ING Direct 2009 Annual Report Download - page 276

With respect to secured transactions, our credit risk may be exacerbated when the collateral held by us cannot be realised, or is liquidated
at prices not sufficient to recover the full amount of the loan or derivative exposure due us. We also have exposure to a number of
financial institutions in the form of unsecured debt instruments, derivative transactions and equity investments. For example, we hold
certain hybrid regulatory capital instruments issued by financial institutions which permit the issuer to defer coupon payments on the
occurrence of certain events or at their option. The EC has indicated that, in certain circumstances, it may require these financial
institutions to defer payment. If this were to happen, we expect that such instruments may experience ratings downgrades and/or a drop
in value and we may have to treat them as impaired, which could result in significant losses. There is no assurance that losses on, or
impairments to the carrying value of, these assets would not materially and adversely affect our business or results of operations.
In addition, we are subject to the risk that our rights against third parties may not be enforceable in all circumstances. The deterioration or
perceived deterioration in the credit quality of third parties whose securities or obligations we hold could result in losses and/or adversely
affect our ability to rehypothecate or otherwise use those securities or obligations for liquidity purposes. A significant downgrade in the
credit ratings of our counterparties could also have a negative impact on our income and risk weighting, leading to increased capital
requirements. While in many cases we are permitted to require additional collateral from counterparties that experience financial difficulty,
disputes may arise as to the amount of collateral we are entitled to receive and the value of pledged assets. Our credit risk may also be
exacerbated when the collateral we hold cannot be realised or is liquidated at prices not sufficient to recover the full amount of the loan or
derivative exposure that is due to us, which is most likely to occur during periods of illiquidity and depressed asset valuations, such as those
currently experienced. The termination of contracts and the foreclosure on collateral may subject us to claims for the improper exercise of
its rights. Bankruptcies, downgrades and disputes with counterparties as to the valuation of collateral tend to increase in times of market
stress and illiquidity.
Any of these developments or losses could materially and adversely affect our business, financial condition, results of operations, liquidity
and/or prospects.
Reinsurers
Our insurance operations have bought protection for risks that exceed certain risk tolerance levels set for both our life and non-life
businesses. This protection is bought through reinsurance arrangements in order to reduce possible losses. Because in most cases we must
pay the policyholders first, and then collect from the reinsurer, we are subject to credit risk with respect to each reinsurer for all such
amounts. As a percentage of our (potential) reinsurance as of 31 December 2009, the greatest exposure after collateral to an individual
external reinsurer was approximately 27%, approximately 45% related to four other external reinsurers and the remainder of the
reinsurance exposure related to various other reinsurers. The inability or unwillingness of any one of these reinsurers to meet its financial
obligations to us, or the insolvency of our reinsurers, could have a material adverse effect on our net results and our financial results.
Current market conditions have increased the risk of loans being impaired. We are exposed to declining property values on
the collateral supporting residential and commercial real estate lending.
We are exposed to the risk that our borrowers may not repay their loans according to their contractual terms and that the collateral
securing the payment of these loans may be insufficient. We may continue to see adverse changes in the credit quality of our borrowers
and counterparties, for example as a result of their inability to refinance their indebtedness, with increasing delinquencies, defaults and
insolvencies across a range of sectors. This trend has led and may lead to further impairment charges on loans and other assets, higher
costs and additions to loan loss provisions. The volume of impaired loans may continue if unfavorable economic conditions persist.
Furthermore, a significant increase in the size of our provision for loan losses could have a material adverse effect on our financial position
and results of operations. Due to worsening economic conditions in the past two years, we have experienced an increase of impaired
loans.
The fall of commercial and residential real estate prices and lack of market liquidity during the past two years has had an adverse effect on
the value of the collateral we hold. Economic and other factors could lead to further contraction in the residential mortgage and
commercial lending market and to further decreases in residential and commercial property prices which could generate substantial
increases in impairment losses.
Interest rate volatility may adversely affect our profitability.
Changes in prevailing interest rates may negatively affect our business including the level of net interest revenue we earn, and for our
banking business the levels of deposits and the demand for loans. In a period of changing interest rates, interest expense may increase at
different rates than the interest earned on assets. Accordingly, changes in interest rates could decrease net interest revenue. Changes in
the interest rates may negatively affect the value of our assets and our ability to realize gains or avoid losses from the sale of those assets,
all of which also ultimately affect earnings. In addition, an increase in interest rates may decrease the demand for loans.
In addition, during periods of declining interest rates, life insurance and annuity products may be relatively more attractive to consumers,
resulting in increased premium payments on products with flexible premium features, and a higher percentage of insurance policies
remaining in force from year-to-year, creating asset liability duration mismatches. A decrease in interest rates may also require an addition
Risk factors (continued)
2.4 Additional information
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