighted asset growth and executing on-balance sheet optimisation. We have strong funding capabilities and attractive home market positions in Northern Europe.
Underlying operating expenses were up 3.4% to EUR 6,768 million, mainly due to increased staff costs, higher marketing spending, the introduction of new products and investments in the branch network in Spain. The underlying cost/income ratio increased to 62.1% from 57.4% in 2010.
Total underlying income 10,903 11,402 Underlying operating expenses 6,768 6,548 Underlying additions to loan loss provisions 1,191 1,253 Underlying result before tax 2,944 3,601 Underlying cost/income ratio 62.1% 57.4% Underlying cost/income ratio (excl. market impacts) 58.8% 56.9% Net production client balances (EUR billion) 51 36 Underlying risk costs in bp of average RWA 67 70 Risk-weighted assets (year-end, EUR billion, adjusted for divestments) 179 176 Underlying Return on Equity based on 10% core Tier 1** 12.0% 14.8%
Retail Netherlands 1,261 1,374 Retail Belgium 454 543 ING Direct 999 1,450 Retail Central Europe 158 154 Retail Asia 72 80
Operating expenses rose 2.2% to EUR 2,428 million in 2011, mainly as a consequence of higher pension costs following updated mortality tables and an impairment on software in WestlandUtrecht Bank. The addition to loan loss provisions decreased 18.4% to EUR 457 million, or 93 basis points of average risk-weighted assets, mainly due to lower additions for specific files in the Mid-Corporate and SME segments, although the level started to increase again in the last quarter of 2011.
Another initiative involved Dutch Board members – together with relationship managers of Business Banking and Private Banking – visiting various customers around the country. The objective was to enhance customer relationships and listen to their feedback on aspects of their relationship with ING.
In 2011, WUB continued with its commercial campaign and roll-out of its savings account, SpaarOnline (save online).
Operating expenses increased 6.5% on 2010 to EUR 1,432 million, mainly reflecting higher staff expenses, increased contribution to the deposit guarantee scheme and higher marketing expenses. The addition to the provision for loan losses declined 9.4%, to EUR 145 million, or 77 basis points of average risk-weighted assets, mainly attributable to releases in the Mid-Corporate segment.
Online sales as a percentage of total sales continued to grow. Nearly 157,000 simple online products (excluding securities brokerage) were sold, considerably more than the 119,482 sold in 2010, reflecting ING’s objective of meeting customers’ needs.
In December, Retail BE (Mid-Corporates/Institutional Banking) successfully participated in a tender for banking services, and acquired the Flemish Government as a client.
As with other banking business units, Retail BE’s ambition is to become the customer’s preferred bank, through operational excellence, customer centricity and being a top employer.
An example of operational excellence is the improvement in the customer information flow by directly linking the customer e-IDs to the ING database.
At Home’Bank, Retail BE’s online bank, existing functions were improved and new ones added, such as an account overview page, an extended history and search function, and a payment basket. Over 1.2 million people use Home’Bank.
To improve online banking security, Retail BE continued the roll-out of the ING Card Reader in Belgium. In 2011, almost 800,000 card readers were sent to customers, bringing the total to more than one million since it was launched in September 2010.
Retail BE also launched two insurance products, ING Lion Assistance (travel and breakdown insurance) and ING Lion Travel Stop (travel cancellation insurance). Customers can buy these products online or at a branch, in a process that takes as little as three minutes.
Private Banking Retail BE provides private banking services in Belgium and Luxembourg to wealthy individuals. Private Banking has a top three position in Belgium. The unit’s assets under management in Belgium amounted to EUR 15.5 billion and in Luxembourg to EUR 6.9 billion at year-end, totalling EUR 22.4 billion. Private Banking contributed favourably to Retail BE’s overall results, despite the adverse economic climate.
ING Luxembourg adopted the NPS method for measuring customer loyalty in late 2010 and used it in several customer interaction areas in 2011.
ING DIRECT FINANCIAL DEVELOPMENTS The underlying result before tax of ING Direct declined 31.1% to EUR 999 million compared to EUR 1,450 million in 2010. The decrease was due to EUR 326 million higher impairments on debt securities (including EUR 346 million of impairments on Greek government bonds) and EUR 181 million of losses from the selective sale of mainly unsecured and ABS exposures in the investment portfolio. Underlying income decreased to EUR 3,423 million from EUR 3,782 million in 2010, fully due to the above mentioned impairments and losses. The interest result increased by 2.4%, or EUR 91 million, driven by higher volumes while the interest margin remained stable at 1.24%. The interest result in the US continued to benefit from the IFRS treatment on previously impaired bonds, which had a positive impact of EUR 168 million in 2011, down from EUR 230 million in 2010.
The total net production in mortgages was EUR 12.4 billion while funds entrusted reported a net inflow of EUR 13.7 billion.
Operating expenses increased by 4.0%, reflecting higher marketing expenses (particularly in Germany, Italy, France and Spain) and higher costs to set up a limited number of branches in Spain and further roll out of payment accounts in France, Italy and Canada. The addition to loan loss provisions increased to EUR 462 million, or 61 basis points of average risk-weighted assets, from EUR 446 million in 2010 (or 59 basis points of average risk-weighted assets). The increase was driven by the lower anticipated recovery rates in the US, partially offset by lower risk costs in Germany.
BUSINESS DEVELOPMENTS ING Direct offers a range of 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 leading market positions in most markets in which it operates – Canada, Spain, Australia, France, Italy, Germany, Austria and the UK.
Customer centricity ING Direct continued to search for ways it can best meet customers’ needs. It encourages customer feedback and uses it to update and improve its service. In all its markets, ING Direct is either first or second in terms of customer satisfaction as measured by the Net Promoter Score (NPS).
Overall volumes in Poland remained relatively stable, while margins improved, particularly in savings and current accounts. In Turkey, a variable savings product was launched which led to a slight decrease in margin and an increase in volumes. In Romania, both volumes and margins remained largely stable. Net production of lending in Central Europe was EUR 3.5 billion, while the net inflow of funds entrusted was EUR 2.2 billion.
Operational excellence During the year, many initiatives were taken to improve operational effectiveness including implementing business process management, knowledge sharing across countries and building up direct distribution capacities by enhancing websites.
Operating expenses were down 3.9% to EUR 173 million, but increased adjusted for currency effects, mainly as a result of business expansion in India.
BUSINESS DEVELOPMENTS Retail Banking is well positioned in the important Asian markets of India, China and Thailand. As with all other banking business units, Retail Asia’s core focus is to become the customer’s preferred bank by focusing on operational excellence, customer centricity and being a top employer.
TMB also opened more branches as part of its strategy to improve channel accessibility. It plans to relocate and open more than 50 branches. The bank also strengthened its electronic banking channel by enabling existing clients to open savings and term deposit accounts online.
On the product front, TMB introduced a ‘No Fixed Account’ product, the first savings account in Thailand with no minimum balance and no withdrawal or transfer fees. In its first month, 160,000 accounts were opened. A ‘no-slip’ service was introduced to make deposit and withdrawal transactions easier for the customer.
ING remains a key bank in the Benelux, helping customers navigate through the adverse economic climate. Delivering superior customer service is a key ambition between now and 2015. ING is committed to offering the right products and services to fit its customers’ needs at every stage of their financial life cycles, and it will continue to develop its ‘direct if possible, advice when needed’ business model.
In 2012, ING Direct will continue to work towards becoming a complete retail bank. It will concentrate on using its low cost, simple and transparent retail banking model to win new clients, while offering a superior customer service. Its ambition is to continue its leadership in the field of internet and mobile banking. ING Direct will play a central role in the Bank’s balance sheet optimisation efforts by contributing to deposit growth and allowing for portfolio transfers through balance sheet integration.
Total underlying income 5,023 5,349 Underlying operating expenses 2,527 2,643 Underlying additions to loan loss provisions 476 489 Underlying result before tax 2,020 2,217 Underlying cost/income ratio 50.3% 49.4% Underlying cost/income ratio (excl. market impacts) 44.5% 42.2% Net production client balances (EUR billion) –6 12 Underlying risk costs in bp of average RWA 35 33 Risk-weighted assets (year-end, EUR billion, adjusted for divestments) 145 140 Underlying Return on Equity based on 10% core Tier 1** 11.2% 11.6%
Commercial Banking Commercial Banking continued grow our German franchise, focusing on multinational companies that benefit from our international network, in particular our franchise in Central and Eastern Europe.
Structured Finance (SF) maintained its client-centric approach, receiving many external awards. These included The American Power Deal of the Year from Project Finance International for the USD 800 million financing for the CPV Sentinel gas-fired power plant, and Asia Pacific Petrochemical Deal of the Year Award from Euromoney for the USD 1.6 billion financing for Jurong Aromatics Corporation. In commodity finance, SF was assessed as number 1 in the FImetrix Client Satisfaction Index.
We are building on our strengths in Industry Lending, covering both Structured Finance and Real Estate Finance, franchises with recognised origination, structuring and risk management skills in selected industries on a global scale.
Dutch supermarket C1000. This transaction strengthened ING’s mergers and acquisition (M&A) track record and demonstrated our excellent financing capabilities, expertise in tailor-made subordinated debt and equity-like products, and strong relationships with Jumbo and other stakeholders.
• Four-year appointment by the Flemish government in Belgium, to cover all incoming and outgoing payments, as well as short-term placements and lending by the Flemish Government. ING secured the mandate from previous incumbent Belgian banks. The deal is expected to incorporate a payments volume of EUR 90 billion per year, 10,000,000 transactions per year, 600 accounts and 200,000 salary payments per month.
gENErAL LENDINg AND PCM gENErAL LENDINg Lending is a core element and anchor product in building and supporting client relationships in our target markets creating a position from which we are able to provide other services.
Examples of this include the sale of the ING Car Lease business to BMW Group in September for EUR 696 million and the divestment of ING Real Estate Investment Management for EUR 770 million (approximately USD 1.0 billion), the majority of which was sold to CBRE Group, Inc. In addition, we took steps to realign our General Leasing business with our core Commercial Banking franchises, which will result in ING’s exit from non-core activities in several countries outside our home markets. Meanwhile, we have continued to narrow our legacy Real Estate development and investment portfolio, reducing our residual exposure.
• US Private Placements: 1st by deal volume Benelux and 3rd by deal volume in Continental Europe. ING was involved as Bookrunner in USD 1.8 billion from a total value of USD 3.6 billion in Benelux US Private Placements transactions.
Greenwich Associates client research confirms PCM’s strong position in the Netherlands and that ING is the most often used cash manager for Dutch companies in Central and Eastern Europe while being equal first in Belgium for services in Central and Eastern Europe. In the Netherlands, PCM is market leader in the domestic factoring market.
Within Financial Markets, a Global Equities platform was created, combining our Cash Equities, Equity Derivatives and Global Securities Finance franchises.
The Energy, Transport & Infrastructure Group specialises in capital-intensive industry sectors such as oil and gas, mining, offshore services, shipping, power-utilities and infrastructure. There is increasing demand for project finance in these sectors, notably for investments in renewable energy, offshore oil production and infrastructure through public-private partnerships.
FM faced further challenges during the year, including the Q4 implementation of Basel 2.5, which had a large impact on Market Risk Capital usage as the new elements of Stressed Value-at-Risk and Incremental Risk Charges were included for the first time.
These anticipated developments have led to a reassessment of individual business lines and activities, particularly with regard to their capital requirements and subsequent return on equity. We will further de-risk our platform in line with other market participants.
• Develop Germany as a core market franchise and make further improvements to our Transaction Services activities.
• Continue to manage our capital prudently and allocate it to core markets and high return businesses with attractive risk/reward characteristics.
Market and other impacts –1,547 –2,569 Underlying result before tax 314 –1,072
New sales 4,200 4,169 Administrative expenses/operating income 39.8% 43.7% Life general account assets (in EUR billion) 175 162 Administrative expenses (total) 3,428 3,443 Underlying Return on equity based on IFRS-EU Equity 1.4% –5.1% Employees (FTEs, year-end, adjusted for divestments) 26,463 27,755 * Underlying numbers are derived from IFRS-EU, excluding the impact of divestments and special items.
Central and Rest of Europe –198 253 United States (excl. US Closed Block VA) 618 308 US Closed Block VA –1,273 –2,075 Asia/Pacific 588 517
ING Investment Management 204 150 Corporate Line insurance –364 –1,000 total 314 –1,072 operating result** in EUR million 2011 2010
Central and Rest of Europe 207 292 United States (excl. US Closed Block VA) 661 559 US Closed Block VA 19 49 Asia/Pacific 554 473 ING Investment Management 193 143 Corporate Line insurance –402 –633 ** Operating result is underlying result before tax excluding gains/losses and impairments, revaluations, market and other impacts.
Lard Friese (until 3 November 2011) responsible for Insurance Europe and Asia
The operating result of Insurance/IM increased to EUR 2,206 million from EUR 1,560 million in 2010, mostly driven by higher investment margins and higher fees and premium-based revenues in the life and the investment management business. The investment spread on life general account assets increased 16 basis points to 106 basis points in 2011 following cautious re-risking of the investment portfolios in the first half of 2011, which was partially offset by de-risking in the second half. The increase in operating income was partly offset by higher expenses. Operating results improved in nearly every business line, with the exception of Central and Rest of Europe given the harsh economic conditions and in US Closed Block VA.
BUSIneSS deVeLoPMentS The restructuring of ING Group is on track, following the operational separation of Insurance/IM from Banking at the end of 2010. In 2011, Insurance/IM focused on preparing the businesses for a stand-alone future.
In 2011, we prepared for two IPOs: one for the US Insurance and IM activities and one for the European and Asian Insurance and IM businesses. On 12 January 2012, ING announced an update on the restructuring of the insurance and investment management businesses. Due to the uncertain economic outlook and volatile markets, especially in Europe, ING has decided to review other strategic options for its Asian insurance and investment management businesses. For the European businesses, ING will continue preparations for a stand-alone future, including the possibility of an IPO. ING will also continue to prepare for the base case IPO for the US insurance/investment management businesses.
The Management Board Insurance EurAsia consists of the following members: Jan Hommen, Patrick Flynn, Wilfred Nagel, Lard Friese, Matthew Rider and Gilbert Van Hassel.
SoLVenCY II deVeLoPMentS Throughout 2011, ING Insurance/IM took an active role in discussions with industry, regulators and institutions on the ongoing development of a new European solvency framework (Solvency II). Notwithstanding the likely delay in implementation until 1 January 2014, internal preparations within the head office and the business units to become Solvency II compliant continue and ING Insurance/ IM believes it can meet the relevant Solvency II deadlines.
tIed agenCY oVerHaUL PrograMMe ING Insurance offers its products and services – often in combination with professional advice – through an extensive network of internal and external sales forces. Its customers are serviced through a variety of channels: tied agent sales forces, independent financial advisers, local and international banks with which commercial cooperation agreements have been concluded (bancassurance), as well as direct marketing channels. ING Insurance has started a Tied Agency Overhaul programme to optimise the current tied agency model by concentrating on the quality, rather than the quantity of agents. The programme was launched in Spain in 2010 and was rolled out in Romania, Hungary, South Korea and Poland in 2011.
* ING completed the divestment of Insurance Latin America on 29 December 2011. ING retains a 36% shareholding in leading Brazilian insurer SulAmérica SA
For Insurance Central and Rest of Europe, business activity continued to be affected by tax and regulatory changes in the major pensions markets such as Hungary and Poland. However, the business in most markets successfully focused on expanding life insurance sales in the region.
Life administrative expenses increased 4.4% as a result of releases of incidental expenses in the previous year, incidental expenses in 2011 and the impact of organisational changes which were only partially offset by recurring cost savings.
New sales (APE) increased by 6.8% in 2011, mainly driven by higher corporate pension sales and renewals.
In non-life insurance, NN launched a new general insurance package (Zekerheidspakket) that covers all general risks and offers discounts for self-employed people and small enterprises. A new car insurance policy with a fast application process was introduced on www.ing.nl, the retail site of ING Bank in the Netherlands. NN’s access to ING Bank’s direct channels such as the internet is part of the commercial agreement between NN and ING Bank.
NN Retail won best-in-class awards for its legal expenses insurance product and its home insurance product from the Consumentenbond, the Netherlands’ primary consumer advocate organisation. NN was also awarded best pension insurer by Dutch management magazine ManagementTeam.
CONCLUSIONS AND AMBITIONS Insurance Benelux will continue to grow the business in all three countries by increasing efficiency, containing expenses, focusing on customer needs, standardising products and operations and pursuing exemplary service standards. The first stage of the transformation of NN over the past two years has succeeded in significantly reducing costs and increasing efficiency. The next stage is under way after the business revealed a new strategy late in 2011. The strategy has a sharper focus on producing a flexible, transparent and low-cost product range, available through the customer’s channel of choice. Investment in new and improved systems is also a core pillar of the strategy.
