ING Groep NV (ING) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ING first-quarter 2008 results conference call on 14th of May, 2008. (OPERATOR INSTRUCTIONS).

I would now like to hand the conference over to [Gemma Backs]. Please go ahead.

Good morning. Good afternoon. This is Gemma Backs for ING Groep, welcoming you to ING's first-quarter 2008 results conference call. Before turning this over to John Hele, CFO of ING Groep, and Koos Timmermans, Chief Risk Officer, as well as Tom McInerney, Member of the Executive Board responsible for Insurance Americas, let me first say that any forward-looking statements in today's comments are subject to a number of variables. They include interest rates; foreign exchange rates; inflation rates; movements in securities markets, including equity markets; and underlying economic health and changes. The realization of forward-looking statements could be materially altered by unexpected movements in any or all of these and other variables.

That said, good morning and good afternoon again. John, Koos, and over to you, Tom -- John, over to you.

Good afternoon. Good morning to those listening in the Americas. I would like to welcome you to our analyst conference call. We will be a little shorter on time today. We only have 45 minutes due to travel schedules. We will be ending at 1645 Central Time. And as such, and also because we ran through some of the presentations this morning, we're just going to go directly to Q&A so people have time to ask their questions. So we will turn it back to the operator to poll for questions.

(OPERATOR INSTRUCTIONS). Bruno Paulson, Bernstein.

Some questions on the write-downs in the economic capital. Firstly, on the write-downs, you had -- I think it was EUR3.3 billion on the Alt-A portfolio. I was wondering if you could split that between the three elements of the Alt-A portfolio so we can get percentage valuations of each of those.

Secondly, were there any significant moves on the prime RMBS and other ABS elements of the portfolio?

And on the economic capital, it mentioned that you have around about a EUR5 billion economic capital deficit in insurance, but points out this is because of the mismatch between your assumptions on the assets and liabilities. I was wondering why you have that mismatch, given it's in economic capital, and is this artificial deficit likely to affect your behavior?

The first question was in the Alt-A -- I think you were asking among the change in the pretax revaluation through equity, how much of that was split between, I guess, the two Alt-A portfolios, the U.S. and the --

I was more interested in between the three kinds of Alt-A.

Between the three kinds of Alt-A -- Koos, do you have that?

I have it, although you have to do some calculations yourself, because if I look at the portfolio on average, we have a value of close to -- well, close to the 84%, which is predominantly -- we have the neg-ams; they are around 65% levels. If I look at the ARMs, they are more at level of 86%, and the fixed and the long-term hybrids, closer to 93%. So that is a better distribution of it.

That's fine.

And you were interested in the prime or the other RMBSs in terms of the write-down. I think Koos gave you the CMBSs, and I don't actually have the other piece. In total, in our total portfolio, there was another EUR900 million after tax of devaluation in the debt instruments of about EUR270 billion in total. So it's sort of distributed throughout all of those things.

And on the economic capital element?

This is a measure that we have just started to use, and I would say we're sort of leading the industry in this. This is how we compare our available financial resources to our economic capital. And available financial resources is essentially the market value of our assets, less our market value of our liabilities. So we mark that on a quarterly basis compared to the economic capital.

The economic capital tends to be a little more static quarter to quarter, but the AFR can move up and down, depending upon how the prices of the assets and the liabilities move. Of course, we saw in the first quarter dramatic spread widening on the asset side that depressed the asset prices in the quarter.

But the market value of liabilities, the way we do it, which is in line with Solvency II, we use a constant risk-free rate, essentially the swap curve, to discount the liabilities. So you can see this inherent mismatch as spreads widen compare to how your assets move and your liabilities move.

If we were to mark, for example, our liabilities to market as U.S. GAAP does for fair value of liabilities, this whole deficit would have disappeared. And then on the other hand, much of this credit spread widening has already come back since the end of March. So a good piece of this deficit has already disappeared to date.

So this is not something -- this is really an early warning. This is -- we look at this. We manage it on a total group basis. We think it is a useful indicator as an early warning. But the way we view this is as it is really viewed ultimately in Solvency II for the insurance side will be that if you go below your target, so below 120, you want to make sure that over the course of the next year that you are taking steps to rectify it. Either the market corrects it in a short period of time, or you take steps to manage this more carefully. But it is not something that you react to in a quarter, but something that you think about over a longer-term time period. But it is an early-warning indicator and is useful in how we think about and manage our businesses.

Marc Thiele, UBS.

I have a question on the P&C business. And clearly, there has been a year-on-year improvement as a result of [Kugel] that impacted the numbers last year. I was wondering if you could also give us some color of if there have been any reserve releases that have helped the numbers as well. And then can you also give us a bit more of a outlook regarding the Canadian business, where there has been a significant deterioration in combined ratio from 100 to 109, and how the outlook for that business looks like going forward?

