ING Direct 2013 Annual Report Download - page 337

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 Capital 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, NN Group and ING Bank. ING takes an integrated approach to assessing the adequacy of its capital position in relation
to its risk profile and its operating environment. This implies taking into account the interests of its various stakeholders. 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 fixed coverage ratio) and internal metrics such as
Available Financial Resources (AFR) and Economic Capital (EC).
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;
• Core Tier 1 capital, Tier 1 capital and total BIS capital (ING Bank) – Tier 1 capital is defined as shareholders’ equity including core Tier 1
securities plus hybrid capital less certain prudential filters and deductible items. Core Tier 1, Tier 1 and BIS capital divided by risk-
weighted assets equal the Core Tier 1, Tier 1 and BIS ratio respectively. Core Tier 1 capital is equal to Tier 1 capital excluding hybrid capital;
• Insurance Group Directive capital (NN Group) – 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. As of 30 September 2013, the IGD ratio for NN Group was adjusted for the transfer
of ING U.S. Inc. from ING Verzekeringen N.V. to ING Groep N.V. and a change in the calculation methodology. Prior period has not
been restated to reflect these adjustments, as the impact is not material.
• AFR (NN Group excluding US Insurance business) –This is a pre-tax market value concept, defined for the insurance operations in scope
of the IPO as the market value of assets (MVA) less the market value of liabilities (MVL) on the balance sheet. The liabilities valuation
includes an adjustment for liquidity premium. For other businesses a proxy is used for AFR, i.e. statutory net equity for third party
pension funds and NN Bank, and IFRS Equity adjusted for Goodwill for Asian divestments and Investment Management companies. The
qualifying perpetual hybrid capital is considered equity and included in AFR. AFR is used as the measure of available capital in
comparison with EC employed.
• EC (NN Group excluding US Insurance business) – This is the pre-tax required capital for the insurance operations in scope of the IPO,
based on a 99.5% confidence interval on a one-year horizon. This is considered an interim step to the Solvency II capital framework.
The EC for other businesses is based on a proxy, i.e. sectoral rules for third party pension funds and NN Bank, 150% EU required capital
for Asian divestments, and (adjusted) IFRS Equity (adjusted for Goodwill) for Investment Management companies.
• Regulatory Capital framework – Insurance and Investment Management legal entities have to comply with local statutory capital
frameworks that are under supervision of local regulators. Most of these frameworks for insurance businesses in Europe are based on
Solvency I principles and are expected to migrate to Solvency II starting in 2016.
• Financial Leverage (NN Group). Financial Leverage is the sum of hybrid capital, sub-debt and net financial debt.
DEVELOPMENTS
In 2013 Capital Management’s main focus remained the strengthening of the capital position of ING Group, ING Bank and NN Group.
ING’s capital is well prepared to withstand financial market challenges, new regulations and the ambition to repay the remaining
outstanding Core Tier 1 securities. ING aims to ensure that it has sufficient loss-absorbing capacity to cope with severe unexpected losses
without jeopardising its business-as-usual franchise.
In November 2013, ING repaid EUR 750 million of the Core Tier 1 securities issued in November 2008. ING paid EUR 1.125 billion to the
Dutch State, including a EUR 750 million repayment of Core Tier 1 securities and EUR 375 million in premiums and interest.
The payment of EUR 1.125 billion is the second tranche of a series of four tranches that are part of the amended EC Restructuring Plan
which was announced on 19 November 2012. The third tranche is scheduled to be paid in March 2014 and the final tranche is scheduled
to be paid ultimately in May 2015.
ING has reached an agreement with the Dutch State on the unwinding of the Illiquid Assets Back-Up Facility (IABF). The unwinding of the
IABF added approximately 10 basis points to ING Bank’s core Tier 1 ratio. ING Bank called its USD 2 billion 8.5% Tier 1 hybrid per call date
15 December 2013 and launched an exchange offer on EUR 4.7 billion existing Tier 2 securities for new CRD IV compliant Tier 2 securities.
This transaction was successfully completed on 15 November 2013 at an average participation of 55% (take-up rate). Through the offers,
ING Bank issued EUR 2.6 billion of new CRD-IV eligible Tier 2 securities.
335ING Group Annual Report 2013
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