The operating result declined 29.3% to EUR 207 million from EUR 292 million in 2010. The decline was mainly driven by lower fees reflecting regulatory changes in the region’s major pension markets (Poland, Hungary) and higher administrative expenses, mainly related to project costs.
The technical margin increased by 13.4% due to the reallocation of health insurance premiums in Greece from fees and premiumbased revenues. Life administrative expenses rose by 17.7% compared with 2010, mainly due to higher project-related costs such as Solvency II and building a regional IT organisation. The increase also reflects non-recurring restructuring expenses in Spain, Hungary and Greece. New sales (APE) increased 1.3% compared to 2010. Life sales 49ING Group Annual Report 2011
A comprehensive analysis of underwriting processes was conducted on a regional level. It has led to the implementation of improvements to standardise and simplify processes, such as streamlining medical tests and improved medical application forms.
FINANCIAL DEVELOPMENTS The underlying result before tax of Insurance US more than doubled to EUR 618 million from EUR 308 million in 2010. The increase was driven by higher operating results, lower impairments, and favourable DAC unlocking, partially offset by lower revaluations and a non-recurring increase in reserves related to the company’s use of the US Social Security Death Master File to identify potential claims.
New sales (APE) in full service retirement plans and individual life business generated strong growth in 2011. Overall APE declined 5.9%, reflecting the de-emphasis of Stable Value and Fixed Annuities, as Insurance US maintained its disciplined pricing and risk standards.
Retirement ING is the third largest provider of defined contribution (DC) retirement plans in the US based on assets under management and administration, and the second largest based on the number of retirement plans administered and participants served. In a Cogent research survey, 84% of employer plan clients surveyed rated ING favourably, more than any other of the 36 providers in the survey.
During 2011, ING added several significant new retirement plan clients and retained others, including numerous states and municipalities, well-known colleges and universities, and household-name companies.
Making retirement easier According to a study by the ING Retirement Research Institute in 2011, a majority of Americans, while highly valuing the opportunity to save for retirement via the workplace, find retirement planning confusing and difficult to understand, and are seeking assistance.
ING is dedicated to helping individuals make beneficial retirement decisions and encouraging them to take ownership of their retirement funding needs. It does this by providing advice, guidance and planning services.
In 2011, a number of initiatives were introduced to make retirement saving easier.
ING continues to see growth opportunities in both the term and universal life markets. In September, a new indexed universal life product was launched, which has been well received by the market and is showing strong growth opportunities.
CONCLUSIONS AND AMBITIONS With approximately 12 million account and policyholders, Insurance US has leading franchises in retirement, life insurance and investment management, and remains strongly committed to its strategy to become the premier franchise in our industry in the US. The business will remain focused on customers’ needs and providing retirement, life insurance and investment products and solutions through a broad set of distribution channels.
Fees and premium-based revenues increased by 8.5%, driven by growth in premium income, particularly in Japan’s COLI business as well as in Hong Kong and KB Life in South Korea. The inclusion of the Malaysian Employee Benefits business (modelled as of the first quarter of 2011), contributed an additional EUR 31 million, with a corresponding reduction in non-modelled income.
ING is well positioned to capture the increased need for insurance. IAP is a major foreign life insurer in Asia with nine insurance companies in seven markets: China, Hong Kong, South Korea, Japan, Malaysia, India and Thailand. In the region, IAP offers a wide range of insurance products varying from traditional whole life, universal life, endowment, unit-linked, Corporate Owned Life Insurance (Japan) as well as employee and health benefit products. IAP’s distribution is mainly through tied agency channels, although bancassurance is rapidly becoming more important as well as direct channels and independent agents.
Customer-focused product innovation IAP continued to focus on product innovations to capture new market opportunities and to differentiate its product line to meet changing customer demands. For example, in Hong Kong, a life insurance product tailored for high net-worth customers was successfully launched. Another example is, in India, where a new child life insurance plan was developed for parents who need to plan for their children’s education or marriage.
The underlying result before tax increased 36.0% to EUR 204 million and the operating result increased 34.2% to EUR 193 million. Both increases were largely attributable to higher fee income in line with the increase in assets managed.
Fees and premium-based revenues increased 5.1% to EUR 868 million from EUR 826 million in 2010 supported by an increase in assets managed. The annualised fourth quarter ratio of fees to average AuM decreased to 27 basis points compared with the previous year at 29 basis points partly due to a change in the underlying asset mix. This ratio is calculated using an average of opening and closing AuM balances for the period.
IMPROVING PERFORMANCE Despite the market circumstances, ING IM’s performance has improved in all client categories: general account (ING Insurance), affiliated distribution (business sold via ING channels) and thirdparty retail and institutional.
FIXED INCOME STRATEGIES Emerging Market Debt (EMD) continued to be one of the main focus points of ING IM’s investment strategies. In 2011, ING IM strengthened its presence in the EMD asset class with the launch of the ING (L) Renta Emerging Markets Corporate Debt fund. This fund gives investors exposure to corporate debt investment opportunities in emerging countries.
In the Netherlands, ING IM broadened its core fixed income fund range with the launch of the ING Covered Bond Basis fund in April. Since its launch, the fund has recorded EUR 1.4 billion of inflows.
CONCLUSIONS AND AMBITIONS In 2012, ING IM will continue to focus on delivering best-in-class performance and services for its customers.
GENERAL SUPERVISORY BOARD MEETINGS The Supervisory Board met nine times in 2011 of which eight meetings were regular meetings. On average, 94% of the Supervisory Board members were present at the scheduled meetings. Apart from closely monitoring the financial results in 2011, the Supervisory Board also frequently discussed the strategy, the progress in executing the restructuring plan of the European Commission (EC) including the preparation of the initial public offerings (IPOs) for Insurance EurAsia and Insurance US as well as the repayment to the Dutch State. In the second half of 2011 the sovereign debt crisis in the eurozone and the impact on the banking and insurance businesses were also important topics on the agenda.
During the annual Supervisory Board Knowledge Day in January 2011 presentations were given on regulatory developments in Europe and the US, the implementation of Basel III and the measures ING has taken to improve its duty of care towards customers. Furthermore, several educational sessions on specific topics were organised for the Supervisory Board during the year.
In May, the Supervisory Board discussed the impact on employees, customers and the public in general as a result of the public debate about the decision of the Executive Board not to accept variable remuneration for 2010 and decided to address this issue at the General Meeting. The Supervisory Board was updated on the 58 ING Group Annual Report 2011
In September, the Supervisory Board visited the insurance and banking businesses in Madrid, Spain. During this visit the Supervisory Board was informed extensively on the various operations of ING in Spain and met with clients and national authorities. Furthermore, the Supervisory Board approved the first phase in the legal restructuring of Insurance in preparation of the envisaged IPOs.
Given the new regulatory and changing economic environment, a first framework for an adjusted business plan for ING Bank and ING Insurance/IM in the Netherlands was presented to the Supervisory Board in September followed by a final business plan for ING Bank and ING Insurance/IM in November. The Supervisory Board approved both business plans in its November meeting. In December, the Supervisory Board met to discuss the first outline of the Medium Term Plan for 2012–2015 as well as possible changes to the strategy including alternatives for an IPO of EurAsia.
Following the annual General Meeting, Jeroen van der Veer succeeded Peter Elverding as chairman of the Supervisory Board and became chairman of the Nomination Committee. Peter Elverding became chairman of the Remuneration Committee and was appointed vice-chairman. Joost Kuiper joined the Audit Committee, taking over the chair from Jeroen van der Veer, who had temporarily chaired this committee, and became a member of the Risk Committee. Luc Vandewalle joined the Audit Committee and the Risk Committee as well. Sjoerd van Keulen became a member of the Risk Committee and the Remuneration Committee. Piet Klaver succeeded Peter Elverding as chairman of the Risk Committee and Henk Breukink succeeded Peter Elverding as chairman of the Corporate Governance Committee. Please see page 8 for the current composition of the Supervisory Board Committees.
Information on the members of the Supervisory Board is provided on pages 70–71.
Remuneration Committee meetings In 2011, the Remuneration Committee met seven times, with twice one absentee. In February, the 2010 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 Committee advised positively on the 2010 variable remuneration pools and reviewed the individual compensation proposals for the Board members and identified staff. After the publication of the variable remuneration of the Executive Board in the 2010 Annual Report, the Committee discussed the public reaction on the Executive Board variable remuneration at various occasions. The proposed 2011 performance objectives for the CEO were decided upon as well. The impact of the new EU Capital Requirements Directive III and the regulation on controlled remuneration policy was discussed throughout the year, resulting in positive advice on the proposed remuneration frameworks and implementation plans for ING Group, ING Bank and Insurance EurAsia in September, taking into account that some issues are still under discussion.
In addition, several legislative proposals with corporate governance implications were under discussion, or were adopted, in 2011 by the Lower House of the Dutch Parliament, or were under discussion in the Upper House of the Dutch Parliament. These proposals concern, among other things, the bill on revision and claw back of executive bonuses and profit-sharing of directors (wetsvoorstel aanpassing en terugvordering van bonussen en winstdelingen van bestuurders en dagelijks beleidsbepalers), the bill on the limitation of liability of supervisors of financial markets and the rules on executive bonuses of directors of financial institutions receiving financial assistance by the Dutch government (wetsvoorstel in verband met het invoeren van een aansprakelijkheidsbeperking voor de toezichthouders op de financiële markten en het opnemen van regels met betrekking tot de beloning van bestuurders van financiële ondernemingen die staatssteun genieten) and the bill on corporate investigation proceedings (wetsvoorstel in verband met de aanpassing van het recht van enquête).
TRANSFER OF SHARES AND DEPOSITARY RECEIPTS AND TRANSFER RESTRICTIONS Shares are transferred by means of a deed of transfer between the transferor and the transferee. To become effective, ING Group has to acknowledge the transfer, unless ING Group itself is a party to the transfer. The Articles of Association do not restrict the transfer of ordinary shares, whereas the transfer of cumulative preference
CAPITAL AND SHARES CAPITAL STRUCTURE, SHARES The authorised capital of ING Group consists of ordinary shares and cumulative preference shares. Currently, only ordinary shares are issued, while a call option to acquire cumulative preference shares has been granted to ING Continuity Foundation (Stichting Continuïteit ING). The acquisition of cumulative preference shares pursuant to the call option is subject to the restriction that, immediately after the issue of cumulative preference shares, the total amount of cumulative preference shares outstanding may not exceed one-third of the total issued share capital of ING Group (see page 10). The purpose of the call option is to protect the independence, the continuity and the identity of ING Group against influences which are contrary to the interests of ING Group, its enterprise and the enterprises of its subsidiaries and all stakeholders (including, but not limited to, hostile takeovers). The ordinary shares are not used for protective purposes. The ordinary shares, which are all registered shares, are not listed on a stock exchange.
General Meeting, ING Group communicates with its shareholders and the investment community through earnings announcements, presentations, and meetings with analysts or investors.
ING Group strives to maintain an open and constructive dialogue with current and potential investors, and with industry analysts. The scope of such bilateral communication may range from single investor queries via e-mail, to more elaborate discussions with analysts or institutional investors that take place via telephone or face-to-face. These meetings are not announced in advance, nor can they be followed by webcast or any other means. ING Group’s Investor Relations department is the main point of contact for these communications. However, Executive Board members also participate in investor meetings. Information provided during such occasions is always limited to that which is already in the public domain, and any bilateral contacts do not take place shortly before publication of the regular quarterly results releases. If bilateral communication between ING Group and investors is organised and/or facilitated through a broker, an analyst or specialist salesperson representing the broker may be present in the meeting. ING Group does not provide brokers with any form of compensation pertaining to such meeting organisation and/or facilitation services.
DIALOGUE WITH SHAREHOLDERS AND HOLDERS OF DEPOSITARY RECEIPTS In 2011, shareholders and holders of depositary receipts were allowed to ask questions about items on the agenda for the annual General Meeting and they will similarly be allowed to do so in 2012. Shareholders and holders of depositary receipts can visit the website of ING Group (www.ing.com) to submit their questions.
ING Group presented at seven industry conferences throughout the course of the year. In total, there were 364 meetings (including conference calls) with institutional investors and/or analysts. Combined, conference presentations and face-to-face meetings with investors and/or analysts took place in 32 different cities across the globe. In 2011, ING Group did not host any Investor Days.
Executive Board and members of the Supervisory Board, subject to a binding nomination or a proposal of the Supervisory Board; • the adoption of the annual accounts; • the declaration of dividends, subject to the power of the
ING Trust Office has made it easier for votes to be cast this way by putting arrangements in place for proxy voting and e-voting.
dditional inform ation so competition-sensitive that the disclosure could damage the competitive position of ING Group.
Significant conflicting interests are considered to be absent and are not reported if a member of the Executive Board obtains financial products and services, other than loans, which are provided by ING Group subsidiaries in the ordinary course of their business on terms that apply to all employees. In connection with the foregoing, ‘loans’ does not include financial products in which the granting of credit is of a subordinated nature, e.g. credit cards and overdrafts in current account, because of a lack of materiality (for an overview of loans granted to members of the Executive Board see page 84).
REMUNERATION AND SHARE OWNERSHIP Members of the Executive Board are permitted to hold shares and depositary receipts for shares in the share capital of ING Group for long-term investment purposes. Transactions by members of the Executive Board in these shares and these depositary receipts for shares are subject to the ING regulations for insiders. These regulations are available on the website of ING Group (www.ing.com). Details of the remuneration of members of the Executive Board, including shares and/or option rights granted to them, together with additional information thereto, are provided in the Remuneration report, starting on page 80.
The recommendation right of the Dutch State is subject to applicable law and to corporate governance practices, generally accepted under stock exchange listing regimes applicable to ING Group and continues as long as the Dutch State holds at least 250 million Securities, or as long as the IABF continues (whichever occurs last). Should the holding of the Dutch State decrease below 250 million Securities and the IABF have expired, the State Nominees will remain in office and complete their term of appointment.
Supervisory Board member; • upon appointment the composition of the Supervisory Board would not be appropriate and/or not be in accordance with the Supervisory Board Profile; • appointment would be incompatible with any provision of the Articles of Association, the Supervisory Board Charter, any principle or best-practice provision of the Corporate Governance Code as applied by ING Group and/or any other generally accepted corporate governance practice or requirement which is applicable to ING Group as an internationally listed company; • the relevant candidate has a structural conflict of interest with ING Group; and
TRANSACTIONS INVOLVING ACTUAL OR POTENTIAL CONFLICTS OF INTEREST In accordance with the Corporate Governance Code, transactions with members of the Supervisory Board in which there are significant conflicting interests will be disclosed in the Annual Report. In deviation of the Corporate Governance Code however, this does not apply if (i) disclosure would be against the law; (ii) the confidential, share-price sensitive or competition-sensitive character of the transaction prevents disclosure; and/or (iii) the information is so competition-sensitive that disclosure could damage the competitive position of ING Group.
INDEPENDENCE Annually, the members of the Supervisory Board are requested to assess whether the criteria of dependence set out in the Corporate Governance Code do not apply to them and to confirm this in writing. On the basis of these criteria, all members of the Supervisory Board, with the exception of Luc Vandewalle, are to be regarded as independent on 31 December 2011. Luc Vandewalle is not to be regarded as independent because of his former position at ING Belgium. Members of the Supervisory Board to whom the independence criteria of the Corporate Governance Code do not apply, and members of the Supervisory Board to whom the criteria do apply but who can explain why this does not undermine their independence, are deemed to be independent.
The Supervisory Board has determined that Sjoerd van Keulen, Joost Kuiper and Aman Mehta are financial experts as referred to in the Corporate Governance Code. Joost Kuiper and Aman Mehta were appointed to the Audit Committee per 9 May 2011 and 14 February 2011, respectively. Sjoerd van Keulen was appointed to the Risk Committee per 9 May 2011.
CHANGES IN THE COMPOSITION Jackson Tai, Godfried van der Lugt and Joan Spero resigned from the Supervisory Board as of 6 January 2011, 24 January 2011 and 1 June 2011 respectively. Claus Dieter Hoffmann retired at the end of the 2011 annual General Meeting.
More information can be found in the convocation for the 2012 annual General Meeting, available on the website of ING Group (www.ing.com) from 29 March 2012.
CHANGE OF CONTROL PROVISIONS LEGAL PROVISIONS Pursuant to the terms of the Dutch Financial Supervision Act a declaration of no objection from the Dutch Minister of Finance must be obtained by anyone wishing to obtain or hold a participating interest of at least 10% in ING Group and to exercise control attached to such a participating interest. Similarly, on the basis of indirect change of control statutes in the various jurisdictions where subsidiaries of ING Group are operating, permission from or notification to local regulatory authorities may be required for the acquisition of a substantial interest in ING Group.
LUC A.C.P. VANDEWALLE (Born 1944, Belgian nationality, male; appointed in 2011, term expires in 2014) Former chairman and non-executive member of ING Belgium NV/SA.
