Dear stakeholder, Looking back on 2010, we can conclude that ING closed a remarkable year in the history of the company. It was a real transition year. Throughout those 12 months we worked hard at shaping our future. We took important steps to create strong stand-alone companies in preparation for the final separation of our Banking and Insurance/Investment Management businesses. The Bank will continue as one integrated banking organisation with one management team and one balance sheet. For our Insurance/Investment Management activities we plan to have two initial public offerings (IPOs).
* Still valid on 14 March 2011, the date of this Annual Report. ** All ratings on ING Group have a stable outlook. *** All Bank long-term ratings have a stable outlook. **** All Insurance long-term ratings have a negative outlook.
which will be further developed in 2011. ING wants to become a global top employer with enthusiastic and ambitious employees, who want to share in the bank’s success. Specific areas of focus include profiles, training, career development and pay and benefits.
BUSINESS DEVELOPMENTS Retail Banking is well positioned in the important Asian markets of India, China and Thailand.
Gross premium income 27,947 30,170 New sales 4,877 4,426 Administrative expenses/operating income 43.9% 44.3% Life general account assets (in EUR billion) 165 143 Client balances (in EUR billion) 454 408 Administrative expenses (total) 3,698 3,431 Underlying Return on IFRS-EU Equity –1.8% –0.9%
#2 Pensions company in Latin America 2 Report of the Executive Board
Regulatory changes in several of ING’s key markets had a marked dampening impact on some ING pension funds in 2010, especially in Poland and Hungary. In Life, Slovakia, Bulgaria and especially Greece faced difficult conditions, yet companies in our key markets were able to grow their sales compared to 2009. Poland and Hungary had double-digit sales growth in Life. There were reduced bancassurance activities in some countries, especially in single premium unit-linked business. Lapses and surrenders, although lower than in 2009, still remained relatively high.
Greenfields in Rest of Asia In Thailand, ING’s bancassurance relationship with TMB Bank remained the key driver of growth. Further work was done to improve productivity in the tied agency channel.
Given the underlying result of ING Insurance US over the third quarter which was affected by various non-operating impacts, management presented several measures to the Supervisory Board in November to mitigate the issues in the US. Furthermore, the Supervisory Board supported the choice of a divestment strategy base case of a European-led IPO and a US-focused IPO. In November, the implementation of the strategy for the bank was presented to the Supervisory Board as well as the implementation of the Dutch Banking Code.
• In contrast to the Sarbanes-Oxley Act of 2002, the Corporate Governance Code contains an ‘apply-or-explain’ principle, offering the possibility to deviate from the Corporate Governance Code as long as any such deviations are explained. To the extent that such deviations are approved by the General Meeting, the company is deemed to be in full compliance with the Corporate Governance Code.
In accordance with the Corporate Governance Code, members of the Supervisory Board are to disclose material conflicts of interest and potential conflicts of interest and to provide all information relevant thereto. Thereupon the Supervisory Board – without the member concerned taking part – decides whether a conflict of interest exists. In special circumstances, the Supervisory Board may deviate from this rule and decide that, notwithstanding the fact that the matter would entail a conflict of interest according to the Corporate Governance Code, a conflict of interest does not exist. This concerns in particular situations in which the conflict of interest is based on a marriage that exists no longer, to allow for situations where there is no material family relation.
The decrease came about as follows: add: conversion of shares into depositary receipts 65,141 less: conversion of depositary receipts into shares 451,858
The deferred cash and deferred stock awards will be subject to tiered vesting at the first, second and third anniversary of the grant date (one-third per annum). Vesting is conditional on an ex-post assessment by the Supervisory Board. The ex-post assessment cannot lead to an upward adjustment of the value of the cash deferred portion or the number of deferred shares.
Remuneration Supervisory Board 2010 The table below shows the remuneration, expense allowances and attendance fees per Supervisory Board member for 2010 and previous years.
EQUITY Shareholders’ equity (parent) 13 41,555 33,863 Non-voting equity securities 13 5,000 5,000
ING Group does not expect the adoption of these new or revised standards and interpretations to have a significant effect on the consolidated financial statements.
