ING Direct 2008 Annual Report Download - page 183

of which the Dutch State will become the economic owner. Par value of the portfolio is approximately EUR 30 billion. Following the
deteriorated economic outlook in the third and fourth quarter market prices for these securities had become depressed as liquidity
dried up, which had an impact on ING’s results and equity far in excess of estimated credit losses. The transaction with the Dutch State
is expected to significantly reduce the uncertainty regarding the impact on ING of any future losses in the portfolio. As condition to the
Facility ING will commit to support the growth of the Dutch lending business for an amount of EUR 25 billion at market-conforming
conditions. The Dutch State will also acquire certain consent rights with respect to the sale or transfer of the 20% proportion of the
Alt-A RMBS portfolio that is retained by ING.
Reduction of equity exposure (available-for-sale) •
Direct public exposure was reduced from EUR 15.8 billion at the end of 2007 to EUR 5.8 billion at year-end 2008. The reduction in
exposure was due to negative revaluations, and sales. ING Insurance holds EUR 3.9 billion balance sheet exposure which was partially
hedged against further market losses. In addition, a temporary hedging programme was put in place to reduce earnings volatility
resulting from potential DAC (Deferred Acquisition Cost) unlocking.
Reduction of interest rate risk•
ING sold ING Life Taiwan which resulted into a significant reduction of its interest rate risk exposure. This divestment was in line with
the strategy to allocate capital to those businesses that generate the highest return. In addition, ING lengthened its asset duration in
order to mitigate the impact of declining interest rates, herewith further reducing its interest rate risk exposure.
A more detailed disclosure of outstanding risk factors facing ING and the financial industry is given in the Risk Factor section in the
Additional Information part of the Annual Report.
Impact of financial crisis
Impact on pressurised asset classes
As a result of the deteriorating market conditions throughout 2008 ING Group incurred negative revaluations on its investment portfolio,
which impacted shareholders’ equity. Furthermore, ING Group incurred impairments, fair value changes and trading losses, which
impacted its profit and loss account (P&L).
The table below shows the exposures and negative revaluations and losses taken on US sub-prime and US Alt-A residential mortgage
backed securities (RMBS), Collateralised Debt Obligations (CDOs) and Collateralised Loan Obligations (CLOs) during 2008.
US Subprime RMBS, US Alt-A RMBS, CDOs/CLOs exposures, revaluations and losses
31 December 2008 Change in 2008 31 December 2007
Market Value
Revaluation
through Equity
(pre-tax)
Write-downs
through P&L
(pre-tax) Other changes Market value
Revaluation
through Equity
(pre-tax)
US Subprime RMBS 1,778 –839 –120 –52 2,789 –307
US Alt-A RMBS 18,847 –6,538 –2,064 –33 27, 48 2 –936
CDOs/CLOs 3,469 –218 –394 2,186 1,895 –134
Total 24,094 –7,595 –2,578 2,101 32,166 –1,377
ING Group’s total EUR 1.8 billion exposure to US sub-prime assets relates to non originated loans acquired as investments in RMBS •
and represents 0.1% of total assets. At 31 December 2008 approximately 77% of ING’s US sub-prime portfolio was rated AA or
higher. ING Group does not originate sub-prime mortgages. The vast majority of the total mortgage backed securities (MBS)
are (residential) mortgages that are not classified as sub-prime.
ING Group’s total US Alt-A RMBS exposure at 31 December 2008 was EUR 18.8 billion. About 65% of this portfolio was AAA rated. •
The majority of the exposure (EUR 16.3 billion) was held by ING Direct. ING’s Available-for-Sale Alt-A investments are measured at fair
value in the balance sheet. The substantial amount of negative pre-tax revaluation and impairments on this portfolio are mainly caused
by the illiquid market.
Net investments in CDOs/CLOs at 31 December 2008 were 0.3% of total assets. The vast majority of the CDOs/CLOs has investment •
grade corporate credit as underlying assets, only EUR 1 million has US subprime mortgages underlying. Other changes includes
purchases and sales of CDOs/CLOs, as well as foreign currency effects.
EUR 23.7 billion of the EUR 24.1 billion exposure on US Subprime RMBS, US Alt-A RMBS and CDOs/CLOs is booked at fair value. An
analysis of the method applied in determining the fair values of financial assets and liabilities is provided in Note 33 ‘Fair value of Financial
Assets and Liabilities’. At 31 December 2008 the fair value of US Subprime RMBS, US Alt-A RMBS and CDOs/CLOs was as follows:
Fair value of US subprime RMBS, US Alt-A RMBS and CDOs/CLOs
2008
Reference to
published price
quotations in
active markets
Valuation
technique
supported by
market inputs
Valuation
technique not
supported by
market inputs Total
US Subprime RMBS 20 26 1,732 1,778
US Alt-A RMBS 244 18,244 18,488
CDOs/CLOs 3,273 162 34 3,469
Total 3,293 432 20,010 23,735
181
ING Group Annual Report 2008