Other business activities: Chairman of the Supervisory Board of each of Bakker Hillegom B.V., Domo Real Estate, Matexi Groep, Plu Holding and Transics International. Member of the Supervisory Board of each of Allia Insurance Brokers, Arseus, Besix Groep, Galloo, Masureel Veredeling, Sea-Invest, Sioen Industries, Vergroup, Veritas and Willy Naessens Industriebouw.
SEVERANCE PAYMENTS TO MEMBERS OF THE EXECUTIVE BOARD The employment contracts entered into with the members of the Executive Board provide for severance payments, which become due upon termination of the applicable board member’s 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. Severance payments to the members of the Executive Board are limited to a maximum of one year’s fixed salary, in line with the Corporate Governance Code.
AMENDMENT OF THE ARTICLES OF ASSOCIATION The General Meeting may resolve to amend the Articles of Association, provided that the resolution is adopted on a proposal of the Executive Board, which has been approved by the Supervisory Board. Such a resolution of the General Meeting requires a majority of at least two-thirds of the votes cast at a general meeting at which at least two-thirds of the issued share capital is represented. An amendment of the Articles of Association has to be passed by notarial deed.
EXTERNAL AUDITOR At the annual General Meeting held on 22 April 2008, Ernst & Young was appointed to audit the financial statements of ING Group for the financial years 2008 to 2011 inclusive, to report on the outcome of these audits to the Executive Board and the Supervisory Board and to provide an audit opinion on the financial statements of ING Group. Furthermore, Ernst & Young also audited and reported on the effectiveness of internal control over financial reporting on 31 December 2011. The external auditor attended the meetings of the Audit Committee and the 2011 annual General Meeting.
- The promotion of participation of shareholders and holders of depositary receipts and the exercise of voting rights in general.
- The functioning of ING Trust Office, the composition of the Board, the 2010 balance sheet and statement of income and expenses of ING Trust Office and the amendments to the trust conditions for registered shares in the share capital of ING Group (the ‘Trust Conditions’) in order to align the Trust Conditions with the Securities Giro Act (Wet giraal effectenverkeer), as amended 1 January 2011.
The increase came about as follows: add: conversion of shares into depositary receipts 58,927 less: conversion of depositary receipts into shares 7,500
Mick den Boogert was appointed as a member of the Board as of 8 February 2011 for a term ending per 1 January 2015. Further, Jan Veraart, Carel van den Driest, Paul Frentrop and Herman Hazewinkel were reappointed as members of the Board as of 1 January 2011, for terms ending per 1 May 2013, 1 May 2012, 1 May 2014 and 1 January 2015 respectively.
CONTACT DETAILS The contact details of ING Trust Office are: Hilde Mulder
Stichting Continuïteit ING (‘ING Continuity Foundation’), a foundation organised under the laws of the Netherlands, established in Amsterdam, was founded on 22 January 1991.
All members of the Board stated that they meet the conditions regarding independence as referred to in the Articles of Association of ING Continuity Foundation.
• provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Our independent registered public accounting firm has audited and issued their report on ING’s internal control over financial reporting, which appears on the following page.
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 2011, 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 12 March 2012 expressed an unqualified opinion thereon.
Should it become clear, after such evaluation, that the new remuneration policy has led to an unintended or inequitable outcome, the Supervisory Board will have the discretion to correct the previously allocated variable remuneration. However, it is understood that any such correction could not lead to a deviation from the requirement that variable remuneration cannot exceed 100% of base salary during any year, as required under the Dutch Banking Code or be in violation of the Capital Requirements Directive III.
benefits Executive Board members will continue to be eligible for a range of additional benefits (e.g. the use of company cars, contributions to company savings plans and, if applicable, expatriate allowances). Executive Board members may obtain banking and insurance services from ING Group subsidiaries in the ordinary course of their business and on terms that apply to most other comparable employees of ING. In addition, tax and financial planning services will be provided to ensure compliance with the relevant legislative requirements.
(4) Koos Timmermans stepped down from the Executive Board as per 1 October 2011. The figures for this member reflect remuneration earned in the capacity as Executive Board member. Thus, the figure for 2011 reflects a partial year as an Executive Board member.
(1) Jan Hommen does not participate in the pension plan. (2) Patrick Flynn was appointed to the Executive Board on 27 April 2009.
2011 base salary Executive Board The base salary of all Executive Board members was set at the time of the introduction of the remuneration policy in 2010 and the Executive Board decided not to accept a base salary increase in 2011 as ING had not completely repaid all outstanding core Tier 1 securities that were issued to the Dutch State. As a consequence the base salary level remained at the 2010 level 2011 variable remuneration Executive Board In 2011 the Executive Board decided that it will not accept variable remuneration for as long as ING has not completely repaid all outstanding core Tier 1 securities that were issued to the Dutch State. As the full repayment did not occur during 2011, the Executive Board did not receive any variable remuneration in relation to performance year 2011.
Information on the options outstanding and the movements during the financial year of options held by the members of the Executive Board as at 31 December 2011 (1)
(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. (2) Waived at vesting date or expired at expiry date. (3) Koos Timmermans stepped down from the Executive Board as per 1 October 2011. The table above shows all options outstanding as at 31 December 2011.
Loans and advances to Executive Board members The table below presents the loans and advances provided to Executive Board members and outstanding on 31 December 2011, 2010 and 2009. These loans were concluded in the normal course of business and on terms generally applicable to comparable Company personnel and were approved by the Supervisory Board.
2012 REMUNERATION STRUCTURE SENIOR MANAgEMENT 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 2011 based on internal strategy and external regulatory developments.
The remuneration policy for the Executive Board, which permits a combination of fixed remuneration (base salary) and variable remuneration (together ‘total direct compensation’), pension arrangements and benefits, will apply in full to members of the Management Board Banking. For senior management in banking, a gradual shift to a more balanced mix of fixed and variable remuneration, in line with the remuneration policy for the Executive Board, was initiated in 2010 and will continue during the coming year. Exceptions may exist for high value specialists and senior management working in certain divisions and/or geographical areas. In addition, the remuneration policy for senior management has been amended in line with the requirements of the Capital Requirements Directive III.
The remuneration for a select group of ING Bank and Insurance EurAsia employees has been reviewed and amended as necessary in order to comply with the Capital Requirements Directive III. The amendments relate to the allocation of variable remuneration and the ratio between fixed and variable remuneration and are intended to mitigate risk relating to remuneration. Measures include an ex-ante and ex-post assessment of variable remuneration prior to awarding and vesting respectively, significant deferral of variable remuneration, an equal divide between variable remuneration in cash and in shares, as well as retention periods on all equity remuneration as soon as it becomes unconditional.
For the Insurance US operations the changes in the mix between fixed salary and variable remuneration as well as the allocation of variable remuneration will need to be weighted in light of the different regulatory requirements within the US insurance industry and the intended separation of these activities from ING.
The table below shows the remuneration, expense allowances and attendance fees per Supervisory Board member for 2011 and previous years.
Sjoerd van Keulen (12) 49 Joost Kuiper (12) 46 Luc Vandewalle (12) 58
LOANS AND ADVANCES TO SUPERVISORY BOARD MEMBERS Supervisory Board members may obtain banking and insurance services from ING Group subsidiaries in the ordinary course of their business and on terms that are customary in the sector. The table below presents the loans and advances to Supervisory Board members outstanding on 31 December 2011, 2010 and 2009.
(2) Sjoerd van Keulen and Luc Vandewalle were newly appointed in May 2011. (3) The ING depositary receipts held by Luc Vandewalle are currently being held in usufruct.
Mathieu Blondeel, chairman, Belgium Marcel Koopman, secretary, the Netherlands Norbert Lucas, deputy chairman, Germany Leo D Antuono, deputy secretary, Belgium Otmar Haneder, Austria Jean-Claude Van Den Abeele, Jean Pierre Lambert, Belgium Biliana Petrova, Bulgaria Petr Kupsa, Czech Republic Mourad Benzaaza, France Carolin Simonis, Germany Nikolaos Ploumis, Greece Csilla Dobos, Hungary Anna Adinolfi, Nicola Cerruti, Italy Arsène Kihm, Luxembourg Jeffrey Dinsbach, Robert Milewski, Gerrit Riphagen, Havva Tasgil, Gerard Veldman, Jelte Wiersinga, the Netherlands Mieczyslaw Bielawski, Krystov Burnat, Mariusz Cieslik, Poland Mihai Ailincai, Romania Miguel Hernandez, Raul Lopez, Spain Sam Chaudhuri, Rina Goldenberg, UK.
Parent company balance sheet 286 Parent company profit and loss account 287 Parent company statement of changes in equity 288 Accounting policies for the parent company annual accounts 289 Notes to the parent company annual accounts 290 6 Other information
Amounts for 2010 are restated for the change in accounting policy as disclosed in the section ‘Changes in accounting policies’ on page 99.
Consolidated profit and loss account of ING Group for the years ended 31 December amounts in millions of euros 2011 2011 2010 2010 2009 2009
Net result on disposals of group companies 38 855 310 287 Gross commission income 6,003 5,868 6,551 Commission expense –1,966 –1,720 –2,311
– available-for-sale investments 219,442 154,640 167,074 – held-to-maturity investments 2,370 2,620 1,675 – real estate investments 118 295 656 – property and equipment 67 96 82 – assets subject to operating leases 43 53 93 – investments for risk of policyholders 61,898 54,817 64,158
As at 31 December 2011 Cash and cash equivalents includes cash and balances with central banks of EUR 31,194 million (2010: EUR 13,072 million; 2009: EUR 15,390 million). Reference is made to Note 55 ‘Cash and Cash equivalents’.
Balance as at 1 January 2009 (before change in accounting policy) 495 9,182 7,657 17,334 10,000 1,594 28,928 Effect of change in accounting policy (1) –145 –145 –145 Balance as at 1 January 2009 (restated) 495 9,182 7,512 17,189 10,000 1,594 28,783
Other revaluations –1 –1 –9 –10 Total amount recognised directly in equity 10,596 10,596 –13 10,583
(1) The change in accounting policy is disclosed in the section ‘Changes in accounting policies’ on page 99. (2) The 2009 amount of EUR 605 million includes the coupon (EUR 259 million) and repurchase premium (EUR 346 million) on the repayment of EUR 5 billion non-voting equity securities.
Reserves include Revaluation reserve of EUR 5,550 million (2010: EUR 4,752 million; 2009: EUR 2,466 million), Currency translation reserve of EUR 93 million (2010: EUR 79 million; 2009: EUR –2,011 million) and Other reserves of EUR 24,067 million (2010: EUR 19,120 million; 2009: EUR 16,235 million). Changes in individual components are presented in Note 13 ‘Shareholders’ equity (parent)/non-voting equity securities’.
The following new or revised standards and interpretations were issued by the IASB, which become effective for ING Group after 2011, if and when endorsed by the EU: • Amendments to IFRS 7 ‘Disclosures – Transfers of Financial Assets’, effective as of 2012; • Amendments to IAS 12 ‘Deferred tax: Recovery of Underlying Assets’, effective as of 2012; • IFRS 10 ‘Consolidated Financial Statements’, effective as of 2013; • IFRS 11 ‘Joint Arrangements’, effective as of 2013; • IFRS 12 ‘Disclosure of Interests in Other Entities’, effective as of 2013; • IFRS 13 ‘Fair Value Measurement’, effective as of 2013; • IAS 28 ‘Investments in Associates and Joint Ventures’, effective as of 2013; • Amendments to IAS 1 ‘Presentation of Financial Statements – Presentation of Items of Other Income’, effective as of 2013; • Amendments to IFRS 7 ‘Disclosures – Offsetting Financial Assets and Financial Liabilities’, effective as of 2013; and • Amendments to IAS 32 ‘Offsetting Financial Assets and Financial Liabilities’, effective as of 2014.
Although these new requirements are still being analysed and the final impact is not yet known, ING Group does not expect the adoption of these new or revised standards and interpretations to have a significant effect on equity and/or result of ING Group.
Furthermore, in 2009 IFRS 9 ‘Financial Instruments’ was issued, which was initially effective as of 2013. However in December 2011 the International Accounting Standards Board decided to amend this standard and to postpone the mandatory application of IFRS 9 until 2015. This standard is not yet endorsed by the EU and, therefore, is not yet part of IFRS-EU. Implementation of IFRS 9 – if and when endorsed by the EU – may have a significant impact on equity and/or result of ING Group.
International Financial Reporting Standards as adopted by the EU provide several options in accounting policies. ING Group’s accounting policies under these standards and its decision on the options available are set out in the section ‘Principles of valuation and determination of results’ below.
As explained in the section ‘Principles of valuation and determination of results’ and in Note 24 ‘Derivatives and hedge accounting’ ING Group applies fair value hedge accounting to portfolio hedges of interest rate risk (macro hedging) under the EU ‘carve out’ of IFRS-EU.
The impact on individual balance sheet line items and previous reporting periods can be specified as follows: Impact on balance sheet amounts in millions of euros
Basic earnings (before change in accounting policy) 2,779 –1,540 3,781.5 2,686.0 0.73 –0.57 Impact on the profit and loss account –409 –71
Accounting policies for the consolidated annual accounts of ING Group continued 100 ING Group Annual Report 2011
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 carrying value (including goodwill) of the reporting unit to the best estimate of the recoverable amount of that reporting unit. The carrying 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
Accounting policies for the consolidated annual accounts of ING Group continued 102 ING Group Annual Report 2011
Disposal groups held for sale and discontinued operations Disposal groups held for sale are measured at the lower of their carrying amount or fair value less cost to sell. Disposal groups (and groups of non-current assets) are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This is only the case when the sale is highly probable and the disposal group (or group of assets) is available for immediate sale in its present condition; management must be committed to the sale, which is expected to occur within one year from the date of classification as held for sale. When a group of assets that is classified as held for sale represents a major line of business or geographical area the disposal group classifies as discontinued operations. In the consolidated profit and loss account, the income and expenses from discontinued operations are reported separately from income and expenses from continuing operations, down to the level of result after tax for both the current and for comparative years.
Exchange rate differences in the profit and loss account are generally included in Net trading income. Reference is made to Note 41 ‘Net trading income’, which discloses the amounts included in the profit and loss account. Exchange rate differences relating to the disposal of available-for-sale debt and equity securities are considered to be an inherent part of the capital gains and losses recognised in Investment income. As mentioned below in Group companies relating to the disposals of group companies, any exchange rate difference deferred in equity is recognised in the profit and loss account in Net result on disposals of group companies. Reference is also made to Note 13 ‘Shareholders’ equity (parent)/non-voting equity securities’, which discloses the amounts included in the profit and loss account.
DERIVATIVES AND HEDGE ACCOUNTING Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently measured at fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques (such as discounted cash flow models and option pricing models), as appropriate. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair values are negative.
Accounting policies for the consolidated annual accounts of ING Group continued 106 ING Group Annual Report 2011
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual terms of the assets being evaluated. The collective evaluation of impairment includes the application of a ‘loss confirmation period’ to default probabilities. The loss confirmation period is a concept which recognises that there is a period of time between the emergence of impairment triggers and the point in time at which those events are captured by the Group’s credit risk systems. Accordingly, the application of the loss confirmation period ensures that impairments that are incurred but not yet identified are adequately reflected in the Group’s loan loss provision. Although the loss confirmation periods are inherently uncertain, the Group applies estimates to sub-portfolios (e.g. large corporations, small and medium size enterprises and retail portfolios) that reflect factors such as the frequency with which customers in the sub-portfolio disclose credit risk sensitive information and the frequency with which they are subject to review by the Group’s account managers. Generally, the frequency increases in relation to the size of the borrower. Loss confirmation periods are based on historical experience and are validated, and revised where necessary, through regular back-testing to ensure that they reflect recent experience and current events.
Accounting policies for the consolidated annual accounts of ING Group continued 108 ING Group Annual Report 2011
For real estate investments held through (minority shares in) real estate investment funds, the valuations are performed under the responsibility of the funds’ asset manager.
Property obtained from foreclosures Property obtained from foreclosures is stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Property obtained from foreclosures is included in Other assets – Property development and obtained from foreclosures.
ACQUISITIONS, GOODWILL AND OTHER INTANGIBLE ASSETS Acquisitions and goodwill ING Group’s acquisitions are accounted for using the acquisition method of accounting. The consideration for each acquisition is measured at the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued in exchange for control of the acquire. Goodwill, being the difference between the cost of the acquisition (including assumed debt) and the Group’s interest in the fair value of the acquired assets, liabilities and contingent liabilities as at the date of acquisition, is capitalised as an intangible asset. The results of the operations of the acquired companies are included in the profit and loss account from the date control is obtained.
Accounting policies for the consolidated annual accounts of ING Group continued 110 ING Group Annual Report 2011
Where a business combination is achieved in stages, ING Group’s previously held interests in the assets and liabilities of the acquired entity are remeasured to fair value at the acquisition date (i.e. the date ING Group attains control) and the resulting gain or loss, if any, is recognised in the profit or loss account. Amounts arising from interests in the acquire prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to the profit or loss account, where such treatment would be appropriate if that interest were disposed of. Acquisition-related costs are recognised in the profit or loss account as incurred and presented in the profit and loss account as Other operating expenses.