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES The fair value of financial instruments are based on quoted market prices at the balance sheet date where available. The quoted market price used for financial assets held by the Group is the current bid price; the quoted market price used for financial liabilities is the current ask price.
Equity securities 392 392 Debt securities 3,672 3,478 Loans and receivables 570 524
Reclassifications to Loans and advances to customers and Amounts due from banks (2009 and 2008) Reclassifications out of available-for-sale investments to loans and receivables are allowed under IFRS-EU as of the third quarter of 2008. In the second and first quarter of 2009 and in the fourth quarter of 2008 ING Group reclassified certain financial assets from Investments available-for-sale to Loans and advances to customers and Amounts due from banks. The Group identified assets, eligible for reclassification, for which at the reclassification date it had an intent to hold for the foreseeable future. The table below provides information on the three
As at 31 December 2010, the balance sheet value included debt securities which were lent or sold in repurchase transactions amounting to EUR 3,302 million (2009: EUR 6,853 million) and EUR 14,617 million (2009: EUR 20,900 million), respectively.
– Loans and advances to customers 1,932 1,461 3,242 2,892 5,174 4,353
ING Retail Property Partnership Southern Europe C.V. 21 52 1,001 759 48 67 ING Real Estate European Industrial Fund C.V. 15 50 647 308 42 28 Other investments in associates 934
Goodwill impairment testing Goodwill is tested for impairment at the lowest level at which it is monitored for internal management purposes. This level is defined as the so called ‘reporting units’ as set out above. Goodwill is tested for impairment by comparing the book value of the reporting unit to the best estimate of the recoverable amount of that reporting unit. The book value is determined as the IFRS-EU net asset value including goodwill. The recoverable amount is estimated as the higher of fair value less cost to sell and value in use. Several methodologies are applied to arrive at the best estimate of the recoverable amount.
Other includes EUR 1,875 million (2009: EUR 2,058 million) related to transactions still to be settled at balance sheet date.
Changes in the composition of the group –2,366 1 –110 1 –2,476
Opening balance 11,302 21,085 Changes in the composition of the group –8,208
Included in Interest income and interest expense on non-trading derivatives is EUR 3,613 million (2009: EUR 2,159 million) and EUR 3,138 million (2009: EUR 1,964 million), respectively, relating to derivatives used in cash flow hedges.
As at 31 December 2010, the fair values of outstanding non-derivatives designated under net investment hedge accounting was EUR 208 million (2009: EUR 555 million).
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’ and Note 4 ‘Investments’ for the relevant amounts.
In October 2009 ING reached an agreement to sell its Swiss Private Banking business to Julius Baer for a consideration of EUR 345 million (CHF 520 million) in cash. The transaction generated a net profit for ING of EUR 73 million. The sale was completed in January 2010. The Swiss Private Banking business was previously included in the segment Retail CE.
In August 2009 ING obtained control of its 50% owned joint venture 3W Holding B.V., a real estate development company. ING obtained a majority representation in the Supervisory Board of 3W Holding B.V. and entered into an option agreement that allows ING to acquire the remaining 50%. As a result of obtaining control, 3W Holding B.V. is fully included in the consolidation as of September 2009. Net assets upon consolidation amounted to EUR –21 million. The estimated consideration payable for obtaining the remaining 50% under the option agreement is approximately EUR 5 million. Therefore, goodwill of EUR 26 million is recognised. This goodwill is mainly attributable to operational synergies arising from obtaining control of the professional network of 3W and the future business potential in the southern Netherlands where 3W is active.
Liabilities Trading liabilities 119 119 Non-trading derivatives –2 2 Financial liabilities designated as at fair value through profit and loss 85 85 Investment contracts (for contracts carried at fair value) 1 –5 –4
Liabilities Trading liabilities –64 –64 Non-trading derivatives –154 67 –87 Financial liabilities designated as at fair value through profit and loss 124 124 Investment contracts (for contracts carried at fair value) 2 2
Attribution to non-voting equity securities (1) –441 –605 Impact of rights issue (2) 583.1 617.5
Insurance Latin America Income from life insurance and retirement services in Latin America. Insurance Asia/Pacific Income from life insurance and retirement services in Asia/Pacific.
