ING Direct 2013 Annual Report Download - page 328

Risk management continued NN Group
The table below sets out NN’s holdings of asset-backed securities by market value of asset type and the percentage of NN’s total general
account asset-backed securities portfolio as at 31 December 2013 and 2012, respectively.
General Account Asset-backed securities
Market Value % of total Market Value % of total
2013 2012
RMBS 3,822 53% 4,356 60%
Car loans 1,848 26% 1,415 19%
Credit cards 463 6% 382 5%
CMBS 358 5% 343 5%
Student loans 251 3% 318 4%
SME loans 233 3% 227 3%
Consumer loans 117 2% 134 2%
Other 106 1% 91 1%
Total 7,198 100% 7,266 100%
Risk mitigation
NN aims to maintain a low-risk, well diversified credit portfolio. NN has a policy of maintaining a high quality investment grade portfolio while
avoiding large risk concentrations. In order to reduce the credit spread risk, NN has increased its investments in non-listed and own-originated
assets. Going forward, the volatility in NN’s credit spread risk will continue to have possible short term negative effects on the balance sheet.
However, in the long run, these investments will back the long-dated and illiquid liabilities well. The concentration risk on individual issuers is
managed using rating-based issuer limits on one (group of related) single name(s), effectively managing the default risk of the issuers.
Risk measurement
The economic capital for credit spread risk reflects, with 99.5% level of confidence, the maximum amount of capital needed to absorb the
impact of spreads widening. Credit spreads are stressed depending on the assets with regard to the credit rating, duration, and region, to
determine the economic capital for spread risk. Furthermore, the illiquidity premium on the liabilities is stressed to dampen the impact of
credit spread stresses.
The table below sets out NN’s general account economic capital for credit spread risk.
General account economic capital for credit spread risk
2013 2012
Credit spread risk assets 5,617 5,718
Illiquidity premium offset –3,383 –3,197
Total Credit Spread risk net of illiquidity premium
offset 2,234 2,521
Counterparty Default risk
Counterparty default risk is the risk of loss of investments due to unexpected default, or deterioration in the credit standing, of the
counterparties and debtors (including reinsurers) of NN Group. The economic capital for counterparty default risk is primarily based on the
associated issuer’s probability of default (PD) and the estimated loss-given-default (LGD) on each individual asset combined with diversification
across assets. Note that fixed income bonds are also subject to counterparty default risk, but this risk is included in credit spread risk.
Risk profile
Counterparty default risk emanating from residential mortgages and policy loans (retail credit risk) represent the majority of the portfolio
of economic capital for counterparty default risk.
Loans form a relatively small source of credit risk for NN Group (as compared to bonds). Other sources of credit risk include the claims on
counterparties from over-the-counter derivatives, money market exposures and reinsurance.
General account mortgages, reinsurance and loans and advances
2013 2012
Mortgages 14,218 5,398
Reinsurance 331 348
Other loans 2,900 2,260
Cash 6,749 6,778
Total 24,198 14,784
NN Group has notably increased its exposure to Dutch residential mortgages during the course of 2013, both at NN Bank as well as
Netherlands Life. In the third quarter, EUR 4.7 billion of Dutch residential mortgage loans were transferred from Westland Utrecht Bank
(WUB) to NN Bank’s mortgage loan portfolio. In the fourth quarter of 2013, Netherlands Life’s exposure to residential mortgages also
326 ING Group Annual Report 2013