Until 2009, before IFRS 3 ‘Business Combinations’ was revised the accounting of previously held interests in the assets and liabilities of the acquired entity were not remeasured at the acquisition date and the acquisition-related costs were considered to be part of the total consideration.
DEFERRED ACQUISITION COSTS Deferred acquisition costs (DAC) are an asset and represent costs of acquiring insurance and investment contracts that are deferred and amortised. The deferred costs, all of which vary with (and are primarily related to) the production of new and renewal business, consist principally of commissions, certain underwriting and contract issuance expenses, and certain agency expenses.
TAXATION Income tax on the result for the year comprises current and deferred tax. Income tax is recognised in the profit and loss account but it is recognised directly in equity if the tax relates to items that are recognised directly in equity.
Accounting policies for the consolidated annual accounts of ING Group continued 112 ING Group Annual Report 2011
If, for any business unit, it is determined, using a best estimate (50%) confidence level, that a shortfall exists, and there are no offsetting amounts within other business units in the Business Line, the shortfall is recognised immediately in the profit and loss account.
If the net insurance liabilities are determined to be adequate at above the 90% confidence level, no reduction in the net insurance liabilities is recognised.
Amounts held at central banks 26,481 7,983 Cash and bank balances 3,974 4,264 Short term deposits insurance operations 739 825 2 AMOUNTS DUE FROM BANKS
Equity securities 105,580 109,191 Debt securities 9,612 8,944 Loans and receivables 1,246 2,346
The cost of investments for risk of policyholders as at 31 December 2011 was EUR 113,267 million (2010: EUR 113,879 million).
Equity securities 45 392 Debt securities 2,967 3,672 Loans and receivables 1,000 570
The notional value of the related credit derivatives is EUR 64 million (2010: EUR 205 million). The change in fair value of the credit derivatives attributable to changes in credit risk since the loans were first designated amounts was EUR –1 million (2010: nil) and the change for the current year was nil (2010: nil).
Notes to the consolidated annual accounts of ING Group continued 118 ING Group Annual Report 2011
US Subprime RMBS 774 –190 37 –75 –835 1,647 –227 US Alt-A RMBS 501 –15 –252 –93 –2,001 2,847 237 CDO/CLOs 1,390 –59 –51 –22 –67 1,530 –9
Other changes includes mainly redemptions/prepayments and the classification of ING Direct USA as a disposal group held for sale. Reference is made to Note 11 ‘Assets and liabilities held for sale’.
The impact on ING Group’s revaluation reserve in relation to sovereign and unsecured financial institutions debt is limited per 31 December 2011: the negative impact on troubled countries is offset by opposite positive movements in bonds of financially stronger European countries and by the positive impact from lower interest rates in general. Furthermore, in the course of 2011, ING Group reduced its sovereign debt exposure to these troubled countries.
Changes in the composition of the group and other changes –188 –5 –23,232 –23 –444 –23,864 –28
To/from held-to-maturity 282 282 To/from available-for-sale –282 –282 To/from investment in associates 1,288 12 1,288 12
Carrying value as at 31 December 6,147 20,551 1,189 Fair value as at 31 December 6,472 20,175 1,184 Unrealised fair value losses in shareholders’ equity (before tax) as at 31 December –734 –902 –67 Effect on shareholders’ equity (before tax) if reclassification had not been made 325 –376 –5 Effect on result (before tax) if reclassification had not been made nil nil nil Effect on result (before tax) after the reclassification until 31 December (mainly interest income) 54 629 n/a Effect on result (before tax) for the year (mainly interest income) n/a n/a 47 Recognised impairments (before tax) nil nil nil Recognised provision for credit losses (before tax) nil nil nil
Notes to the consolidated annual accounts of ING Group continued 124 ING Group Annual Report 2011
Loans and advances to customers by type – banking operations Netherlands International Total
Loans to, or guaranteed by, public authorities 29,281 28,671 25,867 27,282 55,148 55,953
As at 31 December 2011, Loans and advances to customers included receivables with regard to securities which have been acquired in reverse repurchase transactions related to the banking operations amounting to EUR 1,228 million (2010: EUR 1,609 million).
Unearned future finance income on finance leases –3,228 –3,328 Net investment in finance leases 17,440 17,521
Loans to, or guaranteed by, public authorities 1 2 3 3 3
Increase in loan loss provisions 1,670 1,751 33 41 1,703 1,792 Exchange rate differences –83 155 –2 6 –85 161 Other changes –637 –49 –637 –49
As a result of the sale of ING Real Estate Investment Management in 2011, as disclosed in Note 30 ‘Companies acquired and companies disposed’, ING is no longer the investment manager of certain funds. For some of the funds significant influence therefore ceased to exist. Significant influence remained for certain funds in which the interest held is below 20% based on the combination of ING Group’s financial interest for own risk and other arrangements, such as participation in the advisory board.
The values presented in the table above could differ from the values presented in the individual annual accounts of the associates, due to the fact that the individual values have been brought in line with ING Group’s accounting principles.
CBRE Retail Property Fund Iberica LP (1) 29 144 1,635 1,122 149 86
ING Real Estate Asia Retail Fund 28 107 782 450 51 53 CBRE DOF Master Fund II C.V. (1) 16 101 755 129 45 29 CBRE Lionbrook Property Partnership LP (1) 21 96 620 171 77 19
Changes in the composition of the group 16 –26 Transfers to and from Investments –1,288 –12 Revaluations –19 –2 Share of results 241 314 Dividends received –174 –229 Disposals –383 –232 Impairments –20 –3 Exchange rate differences –68 251 Closing balance 2,370 3,925
Changes in the composition of the group –88 –1,632 Transfers to and from Property in own use –31 Transfers to and from Other assets –23 Fair value gains/(losses) –19 –98 Disposals –118 –295 Exchange rate differences –6 237 Closing balance 1,670 1,900
Notes to the consolidated annual accounts of ING Group continued 130 ING Group Annual Report 2011
Changes in the composition of the group –28 Transfers to and from Real estate investments 31 Transfers to and from Other assets –31 –4 Depreciation –28 –31 Revaluations –21 –20 Impairments –29 –27 Reversal of impairments 11 5 Disposals –27 –43 Exchange rate differences –26 25 Closing balance 1,535 1,642
Changes in the composition of the group –3,250 –3 –3,250 –3 Disposals –43 –53 –43 –53 Depreciation –594 –784 –2 –3 –596 –787 Exchange rate differences –12 13 –12 13 Transfer and other changes –336 –390 –336 –390
Gross carrying amount as at 31 December 16 4,617 18 16 4,635 Accumulated depreciation as at 31 December –10 –1,564 –16 –10 –1,580 Net carrying value as at 31 December 6 3,053 2 6 3,055
Changes in intangible assets Value of business acquired Goodwill Software Other Total
Retail Central Europe 738 870 Retail Belgium 50 49 Retail Netherlands 1 1 ING Direct 364 468 Commercial Banking – Lease 11 68 ING Real Estate 32 Commercial Banking – Other 14 14 Insurance Benelux 48 48 Insurance Central & Rest of Europe 112 123 Insurance Latin America 680 Insurance Asia/Pacific – South Korea 192 192 Insurance Asia/Pacific – Rest of Asia 44 2 ING Investment Management 220 218
As a first step of the impairment test, the best estimate of the recoverable amount of reporting units to which goodwill is allocated 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 carrying 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 carrying 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 other components, the recoverable amount is determined by a cash flow model taking into account recent market related developments. The most important assumptions in the model are the estimated expected profit based on internal financial budgets/forecasts (4 years medium term plan plus additional 2 years longer term forecast), the terminal growth rate thereafter (approximately 3.5%), the required capital level (ultimately migrating to approximately 10%) and the discount rate (between approximately 10% and 13%). It was concluded that the goodwill allocated to Retail Central Europe is not impaired.
Amortisation and unlocking –1,689 –2,684 –13 –13 –1,702 –2,697 Effect of unrealised revaluations in equity –526 –765 –526 –765 Changes in the composition of the group 44 –5 –2 42 –5
Cumulative other comprehensive income includes EUR 244 million (2010: EUR 7 million) related to Assets and liabilities held for sale.
Other includes EUR 1,840 million (2010: EUR 1,875 million) related to transactions still to be settled at balance sheet date.
Accrued interest and rents includes EUR 6,388 million (2010: EUR 7,113 million) accrued interest on assets measured at amortised cost under the IAS 39 classification Loans and receivables.
Gross carrying amount as at 31 December 2,720 3,240 Accumulated impairments as at 31 December –1,136 –1,087 Net carrying value 1,584 2,153
Notes to the consolidated annual accounts of ING Group continued 136 ING Group Annual Report 2011
The holder of a depositary receipt is entitled to receive from ING Trust Office payment of dividends and distributions corresponding to the dividends and distributions received by ING Trust Office on an ordinary share.
Moreover, ING Groep N.V.’s ability to pay dividends is dependent on the dividend payment ability of its subsidiaries and associates. ING Groep N.V. is legally required to create a non-distributable reserve insofar profits of its subsidiaries and associates are subject to dividend payment restrictions which apply to those subsidiaries and associates themselves. Such restrictions may among others be of a similar nature as the restrictions which apply to ING Groep N.V. Furthermore there can be restrictions as a 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.
Opening balance 461 –10,140 1,177 –8,502 Unrealised revaluations after taxation –50 12,496 12,446 Realised gains/losses transferred to profit and loss 1,406 1,406 Changes in cash flow hedge reserve –805 –805 Transfer to insurance liabilities/DAC –2,079 –2,079
Dividend and repurchase premium includes the coupon (EUR 259 million) and repayment premium (EUR 346 million) on the repayment of EUR 5 billion non-voting equity securities.
Except for the 9% 2008 perpetual of EUR 10 million (a private placement) and EUR 750 million of the 8% 2008 perpetual, these loans have been subsequently provided as subordinated loans by ING Groep N.V. to ING Verzekeringen N.V. and ING Bank N.V. under the same conditions as the original bonds as follows: Subordinated loans provided by ING Groep N.V. to ING Bank N.V. and ING Verzekeringen N.V.
Notes to the consolidated annual accounts of ING Group continued 142 ING Group Annual Report 2011
The following bonds were all issued under the Credit Guarantee Scheme of the State of the Netherlands and are part of ING Group’s regular medium-term funding operations. ING Group pays a fee of 84 basis points over the issued bonds to the Dutch State to participate in the Credit Guarantee Scheme: • ING Bank issued 3 year government guaranteed senior unsecured bonds amounting to USD 6 billion in January 2009. USD 5 billion of the issue was priced at a fixed rate of 80 basis points over mid-swaps. USD 1 billion was priced at a variable rate of 80 basis points over 3 month LIBOR; • ING Bank issued a 5 year EUR 4 billion fixed rate government guaranteed senior unsecured bond in February 2009. The issue was priced at a fixed rate of 3.375%, 75 basis points over mid-swaps; and
In 2011, Subordinated loans from group companies is affected by the exchange offers in Europe and tender offers in the United States of America as disclosed in Note 14 ‘Subordinated loans’.
The deferred profit sharing amount on unrealised revaluation is included in Provision for (deferred) profit sharing and rebates and amounts to EUR 3,721 million as at 31 December 2011 (2010: EUR 1,706 million).
Insurance provisions include a provision for the estimated cost of the agreement with regard to unit-linked policies. For more information reference is made to Note 31 ‘Legal proceedings’.
ING transferred its US group reinsurance business to Reinsurance Group of America Inc. in 2010 by means of a reinsurance agreement. This business continues to be included in Life insurance provisions. The related asset from the reinsurance contract is recognised under Reinsurance contracts.
ING Group had an outstanding balance of EUR 35 million as at 31 December 2011 (2010: EUR 41 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.
Liability relating to underwriting years prior to 2004 951 Total amount recognised in the balance sheet 3,205
Amounts due to banks by type Netherlands International Total 19 CUSTOMER DEPOSITS AND OTHER FUNDS ON DEPOSIT
Customer deposits and other funds on deposit by type Netherlands International Total
As at 31 December 2011, the Funds on deposit include amounts payable of EUR 38,011 million (2010: EUR 43,995 million) with regard to repurchase transactions.
Other mainly relates to year-end accruals in the normal course of business.
Loans and advances to customers 714 –201 –5 –15 –20 473 Unused tax losses carried forward –2,508 1 801 –3 –152 10 –1,851
Comprising: – deferred tax liabilities 2,281 2,618 – deferred tax assets –3,969 –3,425
The following tax loss carry forwards and tax credits will expire as follows as at 31 December: Total unused tax losses carried forward analysed by expiry terms No deferred tax asset recognised Deferred tax asset recognised
More than 1 year but less than 5 years 378 406 539 461 More than 5 years but less than 10 years 774 243 1,971 3,768 More than 10 years but less than 20 years 3,185 2,093 192 1,285
In 2011 the deferred tax assets for banking operations for which the utilisation is dependent on future taxable profits, as disclosed above, decreased significantly compared to 2010, as a result of the announced sale of ING Direct USA. Reference is made to Note 30 ‘Companies acquired and companies disposed’.
In 2011, ING Group has reconsidered its method of determining the breakdown by jurisdiction. The recoverability is now determined at the level of the fiscal unity within that jurisdiction and not at the level of the individual company. Also the offsetting of deferred tax assets with deferred tax liabilities was revised. The comparatives provided in this table have been adjusted accordingly.
As of 31 December 2011 and 31 December 2010, ING Group had no significant temporary differences associated with the parent company’s investments in subsidiaries, branches and associates and interest in joint ventures as any economic benefit from those investments will not be taxable at parent company level.
Changes in the composition of the group –3 –26 –12 –1 –15 –27
No plan assets are expected to be returned to ING Group during 2012.
benefits other than pensions 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
Loans and advances to customers 69,678 15,101 34,354 142,308 347,441 4,322 613,204
Customer deposits and other funds on deposit 451,425 25,142 20,690 12,376 1,729 511,362 Financial liabilities at fair value through profit and loss
– designated as at fair value through profit and loss 260 472 1,014 6,094 4,996 –129 12,707
24 DERIVATIVES AND HEDGE ACCOUNTING Use of derivatives and hedge accounting As described in the ‘Risk management’ section, ING Group uses derivatives (principally interest rate swaps and cross currency interest rate swaps) for economic hedging purposes in the management of its asset and liability portfolios and structural positions. The objective of economic hedging is to enter into positions with an opposite risk profile to an identified exposure to reduce that exposure. The impact of ING Group’s hedging activities is to optimise the overall cost to the Group of accessing debt capital markets and to mitigate the market risk which would otherwise arise from structural imbalances in the duration and other profiles of its assets and liabilities. In addition, hedging activities are undertaken to hedge against the interest rate risk in the mortgage offer period in relation to retail mortgages and to lock in the interest margin in relation to interest bearing assets and the related funding.
As at 31 December 2011, the fair value of outstanding derivatives designated under net investment hedge accounting was EUR –18 million (2010: EUR –87 million), presented in the balance sheet as EUR 141 million (2010: EUR 81 million) positive fair values under assets and EUR 159 million (2010: EUR 168 million) negative fair values under liabilities.
As at 31 December 2011, the fair value of outstanding non-derivatives designated under net investment hedge accounting was EUR –335 million (2010: EUR 208 million).
The sales proceeds in cash of EUR 2,572 million is presented in the consolidated statement of cash flows under ‘Net cash flow from investment activities – Disposals and redemptions: group companies’ and is not included in the table above.
26 ASSETS NOT FREELY DISPOSABLE The assets not freely disposable consist primarily of interest bearing securities pledged to secure deposits from De Nederlandsche Bank (the Dutch central bank) and other banks and serve to secure margin accounts or are used for other purposes required by law. The assets not freely disposable are as follows: Assets not freely disposable
The table does not include assets relating to repurchase and stock lending transactions. Reference is made to Note 3 ‘Financial assets at fair value through profit and loss’, Note 4 ‘Investments’ and Note 5 ‘Loans and advances to customers’ for the relevant amounts.
Insurance operations 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
ING Group as sponsor of multi-seller conduit In the normal course of business, ING Group structures financing transactions for its clients by assisting them in obtaining sources of liquidity by selling the clients’ receivables or other financial assets to an SPE. The SPE issues asset-backed commercial paper to the market to fund the purchases. ING Group, in its role as administrative agent, facilitates these transactions by providing structuring, accounting, funding and operations services.
Other entities ING Group is also a party to other SPEs used, for example, in structured finance and leasing transactions.
ING Group as fund manager ING Group acts as fund manager for several funds. Fees related to these management activities are charged on an at arm’s-length basis. In general, as a fund manager ING Group will hold these funds in a fiduciary capacity. These funds are therefore generally not included in the consolidated financial statements of ING Group.