Corporate Line Insurance The Corporate Line Insurance includes items related to capital management, run-off portfolios and ING Re. * Excluding US Closed Block VA
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 determines the amount and type of collateral, if any, that a customer may be required to pledge to ING. 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 actively enters into various legal arrangements whereby ING 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 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’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.
The Financial Markets Risk Committee (FMRC) is the market risk committee that, within the guidelines set by ALCO Bank, sets market risk limits both on an aggregated level and on a desk level, and approves new products. CMRM advises both the FMRC and ALCO Bank on the market risk appetite of trading activities.
While the reserves for the segment US Closed Block VA are adequate at the 50% confidence level, a net reserve inadequacy exists using a prudent (90%) confidence level. In line with Group Policy, Insurance US Closed Block VA is taking measures to improve adequacy in that region. This inadequacy was offset by reserve adequacies in other segments, such that at the Group level there is a net adequacy at the prudent (90%) confidence level.
Insurance Benelux and Corporate Line are the largest users of Economic Capital. Increased interest rate, equity and credit spread exposure and a lower recognition of diversification has increased Economic Capital for Benelux. The Corporate Line risk includes foreign exchange translation risk related to the potential loss of market value surplus in non-Euro denominated business units. The corporate line increase in Economic Capital has four main causes: the reinsured Japan variable annuity business, which is now included in the corporate line (in 2009 included in Asia/Pacific), the increased Economic Capital related to the minority stake in our Brazil business which is included in the corporate line, and a higher translation risk exposure mainly from increased market value surplus in non-Euro business and a decreased recognition of diversification. The Asia/Pacific risk is unchanged as a lower recognition of diversification offsets the move of the reinsurance Japan variable annuity business to the corporate line.
IT Risk Governance: IT risk management has become more and more important because of increasing dependency on IT and the increase of IT risk due to amongst others cybercrime. Two Executive IT Risk Steering Committees, one for Banking and one for Insurance, steer and monitor ING’s IT Risk Management process and results. In 2011 these Committees will be integrated into the respective ORC’s.
Capital calculation The Operational Risk Capital model of ING 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 scorecard results, taking into account the specific 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. The Bank Operational Risk Regulatory Capital is based on the Advanced Measurement Approach (AMA) decreased from EUR 3,309 million in 2009 to EUR 2,872 million in 2010 due to the extension and improvement of business environment factors and the update of the external operational loss data in the capital model as approved by the Operational & Residual Risk Committee of ING. ING started in 2010 a program to further enhance its AMA framework in 2011 and align with peer/ industry practices as they develop.
The table below provides an overview of the shock scenarios applied for the AFR and Earnings sensitivities. These shocks are also the basis for the US regulatory capital market risk scenarios.
Swaption volatilities up by 30% Equity implied volatility up by 80% for tenors less than 1 year, up 30% for tenors between 1 and 3 years, up 20% for tenors between 3–7 years and up 10% for tenors of 7 years and above.
PROCESSES FOR MANAGING CAPITAL In addition to measuring capital adequacy, Capital Management also ensures that sufficient capital is available through setting targets and limits relevant to the above mentioned metrics for ING Group, ING Bank and ING Insurance and ensuring adherence to the set limits and targets through planning and executing capital management transactions. The process is supplemented by stress testing and scenario analysis. The ongoing assessment and monitoring of capital adequacy is embedded in Capital Management’s capital planning process and results in a quarterly capital update report which is presented to both the ING Group Finance and Risk Committee and the ING Group Executive and Supervisory Boards. The main objective of the assessment is to ensure that ING Group as a whole has sufficient capital relative to its risk profile both in the short and the medium term.
