ING Direct 2011 Annual Report Download - page 55

1 Who we are 2 Report of the Executive Board 3 Corporate governance 4 Consolidated annual accounts 5 Parent company annual accounts 6 Other information 7 Additional information
US CLOSED BLOCK VA
> EUR 1.1 billion charge against profits following
assumptions review
> Assumptions now reflect volatility
of recent years and its impact on
USpolicyholder behaviour
> Interest rate risk reduced by hedge programmes
In 2009, ING decided to cease selling variable annuity policies with
living benefits in the US. Since then, ING has taken decisive action
to reduce risk, earnings volatility and expenses for this legacy book.
These actions have included reducing deferred acquisition costs,
strengthening reserves, expanding hedging programmes and
increasing transparency by reporting the US Closed Block VA as
a separate business alongside the ING Insurance US business.
FINANCIAL DEVELOPMENTS
As announced on 7 December 2011, the completion of a
comprehensive policyholder behaviour assumption review for the
US Closed Block VA led to a charge of EUR 1.1 billion in the fourth
quarter of 2011, which resulted in a loss of EUR 1,273 million on an
underlying result before tax basis in 2011. The assumptions were
updated for lapses, mortality, annuitisation, and utilisation rates,
with the most significant revision coming from the adjustments of
lapse assumptions. The impact of the assumption adjustments
includes a charge to restore the reserve adequacy to the 50%
confidence level for the US Closed Block VA business.
The operating result for the US Closed Block VA was EUR 19 million
versus EUR 49 million in 2010. The investment margin was EUR 28
million compared with EUR –11 million in 2010.
BUSINESS DEVELOPMENTS
The Closed Block Variable Annuity business in the US is closed to new
business and is now being managed in run-off. There are more than
500,000 contract holders and more than USD 42 billion in assets
under management. From October 2010, ING began to report the
US Closed Block VA business as a separate business line to improve
transparency for both the Closed Block and ongoing businesses.
On 1 January 2011, ING moved towards fair value accounting on
reserves for the Guaranteed Minimum Withdrawal Benefit (GMWB)
and consequently implemented changes to the hedging
programme. These hedging changes substantially reduced exposure
to movements in interest rates. The impact of the change in
accounting policy is disclosed in the Annual Accounts section at the
back of this Annual Report.
Also from the first quarter, a mean reversion methodology was
implemented to determine the short-term equity growth
assumption in the company’s DAC calculations, reducing the
sensitivity of the ‘market and other impacts’ result to movements
in equity markets going forward. As of 31 December 2011, the
DAC has been reduced to zero.
During the year, ING conducted an annual review of its actuarial
assumptions for the business and, as stated in the Financial
Developments section above, this resulted in a EUR 1.1 billion
charge against profits.
The review showed current US policyholder behaviour for Closed
Block VA policies sold predominantly between 2003 and 2009
diverged from earlier assumptions made by ING, particularly given
the ongoing volatility and challenging market circumstances. The
revisions in 2011 brought the assumptions more in line with US
policyholder experience and reflected to a much greater degree
the market volatility of recent years.
INSURANCE ASIA/PACIFIC
> Double-digit sales growth
> Customer-focused product innovation
> Distribution expansion through tied agents
and bancassurance
Insurance Asia/Pacific (IAP) recorded strong performance in 2011.
Double-digit sales growth was driven by improved tied agency
productivity, new product launches and a strong multi-distribution
platform. The business continues to focus on its strategic priorities
and enhancing value by increasing the focus on protection and
long-term savings products for customers.
FINANCIAL DEVELOPMENTS
The underlying result before tax of Insurance Asia/Pacific increased by
14.0% to EUR 588 million compared with EUR 517 million in 2010.
The operating result increased by 17.4%, primarily driven by higher
fees and premium-based revenue and a higher technical margin.
The investment margin rose by 37.7%, supported by an improved
spread between interest earned on general account assets and
interest credited to reserves in Japan and Hong Kong. This was
partly offset by lower dividend income.
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.
The technical margin increased by 13.5% to EUR 178 million from
EUR 157 million in the previous year, mainly driven by South Korea
and Malaysia.
Life administrative expenses increased 3.2% to support business
growth. They also increased due to project expenses. The ratio of
administrative expenses to operating income fell from 27.3% in
2010 to 26.3% in 2011.
New sales (APE) increased by 11.8% driven by growth in Japan,
Malaysia, Hong Kong and China.
BUSINESS DEVELOPMENTS
Asia, excluding Japan, continued to report favourable economic
growth throughout 2011. This growth translated into life insurance
premium growth in most Asian markets, although premium growth
in India and China was held back by regulatory changes affecting
unit linked insurance products and bancassurance arrangements.
Going forward, we believe that low life insurance penetration and
53ING Group Annual Report 2011
Insurance continued