ING Direct 2011 Annual Report Download - page 281

Capital management
amounts in millions of euros, unless stated otherwise
OBJECTIVES
ING Group Capital Management (Capital Management) is responsible for the sufficient capitalisation of ING Group entities at all times in
order to manage the risk associated with ING’s business activities. This involves the management, planning and allocation of capital within
ING Group. ING’s Corporate Treasury is part of Capital Management. It executes the necessary capital market transactions, term (capital)
funding and risk management transactions. Capital Management monitors and plans capital adequacy on a consolidated basis at three
levels: ING Group, ING Insurance and ING Bank. Capital Management takes into account the metrics and requirements of regulators
(Insurance Group Directive (IGD) Solvency I, Tier 1 and BIS ratios and limits for hybrid capital), rating agencies (leverage ratios, Adjusted
Equity) and internal models such as the economic capital and market value balance sheet approach for parts of ING Insurance including
Available Financial Resources (AFR).
ING applies the following main capital definitions:
• Adjusted Equity (ING Group) – This rating agency concept is defined as shareholders’ equity plus core Tier 1 securities, hybrid capital
and prudential filters. See ‘Capital Base’ disclosures in this section. This capital definition is applied in comparing available capital to
core debt for ING Group;
• Insurance Group Directive capital (ING Insurance) – This regulatory concept is defined as shareholders’ equity plus hybrid capital,
prudential filters and certain adjustments. IGD capital is calculated in accordance with method 3 ‘method based on accounting
consolidation’ of the Dutch Act on Financial Supervision. In this method the solvency margin is calculated on the basis of the
consolidated accounts and is the difference of (i) the assets eligible for the inclusion in the calculation of the solvency margin based on
the consolidated data; and (ii) the minimum amount of the solvency margin calculated on the basis of the consolidated data. In applying
this method a solvency deficit of an insurance subsidiary, if any, is taken into account, as well as regulatory adjustments of the Dutch
insurance subsidiaries based on the Dutch Act on Financial Supervision. See ‘Capital Base’ disclosures in this section. This capital
definition is applied in comparing IGD capital to EU required capital base. This measurement of available capital is different from
previous years;
• AFR (ING Insurance Eurasia) –This is a pre-tax market value concept, defined for the insurance operations of ING Insurance Eurasia as
the market value of assets (MVA) less the market value of liabilities (MVL) on the balance sheet. The liabilities do not include perpetual
hybrid capital which is included in AFR. The AFR valuation of ING Eurasia includes an adjustment for portfolio illiquidity. The AFR for
pension funds is set equal to the statutory net equity. AFR is used as the measure of available capital in comparison with Economic
Capital employed.
• 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.
• Risk Based Capital (Domestic ING US Insurance only). In the US, regulators have well developed capital adequacy models and stress tests
that reflect the unique characteristics of the US insurance industry. US domiciled insurance legal entities are required to hold minimum
capital levels by state insurance regulators. The level of capital required by rating agencies to maintain an acceptable claims paying
ability rating is well above these levels. The Domestic US Insurance business manages its statutory surplus primarily with respect to
capital metrics that are aligned with the models of the various ratings agencies.
• Financial Leverage (ING Insurance). Financial Leverage is the sum of hybrid capital, sub-debt and net financial debt and is used to
measure the debt ratio of ING Insurance starting 2010.
DEVELOPMENTS
In 2011 Capital Management’s main focus remained to strengthen the capital position of ING Group, ING Bank and ING Insurance. ING’s
capital positions are well placed to deal with the uncertain financial environment, increasing regulatory requirements and the ambition to
repay the remaining outstanding Core Tier 1 securities. Capital Management started managing towards separate US, Eurasia and Insurance
Investments Financial Leverage and Capital Adequacy in 2011.
In May ING repaid EUR 2 billion of the Core Tier 1 securities issued in November 2008 at a 50% premium. Nevertheless ING maintained a
strong capital position, driven mainly by strong capital generation at ING Bank. ING Bank met the additional capital requirements
proposed by the EBA and agreed by the EU Council on 26 October 2011. In December 2011, ING successfully completed a liability
management transaction with an average participation of 60%. The net impact of this transaction on ING Group’s consolidated balance
sheet was a reduction of EUR 2 billion in hybrid capital and a capital gain of EUR 0.7 billion.
On 8 March 2012, in preparation of the planned insurance and investment management divestments, ING Group has announced three
separate exchange offers and consent solicitations on a total of three series of senior securities of ING Verzekeringen N.V. with a total
nominal value of EUR 2.6 billion. The objective of the transaction is to remove potential ambiguity that the planned divestments may
create with regard to these ING Verzekeringen N.V. securities, predominantly with regard to the Change of Control clauses which may be
triggered at the time of a substantial asset disposal. The transaction is scheduled to be completed in April 2012. Any difference between
the book value of the currently outstanding securities and the fair value of the newly issued securities will be recognised in the profit and
loss account upon completion of the exchange.
In 2011 ING Bank issued a total of EUR 23 billion long-term funding against EUR 10.7 billion of ING Bank’s (including subsidiaries) long-
term debt maturing.
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
279ING Group Annual Report 2011