Companies treated as part of the insurance operations ING Verzekeringen N.V. The Netherlands Nationale-Nederlanden Levensverzekering Maatschappij N.V. The Netherlands Nationale-Nederlanden Schadeverzekering Maatschappij N.V. The Netherlands ING Insurance Eurasia N.V. The Netherlands Parcom Capital B.V. The Netherlands Nationale-Nederlanden Service N.V. The Netherlands Movir N.V. The Netherlands ING Re (Netherlands) N.V. The Netherlands ING Fund Management B.V. The Netherlands ING Vastgoed Belegging B.V. The Netherlands ING Zivotna Poistovna a.s. Slovakia ING Nationale-Nederlanden Polska S.A. Poland ING Nationale-Nederlanden Polska Powszechne Towarzystwo Emerytaine S.A. Poland ING Asigurari de Viata S.A. Romania ING Greek Life Insurance Company S.A. Greece ING Nationale-Nederlanden Magyarorszagi Biztosito Rt. Hungary Nationale-Nederlanden Vida, Compañia de Seguros y Reaseguros S.A. Spain Nationale-Nederlanden Generales, Compañia de Seguros y Reaseguros S.A. Spain ING America Insurance Holdings, Inc. United States of America ING International Insurance Holdings, Inc. United States of America ING Life Insurance and Annuity Company United States of America ING North America Insurance Corporation United States of America Lion Connecticut Holdings Inc. United States of America ReliaStar Life Insurance Company United States of America ReliaStar Life Insurance Company of New York United States of America Security Life of Denver Insurance Company United States of America ING USA Annuity and Life Insurance Company United States of America ING Investment Management Co United States of America Security Life of Denver International Limited Cayman Islands ING Insurance Berhad Malaysia ING Life Insurance Company (Japan) Limited Japan ING Life Insurance Company (Korea) Limited South Korea ING Life Insurance Company (Bermuda) Limited Hong Kong 164 ING Group Annual Report 2011
Disposals effective in 2011 Pacific Antai Life Insurance Company Ltd. In June 2011 ING had completed the sale of its entire stake in China’s Pacific Antai Life Insurance Company Ltd. (PALIC) to China Construction Bank for a consideration of EUR 82 million, and a net profit of EUR 28 million. This is the outcome of a strategic review announced in April 2009 as part of ING’s Back to Basics program. The stake in PALIC was previously included in the segment Insurance Asia/Pacific. The deal had been announced in 2009 and was presented as held for sale since 2009 until the sale was completed.
In July 2011 ING announced the completion of the sale of Clarion Real Estate Securities (CRES) to CB Richard Ellis. The sale resulted in a net gain on divestment of EUR 182 million. CRES was previously included in the segment ING Real Estate.
The Latin American pensions, life insurance and investment management operations were previously included in the segments Insurance Latin America and ING Investment Management before they were classified as discontinued operations. The segment Insurance Latin America has ceased to exist following this transaction as the majority of assets and liabilities have been sold. The net result from discontinued operations is presented separately in the consolidated profit and loss account. Reference is made to Note 25 ‘Discontinued operations’ for more detailed disclosures.
Loans and advances to customers 2,390 816 6 3,212 Amounts due from banks 1,171 1,177 39 2,387 Financial assets at fair value through profit and loss 397 8 405 Real estate investments 1,620 1,620
Loans and advances to customers 1,341 79 413 1,833 Financial assets at fair value through profit and loss 1,552 1,075 52 8,370 11,049
Since the end of 2006, unit-linked products (commonly referred to in Dutch as ‘beleggingsverzekeringen’) have received negative attention in the Dutch media, from Dutch Parliament, the AFM and consumer protection organisations. Costs of unit-linked products sold in the past are perceived as too high and insurers are in general being accused of being less transparent in their offering of unit-linked products. The criticism on unit-linked products led to the introduction of compensation schemes by Dutch insurance companies that have offered unit-linked products. In 2008 ING’s Dutch insurance subsidiaries reached an outline agreement with all consumer protection organisations to offer compensation to their unit-linked policyholders where individual unit-linked policies have a cost charge in excess of an agreed maximum and to offer similar compensation for certain hybrid insurance products. At 31 December 2008 a provision was recognised for the costs of the settlement. The costs were valued at EUR 365 million. A full agreement on implementation was reached in 2010 with one of the two main consumer protection organisations. In addition, ING’s Dutch insurance subsidiaries announced additional (so-called ‘flanking’) measures that comply with the ‘Best in Class’ criteria as formulated on 24 November 2011 by the Dutch Minister of Finance. In December 2011 this resulted in an agreement on these measures with the two main consumer protection organisations. Implementation has started; our plan is to inform all unit-linked policyholders about compensation by the end of 2012. Neither the implementation of the compensation schemes nor these additional measures prevent individual policyholders from initiating legal proceedings against ING’s Dutch insurance subsidiaries. Policyholders have initiated and may continue to initiate legal proceedings claiming further damages. Because of the continuous public and political attention for the unit-linked issue in general and the uncertain outcome of pending and future legal proceedings, it is not feasible to predict or determine the ultimate financial consequences.
Most significant joint ventures 2010 Interest held (%) Assets Liabilities Income Expenses
KB Life Insurance Company Ltd (1) 49 1,236 1,118 436 425 ING-BOB Life Insurance Company Ltd 50 333 289 87 85 ING Vysya Life Insurance Company Ltd (1) 26 495 466 127 136
33 RELATED PARTIES In the normal course of business, ING Group enters into various transactions with related parties. 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.
Receivables on ING Bank N.V. and ING Verzekeringen N.V. mainly include long-term funding. Liabilities to ING Bank N.V. mainly include short-term deposits.
Transactions with key management personnel (Executive Board, Management Boards and Supervisory Board) and post-employment benefit plans are transactions with related parties. These transactions are disclosed in more detail as required by Part 9 Book 2 of the Dutch Civil Code in the remuneration report in the annual report. The relevant sections of the remuneration report therefore are part of the annual accounts. For the post-employment benefit plans see Note 21 ‘Other liabilities’.
In 2011 ING made a number of changes in the structure and composition of the Management Boards for Insurance and Banking. As of November 2011 the members of the Management Board Insurance Eurasia and the Management Board Americas Insurance Holdings are considered to be key management personnel and their compensation is therefore included, from that date, in the tables below. Before November 2011 the members of the Management Board Insurance Eurasia were members of the Management Board Insurance.
(1) In light of the changed governance structure of both the Banking and Insurance organisation several changes were made to the Board structure of both entities, which resulted in an overall increase in the number of Board members. In January 2011, one additional Board member joined the Management Board Banking, and two additional Board members joined the Management Board Insurance. In October 2011 a Management Board Banking member stepped down and his successor and another member joined that same month. The latter Board member also joined the Management Board Insurance at the same time. In November 2011, a separate Management Board for Americas Insurance Holdings was created, which included four new members.
(1) Excluding three members that are also members of the Executive Board of ING Groep N.V.
As at 31 December 2011, the remaining outstanding amount from the transaction price that remained payable by the Dutch State is EUR 10.3 billion (2010: EUR 13.1 billion). The net amount of other unamortised components of the total sales proceeds, as explained above, amounts to EUR 0.6 billion payable (2010: EUR 0.7 billion).
Investment contracts for risk of company 6,717 6,066 6,259 5,991 Investment contracts for risk of policyholders 6,939 5,984 6,939 5,984 Amounts due to banks 72,687 73,227 72,233 72,852 Customer deposits and other funds on deposit 468,447 508,755 467,547 511,362 Financial liabilities at fair value through profit and loss
The estimated fair values correspond to the amounts at which the financial instruments at our best estimate could have been traded at the balance sheet date between knowledgeable, willing parties in arm’s length transactions. The fair value of financial assets and liabilities is based on quoted market prices, where available. Such quoted market prices are primarily obtained from exchange prices for listed instruments. Where an exchange price is not available, market prices are obtained from independent market vendors, brokers or market makers. Because substantial trading markets do not exist for all financial instruments various techniques have been developed to estimate the approximate fair values of financial assets and liabilities that are not actively traded. These techniques are subjective in nature and involve various assumptions about the relevant pricing factors, especially for inputs that are not readily available in the market (such as credit spreads for own-originated loans and advances to customers). Changes in these assumptions could significantly affect the estimated fair values. Consequently, the fair values presented may not be indicative of the net realisable value. In addition, the calculation of the estimated fair value is based on market conditions at a specific point in time and may not be indicative of future fair values.
The fair value of private equity is based on quoted market prices, if available. In the absence of quoted prices in an active market, fair value is estimated on the basis of an analysis of the investee’s financial position and results, risk profile, prospects, price, earnings comparisons and revenue multiples and by reference to market valuations for similar entities quoted in an active market.
Debt securities Fair values for debt securities are based on quoted market prices, where available. Quoted market prices may be obtained from an exchange, dealer, broker, industry group, pricing service or regulatory service. If quoted prices in an active market are not available, fair value is determined by management based on an analysis of available market inputs, which may include values obtained from one or more pricing services or by a valuation technique that discounts expected future cash flows using a market interest rate curves, referenced credit spreads, maturity of the investment and estimated prepayment rates where applicable.
Certain asset backed securities in the United States are valued using external price sources that are obtained from third party pricing services and brokers.
The indicative fair value obtained through the discounted cash flow model is then used to select the independently obtained price that is closest to the indicative price. In addition, judgement is applied in the event that the resulting indicative fair value is closest to the highest obtained vendor price and that price is a significant outlier compared to other obtained vendor prices. In such cases, the second highest 178 ING Group Annual Report 2011
Other assets The other assets are stated at their carrying value which is not materially different from their fair value.
The fair values of the financial instruments carried at fair value were determined as follows: Methods applied in determining fair values of financial assets and liabilities 2011 Level 1 Level 2 Level 3 Total
Financial assets designated as at fair value through profit and loss 251 2,300 2,886 5,437 Available-for-sale investments 120,889 81,926 5,724 208,539
Financial assets designated as at fair value through profit and loss 1,143 3,027 1,846 6,016 Available-for-sale investments 113,994 101,816 6,104 221,914
Transfers into Level 3 includes certain bonds which were transferred to Level 3 in 2011 as a result of reduced market liquidity and/or pricing sources that could no longer be classified as market observable.
Amounts recognised in the profit and loss account during the year 193 –5 –275 3 –232 –316 Revaluation recognised in equity during the year 1,047 1,047
Level 3 assets increased because certain bonds were transferred to Level 3 in 2010 as a result of reduced market liquidity and/or pricing sources that could no longer be classified as market observable. On the other hand, Level 3 assets decreased in 2010 because of a transfer of available-for-sale investments of EUR 2.9 billion out of Level 3 to Level 2, relating to mortgage backed securities in the United States. Previously these were classified in Level 3 because of the dispersion between prices obtained for the same security from different price sources. In 2010 prices supported by market observable inputs became available and were used in determining fair value.
Amounts recognised in the profit and loss account during the year 119 85 –5 199 Revaluation recognised in equity during the year 9 9
Investments for risk of policyholders –5 –5 Non-trading derivatives –248 –27 –275 Financial assets designated as at fair value through profit and loss 29 –26 3 Available-for-sale investments –264 32 –232
Valuation for these securities is inherently complex and subjective. Although each security in the portfolio is priced based on an external price, without modification by ING Group, and management is confident that it has selected the most appropriate price in the current market circumstances, the valuation of these portfolios would have been different had different prices been selected. The sensitivity analysis shows that the highest and the lowest available market prices do not materially impact the valuation of these assets as at 31 December 2011.
Transactions with ING Bank N.V. and ING Verzekeringen N.V. 2010 Level 1 Level 2 Level 3 Total
Greece, Italy, Ireland, Portugal and Spain Of the Government and Unsecured Financial institutions’ bonds exposure in Greece, Italy, Ireland, Portugal and Spain as disclosed in Note 4 ‘Investments’, EUR 5.3 billion is classified as available-for-sale and is measured at fair value (with the revaluation recognised in equity, taking into account impairments that are recognised in the profit and loss account). The table below provide the fair value hierarchy per year-end 2011 for the Greek, Italian, Irish, Portuguese and Spanish Government and Unsecured Financial institutions’ bond exposure measured at fair value.
Fair value hierarchy of Greek, Italian, Irish, Portuguese and Spanish bonds at fair value 2011 Level 1 Level 2 Level 3 Total
Interest expense on deposits by banks 902 652 1,266 Interest expense on customer deposits and other funds on deposit 9,383 8,324 10,976 Interest expense on debt securities 3,435 2,761 2,657 Interest expense on subordinated loans 1,625 1,856 1,784 Interest on trading liabilities 27,209 32,847 40,023 Interest on non-trading derivatives 1,658 2,166 4,483 Other interest expense 6,988 6,405 6,286 Interest expense banking operations 51,200 55,011 67,475
Gross premium income from life insurance policies 25,473 26,045 28,476 Gross premium income from non-life insurance policies 1,725 1,741 1,772
Reinsurance ceded –43 –65 –70 –1,888 –2,008 –1,842 –1,931 –2,073 –1,912 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
Direct gross premiums earned 1,728 1,744 1,746 Reinsurance assumed gross premiums earned 23 23 26 Total gross premiums earned 1,751 1,767 1,772
Change in fair value of real estate investments –21 –50 –588 2 –48 –125 –19 –98 –713
Retail Belgium 22 ING Direct 464 107 1,394 –30 Commercial Banking (excluding Real Estate) 301 70 129 –44 Insurance Benelux 410 53 360 Insurance CRE 338 18 36 Insurance US 166 553 527 –5 Insurance Asia/Pacific 15 8 15 –2 –2 ING IM 3 –9 Corporate Line Banking 13 1 16 Corporate Line Insurance 9 6 38 NET RESULT ON DISPOSALS OF GROUP COMPANIES
The result on disposal of the Latin American pensions, life insurance and investment management operations is not included above but in the result on disposal of discontinued operations. Reference is made to Note 25 ‘Discontinued operations’.
Change in fair value of derivatives relating to – fair value hedges –956 –679 –1,321 –72 –69 191 –1,028 –748 –1,130 – cash-flow hedges
Foreign exchange transactions results –374 648 –158 –179 –604 167 –553 44 9
Expenditure from investment contracts Costs of acquiring investment contracts 3 5 3 Other changes in investment contract liabilities 57 91 910
The total Cost of acquiring insurance business (life and non-life) and investment contracts amounted to EUR 1,999 million (2010: EUR 2,843 million; 2009: EUR 1,939 million). This includes amortisation and unlocking of DAC of EUR 1,702 million (2010: EUR 2,697 million; 2009: EUR 1,811 million) and the net amount of commissions paid of EUR 1,884 million (2010: EUR 1,708 million; 2009: EUR 1,758 million) and commissions capitalised in DAC of EUR 1,587 million (2010: EUR 1,562 million; 2009: EUR 1,630 million).
ING has completed a separate annual review of the policyholder behaviour assumptions for the VA Japan business, which has not resulted in material adjustments.
Other underwriting expenditure from life underwriting in 2010 includes a EUR 975 million DAC write-off as explained in Note 51 ‘Operating segments’.
Goodwill 32 540 32 540 Software and other intangible assets 50 31 9 50 31 9
In 2011, impairments are recognised on Property development (in the segment ING Real Estate) due to the sale or termination of large projects in Germany and the Netherlands and on the reassessment of Dutch and Spanish real estate development projects.
In 2011, a goodwill impairment of EUR 32 million (2010: EUR 540 million) is recognised. Reference is made to Note 9 ‘Intangible assets’.
(1) The increase in Share-based compensation arrangements can be explained by ING’s implementation of a global deferral plan as well as regulatory developments which require payment of variable remuneration in stock in lieu of cash.
The option rights are valid for a period of five or ten years. Option rights that are not exercised within this period lapse. Option rights granted will remain valid until the expiry date, even if the option scheme is discontinued. The option rights are subject to certain conditions, including a pre-determined continuous period of service. The exercise prices of the options are the same as the quoted prices of ING Group shares at the date on which the options are granted.
On 6 April 2010 ING Groep N.V. announced that it bought 13,670,000 (depositary receipts for) ordinary shares for its delta hedge portfolio, which was used to hedge employee options and facilitate employee share programmes. The shares were bought in the open market between 23 March and 6 April 2010 at an average price of EUR 7.47 per share.
46 OTHER INTEREST EXPENSES Other interest expenses mainly consist of interest in connection with the insurance operations, including interest on the perpetual subordinated loans.
The effective tax rate in 2011 was lower than the weighted average statutory tax. This is mainly caused by exempt income, which was only partly offset by non deductible expenses and write-down of deferred tax assets.
The effective tax rate in 2009 was lower than the weighted average statutory tax rate. This is caused by the fact that a write-down of the carrying value of deferred tax assets and non-deductible expenses exceeded tax exempt income.
In 2009, the rights issue, which was finalised on 15 December 2009 has an effect on the basic earnings per share and the diluted earnings per share, as defined in IFRS-EU. All weighted average number of shares outstanding before the rights issue are restated with an adjustment factor of approximately 1.3 that reflects the fact that the exercise price of the rights issue was less than the fair value of the shares. The effect of dilutive securities is adjusted as well.