Unrealised revaluations after taxation 12,344 –112 12,232 Realised gains/losses transferred to profit and loss 1,406 1,406 Transfer to insurance liabilities/DAC –2,079 –2,079 Change in cash flow hedge reserve revaluations –805 –805 Unrealised revaluations from net investment hedges –294 –294 Exchange rate differences 208 –4 204 Total amount recognised directly in equity 10,780 –4 –112 10,664
Rights issue –64 Share-based payments –23 –27 –2,140,863 –1,058,658 4 SUBORDINATED LOANS
In the event current resources do not satisfy our needs, we may have to seek additional financing. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, our credit ratings and credit capacity, as well as the possibility that customers or lenders could develop a negative perception of our long- or short-term financial prospects. Similarly, our access to funds may be limited if regulatory authorities or rating agencies take negative actions against us. If our internal sources of liquidity prove to be insufficient, there is a risk that external funding sources might not be available, or available at unfavourable terms.
We operate in highly regulated industries. There could be an adverse change or increase in the financial services laws and/or regulations governing our business. We are subject to detailed banking, insurance, asset management and other financial services laws and government regulation in each of the jurisdictions in which we conduct business. Regulatory agencies have broad administrative power over many aspects of the financial services business, which may include liquidity, capital adequacy and permitted investments, ethical issues, money laundering, privacy, record keeping, and marketing and sales practices. Banking, insurance and other financial services laws, regulations and policies currently governing us and our subsidiaries may also change at any time and in ways which have an adverse effect on our business, and it is difficult to predict the timing or form of any future regulatory or enforcement initiatives in respect thereof. Also, bank regulators and other supervisory authorities in the EU, the US and elsewhere continue to scrutinise payment processing and other transactions under regulations governing such matters as money-laundering, prohibited transactions with countries subject to sanctions, and bribery or other anti-corruption measures. Regulation is becoming increasingly more extensive and complex and regulators are focusing increased scrutiny on the industries in which we operate, often requiring additional Company resources. These regulations can serve to limit our activities, including through our net capital, customer protection and market conduct requirements, and restrictions on businesses in which we can operate or invest. If we fail to address, or appear to fail to address, appropriately any of these matters, our reputation could be harmed and we could be subject to additional legal risk, which could, in turn, increase the size and number of claims and damages asserted against us or subject us to enforcement actions, fines and penalties.
• Dodd−Frank establishes the Bureau of Consumer Financial Protection (‘BCFP’) as an independent agency within the Federal Reserve to regulate consumer financial products and services offered primarily for personal, family or household purposes. The BCFP will have significant authority to implement and enforce federal consumer financial laws, including the new protections established under Dodd−Frank, as well as the authority to identify and prohibit unfair and deceptive acts and practices. In addition, the BCFP will have broad supervisory, examination and enforcement authority over certain consumer products, such as mortgage lending. Insurance products and services are not within the BCFP’s general jurisdiction, and broker−dealers and investment advisers are not subject to the BCFP’s jurisdiction when acting in their registered capacity.
Risk factors continued 274 ING Group Annual Report 2010 7 Additional information
The implementation of the divestments announced in connection with the Restructuring Plan, including the separation of the insurance and most of the investment management operations from the banking operations, will also give rise to additional costs related to the legal and financial assessment of potential transactions. The implementation may also result in increased operating and administrative costs. The process of completing the steps contemplated by the Restructuring Plan may be disruptive to our business and the businesses we are trying to sell and may cause an interruption or reduction of our business and the businesses to be sold as a result of, among other factors, the loss of key employees or customers and the diversion of management’s attention from our day-to-day business as a result of the need to manage the divestment process as well as any disruptions or difficulties that arise during the course of the divestment process. We may face other difficulties in implementing the Restructuring Plan and completing the planned divestments. For instance, the divestments, individually or in the aggregate, may trigger provisions in various contractual obligations, including debt instruments, which could require us to modify, restructure or refinance the related obligations. We may not be able to effect any such restructuring or refinancing on similar terms as the current contractual obligations or at all. In addition, the announced divestments could be the subject of challenges or litigation, and a court could delay any of the divestment transactions or prohibit them from occurring on their proposed terms, or from occurring at all, which could adversely affect our ability to use the funds of the divestments to repurchase the Core Tier 1 Securities, reduce or eliminate our double leverage and strengthen our capital ratios as anticipated and eliminate the constraints on competition imposed by the EC.
EMBEDDED VALUE (EV) Embedded value is the present value of all future cash flows from the contracts being owned today (embedded value does not take into account future sales). The discount rate used is equal to Weighted average cost of capital.