The accounting policies of the operating segments are the same as those described under Accounting policies for the consolidated annual accounts. Transfer prices for inter-segment transactions are set at arm’s length. Corporate expenses are allocated to business lines based on time spent by head office personnel, the relative number of staff, or on the basis of income, expenses and/or assets of the segment.
Retail Belgium Income from retail and private banking activities in Belgium. The main products offered are similar to those in the Netherlands.
Retail CE Income from retail and private banking activities in Central Europe. The main products offered are similar to those in the Netherlands.
Operating segments ING Group Total 2011 Total Banking Total Insurance Eliminations Total
Special items in 2011 includes costs for the Retail Netherlands change programme and strategic repositioning initiatives at Commercial Banking, additional costs for the combining of ING Bank and Postbank in the Netherlands, the transformation programme in Belgium, further restructuring at ING Real Estate following the sale of ING REIM, and costs related to the separation of Banking and Insurance, as well as an adjustment of the Illiquid Assets Back-up Facility based on higher prepayment behaviour in the underlying Alt-A securities and the result on the repurchase of subordinated loans executed in December 2011 as disclosed in Note 42 ‘Other income’ and Note 14 ‘Subordinated loans’.
Operating segments ING Group Total 2010 Total Banking Total Insurance Eliminations Total
Operating segments ING Group Total 2009 Total Banking Total Insurance Elimi-nations Total
– Total investment and other income –1,741 3,061 –171 1,149 Total underlying income 13,036 34,429 –336 47,129
To determine the operating result the following non-operating items are adjusted in the reported underlying result before tax: • Realised capital gains/losses and impairments on debt and equity securities; • Revaluations on assets marked to market through the P&L; and • Other non-operating impacts, e.g. provision for guarantees on separate account pension contracts, equity related and other DAC
As of the fourth quarter of 2010, the Legacy Variable Annuity segment in the US is reported and analysed separately from the other US business in the internal management reporting. Therefore as of 1 October 2010 ING reports the Insurance US Legacy VA business as a separate segment to improve transparency and ongoing business. ING Group’s accounting policy for reserve adequacy as set out in the Accounting policies for the consolidated annual accounts of ING Group requires each segment to be adequate at the 50% confidence level. The separation of the Legacy VA business into a separate segment triggered a charge in the fourth quarter of 2010 to bring reserve adequacy on the new Insurance US Closed Block VA segment to the 50% level. This charge is reflected as a DAC write-down of EUR 975 million before tax. For 2011 the impact of the assumption adjustments includes a charge of EUR 177 million to restore the reserve adequacy of the Insurance US Closed Block VA segment to the 50% level at 31 December 2011. Reference is made to Note 43 ‘Underwriting expenditure’.
Fees and premium based revenues 585 458 1,064 168 1,442 868 4,585
DAC amortisation and trail commissions 213 202 625 124 731 3 1,898
Life & ING IM operating result 795 202 661 19 550 193 2,420
Non-life operating result 179 5 4 188 Corporate Line operating result –402 –402
Income non-modelled life business 40 16 80 136 Life & ING IM operating income 1,318 743 2,082 119 1,619 828 6,709
Life & ING IM operating result 521 285 559 49 468 143 2,025
Non-life operating result 156 7 5 168 Corporate Line operating result –633 –633
Life & ING IM operating result 376 330 568 23 361 183 1,841
Treasury bills and other eligible bills 2,611 4,441 3,182 Amounts due from/to banks –4,505 3,227 2,387 Cash and balances with central banks 31,194 13,072 15,390 Cash and cash equivalents at end of year 29,300 20,740 20,959
Not included in cash and cash equivalents: – amounts due to banks –53,111 –59,954 –71,901 – amounts due from banks 30,706 35,703 28,676
ASSETS Cash and balances with central banks 15,390 22,045 Amounts due from banks 43,397 48,447 Financial assets at fair value through profit and loss – trading assets 111,444 160,378 – investments for risk of policyholders 104,597 95,366 – non-trading derivatives 11,632 16,484 – designated as at fair value through profit and loss 5,517 8,277 Investments – available-for-sale 197,703 242,852 – held-to-maturity 14,409 15,440 Loans and advances to customers 578,946 619,791 Reinsurance contracts 5,480 5,797 Investments in associates 3,699 4,355 Real estate investments 3,638 4,300 Property and equipment 6,119 6,396 Intangible assets 6,021 6,915 Deferred acquisition costs 11,208 12,989 Assets held for sale 5,024 15,312 Other assets 39,229 47,665 Total assets 1,163,453 1,332,809
Insurance provisions –494 –483 –468 55 –1 –55 –1,446 Cash flow hedges 277 –197 –2 –9 69 Pension and post-employment benefits 374 326 700
Comprising: – deferred tax liabilities 3,524 2,281 – deferred tax assets –8,034 –3,969
ING has completed the divestment of its Latin American pensions, life insurance and investment management operations. This transaction is the first major step in the divestment of ING’s insurance and investment management activities.
Risk management in 2011 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
RISK DEVELOPMENTS IN 2011 During 2011, ING continued to actively deleverage and de-risk its balance sheet. The ING Group bond portfolio decreased from EUR 294.5 billion at year-end 2010 to EUR 263.5 billion at year-end of 2011, excluding ING Direct USA. The size of the ING Direct USA bond portfolio is EUR 23.0 billion. The change is mainly caused by changes in the government, financial institutions and ABS and CMBS bond portfolio.
ABS portfolio The RMBS and ABS portfolio changed from EUR 51.2 billion at year-end 2010 to 31.5 billion, excluding ING Direct USA. The RMBS and ABS exposure of ING Direct USA is EUR 15.0 billion. ING Group continued to manage its asset-backed securities (ABS) portfolio downwards in 2011 and reduced the exposure on the ABS portfolio. With the sale of ING Direct USA, the ING Group exposure to ABS is drastically reduced and going forward we will not report them as pressurised assets in our financial reporting. The revaluation reserve on the ABS portfolio deteriorated and is still negative. ING Group still recognised further impairments of EUR 203 million, though for a smaller amount than in the previous year (2010: EUR 541 million). Further details are included in Note 4 ‘Investments’ of the Annual Accounts.
Greece, Italy, Ireland, Portugal and Spain – Total exposures 1) 2) 3)
Credit protection (CDS) Credit protection bought (notional) 112 640 131 43 479 1,405
Throughout 2011 ING has reduced its positions in especially government bonds for some of the weaker countries as a result of these risk analyses.
Several European countries have been downgraded but there have also been some positive developments related to the Eurozone crisis. Financial markets rallied due to amongst others the Long-term Refinancing Operations from the ECB and better than expected economic data. Credit spreads for some of the involved countries tightened significantly. Furthermore, a new Greek bail-out plan was approved in February 2012.
In 2011, new frameworks for the funding and liquidity risk management as well as the organisational Assets and Liability Management (ALM) that reflects the evolved importance of funding and liquidity risk was developed. Both of these frameworks will be implemented in 2012.
ING BANK RISK GOVERNANCE ING Bank’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 Board Bank (and ratified by the Supervisory Board) and is cascaded throughout ING Bank.
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 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.
Executive Level The risk committees described below act within the overall risk policy and delegated authorities granted by the Management Board Bank: • The Finance and Risk Committee (F&RC) is a platform for the CRO and the Chief Financial Officer (CFO), along with their respective direct reports, to discuss and decide on issues that relate to both the finance and risk domains. The primary responsibility of the F&RC is to co-ordinate, on a high level, the finance and risk decisions that have an impact on internal and/or external reporting; • ING Bank Credit Committee – Policy (GCC(P)): Discusses and approves policies, methodologies and procedures related to credit, country and reputation risks within ING Bank. The GCC(P) meets on a monthly basis; • ING Bank Credit Committee – Transaction Approval (GCC(TA)): Discusses and approves transactions which entail taking credit risk (including issuer investment risk). The GCC(TA) meets twice a week; • Asset and Liability Committee ING Bank (ALCO Bank): Discusses and approves on a monthly basis the overall risk profile of all ING Bank’s market risks that occur in its Commercial Banking and Retail & Direct Banking activities. ALCO Bank defines the policy regarding funding, liquidity, interest rate mismatch and solvency for ING Bank; and
From December 2011, the reporting lines have been changed. As of then the CCO reports to the new appointed Head of Non-Financial Risk ING Bank who in his turn reports to the Chief Risk Officer.
ING Bank Risk Appetite Framework ING Bank uses an integrated risk management approach for its banking activities. The MBB uses the risk appetite frameworks to monitor and manage the actual risk profile in relation to the risk appetite, which is derived from ING Bank rating ambition to be in the range of AA rating. It enables the MBB to identify possible risk concentrations and to support strategic decision making. The risk appetite level is reported to the MBB on a quarterly basis and is subsequently presented to the Risk Committee.
Financial Risks For financial risks, ING Bank 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.
Reporting Framework For each business unit and product line, the gross Economic Capital for each risk type is delivered. The net Economic Capital figures are calculated by taking the product of the gross EC and one minus the diversification factor. Total Economic Capital is calculated as the sum of the net EC for each risk type at all reporting levels.
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.
The tables below provide ING Bank’s Economic Capital and Regulatory Capital by risk type and business line. The EC figures shown reflect all diversification effects within ING Bank, including risk reduction between the risk categories; while for RC no diversification is taken into account. In 2010, Credit Risk Regulatory Capital still included Transfer Risk for an amount of EUR 202 million. Economic Capital is including Transfer Risk both in 2011 and 2010.
ONGOING CHANGES IN THE REGULATORY ENVIRONMENT After the turmoil in the financial markets over the last couple of years and the need for governments to provide aid to financial institutions, financial institutions have been under more scrutiny from the public, supervisors and regulators. The resulting revised regulations are intended to ensure that a crisis in the financial system can be avoided in the future. To accomplish this, regulations focus primarily at the following issues: • More stringently aligning risk taking with the capital position of financial institutions (Basel III proposal). The Basel III proposal narrows the definition of core Tier 1 and Tier 1 capital, and introduces a new definition for a leverage ratio that should become part of Pillar 1 of the Basel framework. The Basel Committee has also issued a proposal for new liquidity requirements. Apart from the above mentioned proposals, another aim is to reduce ‘pro-cyclicality’, to avoid that banks would be required to increase their capital in difficult financial times when it is most scarce. Lastly, there is a proposal to introduce additional capital requirements for counterparty credit risk. In addition, the Basel Committee and Financial Stability Board (FSB) are currently considering measures that may have the effect of requiring higher loss absorbency capacity, liquidity surcharges, exposure limits and special resolution regimes for “systemically important financial institutions” (SIFIs) and so-called “Global” SIFIs (G-SIFI). The deadlines for implementation of specific item are set for the timeframe 2013 to 2018.
• Separate from but in line with the Basel III proposal, on a country level local regulators are becoming more stringent on the maximum credit risk bank subsidiaries and branches are allowed to have on their holding companies. In the absence of a supranational harmonisation this leads to so-called trapped pools of liquidity, i.e. excess liquidity in a country that can not merely be transferred (unsecured) to a central treasury in another country.
ING BANK CREDIT RISK ING Bank Credit Risk Management Credit risk is the risk of loss from default by debtors (including bond issuers) or trading counterparties. Credit risks are split into five principal risk categories: a) lending (including guarantees and letters of credit); b) investments; c) pre-settlement (derivatives, securities financing and foreign exchange trades); d) money markets and e) settlement. Additionally a sixth category is determined: country risk, which can include or relate to the earlier mentioned other five risk categories.
The table below summarises different capital measures used for different purposes and shows the difference in key elements and purposes.
Collateral policies During the assessment process of creating new loans, trading limits, or making investments, as well as reviewing existing loans trading positions and investments, ING Bank determines the amount and type of collateral, if any, that a customer may be required to pledge to ING Bank. Generally, the lower the perceived creditworthiness of a borrower or financial counterparty, the more collateral the customer or counterparty will have to provide. Within counterparty trading activities, ING Bank actively enters into various legal arrangements whereby ING Bank and/or counterparties may have to post collateral to one another to cover market fluctuations of their relative positions. Laws in various jurisdictions also affect the type and amount of collateral that ING Bank can receive or pledge. The type of collateral which is held as security is determined by the structure of the loan or position. Consequently, since ING Bank’s portfolio is diversified, the profile of collateral it receives is also diversified in nature and does not reflect any particular collateral type more than others.
As part of its securities financing business, ING Bank entities actively enter into agreements to sell and buy back marketable securities. These transactions can take many legal forms. Repurchase and reverse repurchase agreements, buy/sellback and sell/buyback agreements, and securities borrowing and lending agreements are the most common. The amount of marketable securities that ING Bank held as collateral under these types of agreements was EUR 74.0 billion at 31 December 2011 and EUR 92.0 billion at 31 December 2010. The decrease is commensurate with the overall decrease in open securities financing trades at year end 2011 compared to year end 2010. These amounts exclude the cash leg of the respective transactions, as well as any pledges of securities under Tri-Party agreements (as the underlying is not directly pledged to or owned by ING Bank). As a general rule, the marketable securities that have been received under these transactions are eligible to be resold or repledged in other (similar) transactions. ING Bank is obliged to return equivalent securities in such cases.
Neither past due nor impaired 849,283 822,445 Past due but not impaired (1–90 days) (1) 6,649 5,638
(1) Based on the total amount of credit risk in the respective column using ING Bank’s internal credit risk measurement methodologies. (2) Economic sectors below 2% are not shown separately but grouped in Other.
(1) Geographic areas are based on the country of residence of the obligor.
Collateral Collateral is a security interest in assets. If the customer defaults on its promised performance, the asset is given as collateral or security for that obligation is liquidated, such that the proceeds can be applied towards full or partial compensation of the pledgor’s (financial) obligation to ING Bank. Assets have monetary value and are generally owned by the person or organisation, which gives them as collateral to ING Bank. An asset may be tangible, like plant & machinery, buildings, bonds, receivables etc. or intangible like patents, copyrights and trademarks.
Outstandings for Commercial Banking are reported for the most relevant categories being Financial Institutions, Corporates and Governments, while the remaining outstandings are classified as Other. Credit risk outstandings are inclusive of both on balance and off balance sheet outstandings, and of all risk categories.
Retail * Excluding intercompany positions ** Guarantees received can be additional to pledges and not necessarily replace covers *** The used valuations methods for the underlying covers may vary per cover **** Credit covers are the sum of all existing covers. Excess cover amounts on specific loans cannot be put in place for loans without covers.
Therefore, the figures shown in the table should not be used for netting calculation purposes 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
Aging analysis (past due but not impaired): ING Bank portfolio, outstandings (1) (2)
Past due for 1–30 days 5,455 4,565 Past due for 31–60 days 1,111 973 Past due for 61–90 days 83 100
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) Bank, which advises the MBB on specific provisioning levels.
Private Individuals 4,790 4,838 Real Estate 2,671 2,777 General Industries 819 858 Transportation & Logistics 797 818 Food, Beverages & Personal Care 784 837 Builders & Contractors 774 792
ING Bank holds specific and collective provisions of EUR 3,040 million and EUR 1,133 million, respectively (2010: EUR 2,697 million and EUR 1,404 million respectively), representing the difference between the amortised cost of the portfolio and the estimated recoverable amount discounted at the effective rate of interest. In addition, there is EUR 777 million (2010: EUR 1,094 million) in provisions against the performing portfolio. The 2010 figures are including ING Direct USA.
Increase/(decrease) in loan loss provision 479 497 603 721 588 533 1,670 1,751
The risk costs development in the first half of 2011 was relatively favourable, however, since mid 2011, the economic climate deteriorated. On balance, risk costs for the full year 2011 were in line with 2010 risk costs levels.
Retail 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
Real estate price risk includes 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.
ING Bank Market Risk in Trading Books Governance 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, foreign exchange rates and credit spreads.
The Financial Markets Risk Committee (FMRC) is the market risk committee that, within the risk appetite set by ALCO Bank, sets market risk limits both on an aggregated level and on a desk level, and approves new products. MRM advises both the FMRC and ALCO Bank on the market risk appetite of trading activities.
Other trading controls VaR and event risk limits are the most important limits to control the trading portfolios. Furthermore, ING Bank uses a variety of other limits to supplement VaR and event risk. Position and sensitivity limits are used to prevent large concentrations in specific issuers, sectors or countries. In addition to this, other risk limits are set with respect to the activities in complex derivatives trading. The market risk of these products is controlled by product specific limits and constraints.
During 2011 the overnight VaR for the ING Commercial Banking trading portfolio ranged from EUR 12 million to EUR 29 million.
More details on the VaR of the ING Commercial Banking trading portfolio for 2011 and 2010 are provided in the table below.
(1) Credit spreads are introduced as a separate risk category as of Q4 2011. Minimum, maximum and average values for the risk category Credit spread are calculated on Q4 only. The 2010 credit spreads are consolidated in the interest rate risk category.
Most important interest rate and credit spread sensitivities (year-end 2011) amounts in thousands of euros 2011 2010
(1) Basis Point Value (BPV) measures the impact on value of a 1 basis point increase in interest rates or credit spreads.
ING Bank Market risk in Banking Books ING Bank makes a distinction between trading and banking (non-trading) books. Positions in trading books can change swiftly, whereas positions in banking books are intended to be held until maturity, or at least for the long-term. Books that contain positions to hedge exposures resulting from commercial activities are also classified as banking books.
Interest Rate Risk in Banking Book Interest rate risk in the banking books is defined as the potential negative impact that changing interest rates may have on earnings or market value.
Governance: ALM framework 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.
By currency Euro 32 –237 US dollar –76 –114 Pound sterling –10 –15
Excluding ING Direct USA earnings sensitivity is approximately 0. In 2011 short-term interest rates remained at low levels in both the Eurozone and the US. Earnings sensitivity for an upward shock decreased to a small negative figure. This indicates that when rates go up the increase in interest paid on liabilities only slightly exceeds the increase in interest received on assets. Earnings are therefore relatively insensitive to rate changes.
By currency Euro –1,828 –2,446 US dollar 376 –205 Pound sterling –25 –19
BPV per currency banking books amounts in thousands of euros 2011 2010
By currency Euro –15,545 –21,760 US dollar 4,551 –548 Pound sterling –136 –284
Risk profile – FX Translation result The following table presents the currency exposures in the banking books for the most important currencies: Net currency exposures banking books Foreign Investments Hedges Net Exposure
ING Bank’s real estate exposure (i.e. including leverage) is EUR 4.0 billion of which EUR 0.9 billion is recorded as fair value through P&L. The remaining EUR 3.1 billion is booked at cost or is revalued through equity (with impairments going through P&L).
ING BANK – LIQUIDITY RISK 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.
Liquidity Risk Management MRM is responsible for determining adequate policies and procedures for managing liquidity risk and for monitoring the compliance with these guidelines. In addition it is also responsible for performing liquidity risk stress testing. In accordance with Dutch Central Bank guidelines, ING Bank’s liquidity positions are stress tested on a monthly basis under a scenario that is a mix between a market event and an ING Bank specific event. Additional stress testing exercises are undertaken on consolidated and local level on a periodic and ad-hoc basis.
The funding mix remained well diversified and according to targets set. Deposits accounted for 63% of the total funding mix.
The General Manager Operational Risk Management (ORM) is responsible for monitoring operational risks and developing and establishing the Operational Risk Framework within ING Bank. The General Manager ORM also establishes and approves the policies and minimum standards, supports the business line ORM staff, monitors the quality of operational risk management and assists and supports the Management Board Bank in managing ING Bank’s operational risks. The NFRC is the primary approval and oversight committee. The Non-Financial Risk dashboard (NFRD) enables management to focus on the ten operational risk areas through the quarterly report on regional, divisional and Bank level.
ORM uses a layered functional approach within business lines to ensure systematic and consistent implementation of the group-wide ORM framework, policies and minimum standards. To avoid potential conflicts of interests, it is imperative that the ORM officer is impartial and objective when advising business management on operational risk matters in their business unit or business line. To facilitate this, a strong functional reporting line to the next higher level ORM officer is in place. The functional reporting line has clear accountabilities with regard to objective setting, remuneration, performance management and appointment of new ORM staff.
The yearly objective setting process for both business management and ORM professionals aims to keep improving the management of operational risk throughout ING Bank to ensure that ING stays in control of its current and future operational risks. ING Bank’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.
Model disclosure The Operational Risk Capital model of ING Bank is based on a Loss Distribution Approach (LDA). The Loss Distribution is based on both external and internal loss data exceeding EUR 1 million. The model is adjusted for the specific measured quality of control in a business line and the occurrence of large incidents (‘bonus/malus’). This provides an incentive to local (operational risk) management to better manage operational risk.
ING Bank has further improved its IT risk profile through IT security control implementations and IT process improvements. Specific focus in 2011 was given to further improvements around IT security monitoring, IT platform security and IT user access while specific anti-cybercrime measures were also effectuated.
ING BANK COMPLIANCE RISK Compliance Risk is defined as the risk of impairment of ING Bank’s integrity as a result of failure (or perceived failure) to comply with relevant laws, regulations, ING Bank policies and standards and the ING Bank Business Principles. In addition to reputational damage, failure to effectively manage Compliance Risk could expose ING Bank 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.
Clear and practical policies and procedures are embedded in ING Bank business processes in all Business Lines. Systems are in place to enable management to track current and emerging Compliance Risk issues, to communicate these to internal and external stakeholders, and to drive continuous improvement. ING Bank understands that good Compliance Risk Management involves understanding and delivering on the expectations of customers and other stakeholders, thereby strengthening the quality of key relationships.
ING Bank uses a functional approach Lines to ensure systematic and consistent implementation of the Bank-wide Charter & Framework, policies, Minimum Standards and related procedures. The Local Compliance Officer has the responsibility to assist local management in managing Compliance Risk within that business unit. The Regional or Universal Bank Compliance Officer has a management and 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
ING’s continued actions to mature its compliance risk management programme will ensure that ING continues to comply appropriately with international standards and laws. ING has an on-going objective to continuously strengthen the Financial Economic Crime (FEC) controls related to: • managing Anti-Money Laundering (AML); • Combat Terrorist Financing (CTF); and • Export Trade and Sanction risks.
As a result of our frequent evaluation of all businesses from economic, strategic and risk perspectives ING Bank continues to believe that for business reasons doing business involving certain specified countries should be discontinued, which includes that ING Bank has a policy not to enter into new relationships with clients from these countries and processes remain in place to discontinue existing relationships involving these countries. At present these countries include Myanmar, North Korea, Sudan, Syria, Iran and Cuba. Each of these countries is 246 ING Group Annual Report 2011
ING Bank subject to a variety of EU, US and other sanctions regimes. Cuba, Iran, Sudan, and Syria are identified by the US as state sponsors of terrorism and are subject to US economic sanctions and export controls.
Regulatory measures and law enforcement agencies investigations ING Bank N.V. has continued discussions with its Dutch bank regulator De Nederlandsche Bank (DNB) related to transactions involving persons in countries subject to sanctions by the EU, the US and other authorities and its earlier review of transactions involving sanctioned parties. ING Bank completed the global implementation of enhanced compliance and risk management procedures, and continues working to further strengthen the Financial Economic Crime controls as agreed with DNB.
ING Bank remains in discussions with authorities in the US concerning these matters, including ING Bank’s compliance with Office of Foreign Asset Control requirements. ING Bank has received requests for information from US Government agencies including the US Department of Justice and the New York County District Attorney’s Office. ING Bank is cooperating fully with the ongoing investigations and is engaged in discussions to resolve these matters with the US authorities; however, it is not yet possible to reliably estimate the timing or amount of any potential settlement, which could be significant.
• Ongoing enhancement of Financial Economic Crime controls – ING Bank continued its strong commitment to preventing any involvement in criminal activity. Existing activities were further strengthened by increased monitoring and internal audits as well as awareness and training programmes and an internal annual sign-off process for senior management concerning implementation of policies and procedures relating to Financial Economic Crime including business with sanctioned parties.
ING INSURANCE RISK MANAGEMENT GOVERNANCE ING is engaged in selling a broad range of life and non-life insurance products. Risks from these products arise with respect to the adequacy of insurance premium rate levels and provisions for insurance liabilities, earnings and capital position, as well as uncertainty as to the future returns on investments of the insurance premiums. Financial risks include Investment Risk, Asset and Liability Management and surplus and capital issues. Insurance product risks include Insurance risks (actuarial and underwriting) and interest rate sensitivity. Compliance risk, legal risk, reputation risk and operational risk are classified as Non-Financial Risks.
Governance Risk management within ING is the primary responsibility of the ING Group Chief Risk Officer. The ING Group Chief Risk Officer has a direct functional line with the Deputy Chief Risk Officer of ING Insurance Eurasia and with the Chief Risk officer of ING Insurance US via the ING Insurance US Chief Financial Officer. The General Manager of Insurance Investments is responsible for winding down the activities within Insurance Investments. The ING Group CRO is supported by the Risk functions of ING Group and by the Group functions Corporate Legal and the Functional Controller Insurance.
MISSION AND OBJECTIVES ING Insurance Eurasia is naturally exposed to a variety of risks, being a financial services company that provides wealth management and protection products. The mission of risk management in ING Insurance Eurasia is to ensure that all risks run by the entity are well understood, accurately measured and pro-actively managed, in order to support efficient capital allocation, profitable growth, required returns on capital and predictability in earnings.
ING INSURANCE EURASIA RISK GOVERNANCE ING Insurance Eurasia’s risk 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 Board Insurance Eurasia (MBI Eurasia) and ratified by the Supervisory Board and is cascaded throughout ING Insurance Eurasia.
Product Approval and Review Process A critical aspect of risk management is that all products are designed, underwritten and priced effectively. Within ING Insurance Eurasia this is safeguarded by the Product Approval and Review Process (PARP). This standard includes requirements to risk profile, value-oriented pricing metrics, targets and documentation. The PARP includes requirements to assess market risks, credit risk, insurance risk, compliance risk, legal risk, operational risk as well as the assessment of the administration and accounting aspects of the product. Requirements with respect to the customer suitability of insurance products are an integral part of the PARP.
New Investment class and investment mandate process Complementing the PARP for insurance products, ING Insurance Eurasia maintains a New Investment Class Approval and Review Process (NICARP) for approving new investment classes. Each asset ING Insurance Eurasia invests in should be on the Global Asset List; the list of all approved investment classes. Each Business Unit maintains a Local Asset List that is a subset of the Global List. For a limited number of investment classes, a Group Investment Transaction Approval (GITA) is required for each new transaction. This requirement only applies when the level of complexity or diversity warrants Group approval for individual (programmes of) transaction(s). Actual investments are made based on Investment Mandates, a formal agreement between the owner of the investments and its asset manager. Business Units can only include investment classes in their Investment Mandates that are on their Local Asset List. Next to setting the allowed investment classes, the mandate also serves to agree the strategic asset allocation and asset, industry, regional, and credit concentration limits.
Policies ING Insurance Eurasia has a comprehensive set of risk management policies in place, which are regularly updated to align with the best practices, regulations and change in business profile. Starting in 2011, ING Insurance Eurasia reviews all policies for compliance with emerging Solvency II and other regulations, for example Capital Requirements Directive III (CRD III).
Model governance Models with regards to the disclosed metrics are approved by the ING Insurance Eurasia Model Committee (EMC). The EMC is responsible for policies, procedures, methodologies, models and parameters which are applied within ING Insurance Eurasia. Regional Model Committees are in place for the approval of regional models and parameters. Significant regional models and parameter changes are also subject to EMC approval. Furthermore, the Model Validation function carries out periodic validations of all internal models. To ensure independence from the business and other risk departments the department head reports directly to the Deputy CRO.
ING INSURANCE EURASIA RISK APPETITE FRAMEWORK In order to manage risks on a day-to-day basis and balance value, earnings and capital decisions, ING Insurance Eurasia has implemented a risk limit framework, which follows a top down approach.
Risk Appetite A qualitative statement defining the playing field ING Insurance Eurasia wants to act in. Driven by ING Insurance Eurasia’s business strategy.
Risk Tolerance A quantitative boundary on the risks in which the risk taking should be within. Driven by Capital Rating targets and local capital restrictions and risk appetite for financial and non-financial risks.
Financial Risk Management Report The Financial Risk Management Report (FRMR) is discussed in the Risk Committee of the Supervisory board. The report contains information on the AFR/EC ratio as well as a qualitative summary of relevant risk topics in the regions and specific business units.
Non-Financial Risk Dashboard The Non-Financial Risk Dashboard (NFRD) is a quarterly report that is discussed at the MBI Eurasia and Risk Committee and sent to the Supervisory Board for information. The NFRD provides management at all organisational levels information on their key operational, compliance and legal risks. The NFRD is based on defined risk tolerance within the business and gives a clear description of the risks and responses enabling management to prioritise and to manage operational, compliance and legal risks.
Stress Testing ING Insurance Eurasia complements its regular risk reporting process for financial and non-financial risks with (ad hoc) stress tests. Stress testing examines the effect of exceptional but plausible scenarios on the capital position of ING Insurance Eurasia. Stress testing can be initiated internally or by external parties such as the Dutch Central Bank (De Nederlandsche Bank – DNB) and the European Insurance and Occupational Pensions Authority (EIOPA).
ECONOMIC CAPITAL Economic Capital (EC) within ING Insurance Eurasia is defined as the amount of additional assets to be held above the market value of liabilities in order to ensure a positive surplus in case of adverse movements. The Economic Capital model is based on a 99.5% level of confidence interval on a one-year time horizon.
As reported for ING Insurance excluding US in 2010 10.4 Exclude non-ING Insurance Eurasia entities –2.0 ING Insurance Eurasia 2010, before changes 8.4 Change pension funds fee business to statutory basis –0.1 Change in models and methodology 3.0 ING Insurance Eurasia 2010, on a basis comparable to 2011 11.3
The fee-based pension funds business in Central and Eastern Europe is regulated by local sectoral rules rather than by Solvency II regulations for insurance entities. AFR and EC of the fee-based pensions administration business were previously calculated using market consistent valuation approach. This has been replaced by using the statutory net equity and required capital of the pension funds administration companies. The impact on EC is EUR 0.1 billion.
Economic Capital for ING Insurance Eurasia decreased from 2010 to 2011 primarily due to significant de-risking activities in the Benelux and overall lower market valuations, partly offset by increased interest rate risk in Asia Pacific as actual market rates have become closer to guarantees embedded in the insurance products. The Economic Capital assigned to Corporate Line Insurance Eurasia primarily relates to foreign exchange translation risk of the market value surplus of the business units in non-euro countries to the euro.
The table below shows the breakdown of the Economic capital per risk type. Details can be found in the various risk type sections below.
Insurance risk 2,003 1,833 Business risk 3,011 2,979 Market risk 7,651 9,411 Credit default risk 606 627 Operational risk 640 633 Diversification between risk types –3,625 –4,165 Total insurance operations Eurasia 10,286 11,318
Model disclosure The table below shows the main risk categories for insurance risks within ING Insurance Eurasia. IFRS Earnings sensitivities are defined on a shock scenario at the 90% confidence level, EC numbers are determined using a 99.5% confidence interval on a one-year horizon.
IFRS Earnings & EC: Income protection in the Netherlands and Health riders in Korea and Malaysia
Property & Casualty P&C insurance products cover various risks such as fire damage, car accidents, personal and professional liability, hurricanes etc.
Overall exposure to insurance risks did not change significantly during 2011. Annual review of actuarial assumptions for Insurance risk is reflected in the numbers.
AFR & IFRS earnings sensitivities: – Measured by the impact of a 30% upwards and downwards shock relative to the ten year swap rate. Minimum shock is floored at 50 basis points and capped at maximum 150 basis points. Shocks are applied to forward rates up to the last available tenor of the interest rate curve
AFR & EC: Duration gap for Traditional Life products in Korea caused by non-availability of long duration assets and embedded options in the guaranteed separate account pension business in the Netherlands.
AFR & EC: Translation risk of market value surplus from non-euro businesses
– Liquidity premium is shocked by 50 basis points up to a certain tenor depending on the currency (e.g. EURO 15 years, USD 30 years)
The third source of credit risk is the claims on counterparties from OTC derivatives, money market lending and reinsurance. • Derivatives transactions are only allowed under an ISDA-master agreement with Credit Support Annex, ensuring that ING Insurance
Eurasia receives collateral from its counterparty for the total positive marked-to-market value of all bilateral derivative contracts between ING Insurance Eurasia and that counterparty. In case the net marked-to-market is negative, collateral must be posted with the counterparty.
• Reinsurance credit risk is the risk that one of ING Insurance Eurasia’s reinsurers fails to pay timely, or fails to pay at all, valid claims that were reinsured by ING Insurance Eurasia with that reinsurer. ING Insurance Eurasia mitigates this risk by diversifying its reinsurance exposure over various well rated reinsurers, and by requiring collateral for reinsurance contracts that could lead to reinsurance exposures above a minimum threshold.
AFR & IFRS earnings sensitivities (1): – Measured by the impact of multiplying the Historical Cost, the
IFRS Earnings and EC: General account assets in all regions, mostly bond investments and lending portfolio.
Non-Bank Financial Institutions 17.2% 17.4% Central Governments 43.6% 41.3% Commercial Banks 10.7% 12.9% Private Individuals 7.5% 7.9% Real Estate 2.6% 2.8%
Main shift in 2011 is an increase in central governments due to an increased exposure to European Central Governments, mainly Dutch, Japanese and German.
Promises Promises are defined as a legally binding declaration by persons or organisations that give ING Insurance Eurasia the right to expect and claim from those persons or organisations if an ING Insurance Eurasia’s customer fails on its obligations to ING Insurance Eurasia. An example is the guarantee by the Dutch National Mortgage Guarantee scheme (NHG) for residential mortgage loans.
Past due for 1–30 days 82 88 Past due for 31–60 days 24 28 Past due for 61–90 days 17 14
Similar to other market risks, liquidity risk falls under the supervision of the Risk Committee. ING Insurance Eurasia maintains a liquidity policy that defines liquidity limits in line with risk tolerances. The Liquidity Management Principles include the following: • Interbank funding markets should be used to provide liquidity for day-to-day cash management purposes; • A portion of assets must be invested in unencumbered marketable securities that can be used for collateralised borrowing or asset sales; • Strategic asset allocation should reflect the expected and contingent liquidity needs of liabilities; and • Adequate and up-to-date contingency liquidity plans should be in place to enable management to act effectively and efficiently in times of crisis.
Liquidity risk is measured through several metrics including ratios and cash flow scenario analysis, in the base case and under several stressed scenarios.
Integrated risk assessments are performed at least once a year to determine the completeness of the risks in scope and the level of the risks. Mitigating actions are taken on those risks that are identified as risks beyond the risk appetite level. Status of the mitigating actions is tracked.
ING Insurance Eurasia separates Compliance Risk into four conduct-related integrity risk areas: client conduct, personal conduct, organisational conduct as well as conduct required because of laws and regulations in the financial services industry. In addition to effective reporting systems, ING Insurance Eurasia has a Whistleblower procedure which encourages staff to speak up if they know of or suspect a breach of external regulations or internal policies or Business Principles.
Main developments in 2011 • Building Customer Trust – As part of ING Insurance Eurasia’s customer centric commitment, Compliance Risk Management and the business worked closely together to optimise both products and services to meet the customers’ needs. • Learning – Continuous education and awareness training was provided through face-to-face training sessions and online learning tools.
MISSION AND OBJECTIVES As a financial services company active in investments, life insurance and retirement services ING Insurance US is naturally exposed to a variety of risks. The mission of risk management in ING Insurance US is to build a sustainable and competitive advantage by fully integrating risk management into daily business activities and strategic planning.
RISK GOVERNANCE The risk governance is based on the “three lines of defence” framework which ensures that risk is managed in line with the risk appetite as defined by the Management Board AIH (MB AIH) and ratified by the Supervisory Board and is cascaded throughout ING Insurance US.
For most of 2011 ING Insurance US executive management delegated risk governance to a financial risk committee called “Business Line Insurance US & BL US Closed Block Variable Annuity Asset Liability Committee”, the BL ALCO, and a non-financial risk committee called “Operational Risk Committee”.
• Operational Risk Committee Addressed bottoms up business unit operational risk matters. Coordinated across business units on issues including financial controls, business continuity, and information security. Implemented and monitored ING Group’s operational risk policies across business units.
The Chief Risk Officer (CRO) attends the meetings of both committees. The MB AIH is responsible for managing the risks associated with the activities of ING Insurance US. The MB AIH responsibilities include ensuring the risk management and control systems are effective and ING Insurance US complies with relevant legislation and regulations. The MB AIH reports and discusses these issues on a regular basis with the Supervisory Board, and reports to the Audit Committee on a quarterly basis on ING Insurance US’s risk profile versus its risk appetite.
For risk related issues the MB AIH relies on the Executive Committee which has delegated risk related tasks to the following committees: • Risk Committee Assists the Executive Committee (EC) by focusing on ING Insurance US risk management and capital issues. Advises the EC with respect to financial, non-financial, product and model risk issues (“All Risks”). Recommends, approves and reviews risk policies and determines risk appetite, tolerance and limits. The Risk Committee has a number of sub-committees focussing on different risk areas: – Product Committee Oversees all insurance product risk issues across ING Insurance US. These include insurance risks and interest rate sensitivity (interest guarantees, profit sharing to policyholders, lapse/surrender or increased exposure of products sold, and hedges). Responsible for preparation/approval on product risk items (e.g. product approval, actuarial assumption setting), monitoring underwriting and management of the product portfolio.
The ING Group CRO has delegated the day-to-day Risk Management within ING Insurance US to the ING Insurance US CRO. The ING Insurance US CRO’s department (US Enterprise Risk Management) consists of several risk functions that support the overall business unit and ING Insurance US risk management activities.
Policies ING has a framework of risk policies, procedures, guidance and practice notes 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 Insurance level framework and meets local (regulatory) requirements. Senior Management is responsible to ensure policies, procedures and standards are implemented and adhered to. Policies, procedures, guidance and practice notes are regularly reviewed and updated via the relevant risk committees to reflect changes in markets, products, guidance and emerging best practices.
Stress Testing ING Insurance US complements its regular risk reporting process with (ad hoc) stress tests. Stress testing examines the effect of exceptional but plausible scenarios on the capital position for ING Insurance US. Stress testing can be initiated internally or on certain request from external constituents.
Earnings sensitivity to morbidity risk (e.g. sickness, disability, accidental death, workers’ compensation, medical insurance) is present in the Employee Benefits business.
Sensitivities Mortality and morbidity sensitivities are calculated on a diversified basis at a 10% level assuming a normal probability distribution of results and a specified mortality/morbidity scenario to calibrate the distribution. The largest contribution to the mortality sensitivity comes from the Retail Life business while the morbidity exposure relates for a large part to the Employee Benefit business.
BUSINESS RISK Business risk for insurance is essentially the risk insurance operations accept as consequence of choosing to be in the business. In practice this can be defined as the exposure to the possibility that experience differs from expectations with respect to expenses, the run-off of existing business (persistency/renewals), future premium rerating, etc. The calculation of Business Risk Capital is specified by the regulatory capital methodology prescribed by the National Association of Insurance Commissioners (NAIC). ING Insurance US targets a capital level equal to 425% of the Company Action Level specified by the NAIC.
Interest Rate – Impact on assets and liabilities due to movements of interest rates – Measured by the impact of a 1% upwards and downwards parallel shift of US Treasury curve
– Measured by the impact of a 25% drop in equity prices
Within ING Insurance US, the goal is to maintain a low-risk, well diversified credit risk portfolio that meets or exceeds market based benchmark returns. ING Insurance US has a policy of maintaining a high-quality investment grade fixed income portfolio while avoiding large risk concentrations. The emphasis is on managing total exposure and concentration risk by means of portfolio level risk limits and concentration limits for countries, individual borrowers and borrower groups. Counterparty credit risk is mitigated by only transacting with counterparties that meet minimum credit quality standards as well as by requesting collateral for all larger exposures.
Issuer or Investment Risk – Risk related to the impact of a credit default or rating migration, plus the risk that a change in general credit spread levels can have on the market value of these instruments
Risk Profile Risk classes As a result of the downgrade of the United States Government in August 2011 by S&P, the exposure to AAA rated assets decreased to 16.5%. This resulted in a large “inflow” in the AA category, but that was offset by insurance companies where ING Insurance US has (collateralised) reinsurance counterparty risk were downgraded from AA to A. The 17–22 category largely consists of unrated exposures. The exposure to assets actually rated CCC or below is less than 3% of the portfolio.
Non-Bank Financial Institutions 38.6% 41.5% Real Estate 8.5% 7.9% Central Governments 8.2% 8.4% Natural Resources 6.9% 5.5%
Commercial Banks 4.4% 3.4% Food, Beverages & Personal Care 3.6% 3.2% Chemicals, Health & Pharmaceuticals 3.1% 3.0% Private Individuals 2.2% 2.3%
(1) Economic sectors below 2% are not shown separately but grouped in ‘Other’.
For Operational Risk, ING Insurance US follows the ING Group framework governing the process of identifying, assessing, mitigating, monitoring and reporting operational risks. The ING framework is based on the elements of the Enterprise Risk Management model of COSO (Committee of Sponsoring Organisations of the Treadway Commission).
The Operational risk function works with the ING Operational Risk Management (ORM) Scorecard process to evaluate yearly the embedding level of the Operational Risk Management Framework in each business. Policies and minimum standards governing the framework are kept in the policy house. During 2011 Operational Risk started with the implementation of an ING Insurance US policy house in preparing for a stand-alone public organisation.
The Compliance function In ING Insurance US, the Compliance function is an independent control and risk management department. The ING Insurance US Chief Compliance Officer reports directly to the ING Insurance US Chief Legal Officer, who is a member of the ING Insurance US Executive Committee. The ING Insurance US Chief Compliance Officer also has a functional reporting line to the ING Group Chief Compliance Officer.
Compliance Risk Management Framework ING Insurance US adheres to the ING Group Compliance Framework, which consists of three key components: the Compliance Risk Management process, an Advisory component and the Scorecard. ING Insurance US Compliance executes a regular process of identifying, assessing, mitigating, monitoring and reporting compliance risks. The Compliance function works with Operational Risk Management’s annual evaluation process, assessing the implementation of compliance program elements within each business line and across the enterprise.
ING Insurance US also maintains a Whistleblower process, which encourages staff to speak up, without fear of reprisal, if they know of or suspect a breach of laws, regulations or internal policies. ING Insurance US also maintains a domestic “hotline” operated by a third-party vendor that is available to all employees to report suspected misconduct, and reporting employees may elect to remain anonymous in doing so.
• Employee Compliance Training: Continuous education and awareness training was provided through the ING Learning Center, with four required Corporate Responsibilities Courses for all ING Insurance US employees, in addition to two targeted courses on Privacy and Anti-Money Laundering for certain designated employees.
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.
The changes from 2010 to 2011 are the result of many factors including: • Reduction in interest rates increasing exposure to further declines in rates due to product guarantees; • Hedging programs, including various actions taken to reduce the risk of declining rates; • Hedging activities for Closed Block Variable Annuity related to both interest rates and equity exposure; • Turnover of the asset portfolio; and • Refinement of calculation of equity risk arising from hedge funds and limited partnerships was the primary driver of the increase in equity risk for US excluding CB-VA.
Taking into account diversification between risk factors, Insurance US (excluding CB-VA) is exposed to a EUR 0.9 billion decrease in regulatory capital and CB-VA is exposed to a EUR 0.3 billion decrease in regulatory capital within the context of the market and non-market sensitivity analysis.
• EC, or Economic Capital (ING Insurance Eurasia), is the required capital for the insurance operations of ING Insurance Eurasia, based on a 99.5% confidence interval. This interval is aligned with the Solvency II capital requirement. The EC for pension funds is based on sectoral rules. The excess of AFR over EC is set based on the business strategy and resulting risk appetite defined by the Management Board Eurasia.
Adjustments to equity: Revaluation reserve debt securities –4,142 –1,158 213 –19 Revaluation reserve crediting to life policyholders 3,492 1,488 Revaluation reserve cash flow hedge –1,970 –847 822 639 –2,883 –1,567 Goodwill (4) –2,006 –2,908 –1,390 –1,645 –786 –1,425
(2) Tier 1 instruments issued by ING Group (e.g. perpetual debt securities and preference shares) at nominal value. Group hybrid Tier 1 instruments other than preference shares are provided as hybrid capital to ING Bank or ING Insurance.
(3) Investments in subsidiaries less equity (including core Tier 1 securities) of the Group holding company. This net debt position is provided as equity to ING Insurance and ING Bank.
(2010: EUR –382 million) for Real estate for own use and EUR –441 million (2010: EUR –107 million) for own credit risk. The Dutch banking regulator requires this deduction to be made from Tier 1 capital. This deduction is added back to Tier 2 capital.
(6) Qualifying dated subordinated debt issued by ING Insurance at nominal value. (7) Excess Insurance hybrids over the regulatory cap need to be deducted from both Insurance and Group capital. (8) Consists of EUR 9,516 million (2010: EUR 10,882 million) Tier 2 capital and no Tier 3 (2010: nil), offset by EUR 1,014 million (2010: EUR 1,069 million)
EBA capital exercise An additional capital exercise was proposed by the EBA and agreed by the Council on 26 October 2011. This exercise required banks to strengthen their capital positions by building up a temporary capital buffer against sovereign debt exposures to reflect current market prices. In addition, it required them to establish a buffer such that the Core Tier 1 capital ratio reaches a level of 9% by the end of June 2012. ING Bank already meets the 9% Core Tier 1 ratio after the removal of the prudential filters on sovereign assets in the Available-forSale portfolio and prudent valuation of sovereign debt in the Held-to-Maturity and Loans and receivables portfolios, reflecting current market prices.
Required capital based on Basel I floor (5) 31,107 29,860 BIS ratio based on Basel I floor (5) 12.12% 13.17%
ING INSURANCE The table below shows the Insurance Group Directive position which represents the consolidated regulatory Solvency I position of ING Insurance business. The Insurance companies complied with their respective local regulatory requirements.
(5) The actual required regulatory adjustments for IGD capital and the EU required capital may be different from the estimate since the statutory results are not final until filed with the regulators.
Group Hybrid capital (2) 2,617 2,094 Insurance hybrid capital (3) 1,751 2,313 Total hybrids 4,368 4,407
Required capital banking operations 31,107 29,860 Required capital insurance operations 9,515 8,826 Total required capital 40,622 38,686
BIS ratio (Bank) Year-end actual BIS ratio 14.26% 15.30% Regulatory minimum BIS ratio 8.00% 8.00% Target minimum BIS ratio 10.00% 10.00%
Main credit ratings of ING at 31 December 2011 Standard & Poor’s Moody’s Fitch rating outlook rating outlook rating outlook
References relate to the notes starting on page 290. These form an integral part of the parent company annual accounts.
Unrealised revaluations after taxation 921 224 1,145 Realised gains/losses transferred to profit and loss 723 723 Transfer to insurance liabilities/DAC –2,004 –2,004 Change in cash flow hedge reserve 1,124 1,124 Unrealised revaluations from net investment hedges 167 167 Exchange rate differences –150 –3 –153 Other revaluations Total amount recognised directly in equity 781 –3 224 1,002
Transfer to share of associates reserve 706 –706 Employee stock option and share plans –59 –59 Repayment of non-voting equity securities –2,000 –2,000 Repurchase premium –1,000 –1,000 Purchases/sales of treasury shares 50 50
(1) Other reserves includes Retained earnings, Treasury shares, Other reserves and Unappropriated result.
BASIS OF PRESENTATION The parent company accounts of ING Group are prepared in accordance with the financial reporting requirements included in Part 9 of Book 2, of the Dutch Civil Code. The accounting policies applicable to presentation and disclosures are in accordance with the financial reporting requirements included in Part 9 of Book 2, of the Dutch Civil Code. The principles of valuation and determination of results stated in connection with the consolidated balance sheet and profit and loss account are also applicable to the parent company balance sheet and profit and loss account with the exception of Investments in group companies and investments in associates which are recognised at net asset value with goodwill, if any, recorded under intangible assets.
The profit and loss account is drawn up in accordance with Section 402, Book 2, of the Dutch Civil Code.
Accounting policies for the parent company annual accounts of ING Group 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
Result of group companies 5,337 3,004 Capital contribution 1,500 Dividend –3,000 –200
Receivables from group companies 10,716 11,502 Other receivables, prepayments and accruals 487 463
As at 31 December 2011 an amount of EUR 10,448 million (2010: EUR 11,524 million) is expected to be settled after more than one year from the balance sheet date.
The Share of associates reserve includes the following components: Reserve for non-distributable retained earnings of associates of EUR 1,573 million (2010: EUR 907 million) and Revaluation reserve of associates of EUR 6,527 million (2010: EUR 5,706 million).
No changes have occurred in the issued share capital in 2011 and 2010.
Notes to the parent company annual accounts of ING Group continued 292 ING Group Annual Report 2011
Debenture loans 5,500 6,571 Amounts owed to group companies 2,716 501 Other amounts owed and accrued liabilities 1,103 1,581 Derivatives from group companies 153 236
Notes to the parent company annual accounts of ING Group continued 294 ING Group Annual Report 2011
Auditor’s responsibility Our responsibility is to express an opinion on these annual accounts based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing, and the standards of the Public Company Accounting Oversight Board (United States). This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether about the annual accounts are free from material misstatement.
Net result 5,766 Addition to reserves pursuant to Article 37 (4) of the Articles of Association 5,766 At the disposal of the General Meeting of Shareholders pursuant to Article 37 (5) of the Articles of Association 0
Proposed appropriation of result amounts in millions of euros, except for amounts per share 1 W ho w e are 2 Report of the Executive Board 3 C orporate governance 4 C onsolidated annual accounts 5 Parent com pany annual accounts 6 O ther inform ation 7 A
In case one or more of the factors mentioned above adversely affects the profitability of our business this might also result, among other things, in the following: • the unlocking of deferred acquisition costs impacting earnings; and/or • reserve inadequacies which could ultimately be realised through profit and loss and shareholders’ equity; and/or • the write down of tax assets impacting net results; and/or • impairment expenses related to goodwill and other intangible assets, impacting net results; and/or • movements in Risk Weighted Assets for the determination of required capital.