Sure. The underlying profit before tax in our total nonlife business was down a little -- down about 11%, but a lot of that is due to some currencies. We did see total nonlife premiums decline about 4%. We sold some business, the Chilean health business. We also saw some slight rate pressure on the disability insurance in the Netherlands.

Operating expenses did decline about 8% on a constant currency basis. Again, this was triggered by the divestment of the Chilean health business. Within the Benelux, our combined ratio improved slightly. This was offset by Canada. We had a combined ratio that went up by higher claims and changes in interest rates. But Canada was also affected by the income line, which was the impairments that went through that caused the combined ratio to go up a bit.

So in summary, then, in Canada it is the impairments a bit and slightly higher claims. In the prior year, we had some releases of EUR9 million, but in this quarter we had no unusual releases in P&C.

I'm sorry; we also had winter storms in Canada that also caused the underwriting results to be worsened this quarter in Canada.

Right. The sort of run rate in terms of the underwriting number, is that a number that we can use going forward, or is there something that is disordered not only by these storms that you've mentioned in Canada?

Marc, this is Tom McInerney. First of all, as we saw in the first quarter of '08, the higher catastrophe losses due to winter storms was EUR17 million. In general, as you can imagine, the Canadian market is very much seasonal, based on weather and other travel patterns. So the first quarter is the worst, the fourth quarter is the next worst, and then the second and the third quarter are better. So you really ought to compare the quarter-over-quarter for prior year. So everything else being equal, we should see a better second and third quarter in terms of underwriting losses.

And the other thing that -- we've had very strong prior-year reserve developments in prior years, including last year's first quarter of '07. So basically, the reserves for a number of accident years ago have turned out to be not required, and so we have released those. And so in the first quarter of '08, we did have some prior-year reserve releases, but they were 9 million less than the first quarter of '07.

(OPERATOR INSTRUCTIONS) William Elderkin, Citigroup.

Just a question on the insurance capital structure. I think I read you've injected about EUR1 billion into the insurance entity. Could you just explain what was going on there, and particularly in terms of the Dutch life business, where you seem to be putting about EUR700 million into NN Life, but dividending up a similar amount from other Dutch life insurance activities?

We took out EUR5 billion or so of excess capital not needed in Nationale-Nederlanden, but we did that with the understanding that should there be significant decreases in their capital base, primarily due to the equity markets, that we would always support them to a certain level.

That happened in the first quarter of this year, as we saw from the big downturn in the Dutch equity markets, so we injected some capital to maintain them at an appropriate level, still significantly above regulatory minimums. At the same time, we've been working with the other debt subsidiaries -- Postbank Insurance, RVS -- to optimize their capital structure. And they ended up paying up a dividend to reduce -- to have their capital at a more appropriate level. So that kind of balanced each other out. We also took a major dividend out of the bank in the first quarter of about EUR2.5 billion.

So this is part of our ongoing active capital management. We'd like to keep in our subsidiaries the right amount and the appropriate amount for ratings, but no more, so that the group has the maximum flexibility.

Bruno Paulson, Bernstein.

Just looking at your useful new margin analysis on the insurance businesses in the presentation, one question is there's an element in Asia that is unmodeled. Is that the Japanese BOLI/COLI? I was just wondering what it was. It moves around a bit.

And secondly, the European technical margin moved around quite a bit, generally between some EUR60 million and EUR100 million, but it was zero in Q4 '07. And I was wondering if you could give us a bit of help about what is going on there.

In Asia, we're still working hard to get things modeled there to get this analysis done. It includes the Japan SPVA business; KB Life, which is the [smallish] joint venture. Taiwan is not modeled, New Zealand, Malaysia, Hong Kong, Taiwan, China, India, although the latter are pretty small. So the big groups are Japan SPVA. We hope over time to build this up to include more. As you can see, it is the vast majority of what we have in total as a group is currently modeled.

Your second question was the technical margin in Insurance Europe, and I believe there's some provisions that are made on a quarterly basis. Fourth quarter, there was a provision in what?

Unit-linked.

In unit-linked-type instruments and some other reserve analysis done that affected the technical margins.

Duncan Russell, JPMorgan.

I've only just got on the call, if this has been asked just tell me and I will listen to the replay. But on the Alt-A book and the structured credit in general, you've said previously that duration is quite short, because it's back in the ING Direct liabilities, which makes sense. Presumably, those structured credit assets are in part driven by prepayments, etc. And I was just wondering if you could just make it simple and say when would you expect, for example, to get the 2005 Alt-A vintages -- when would you expect to get all of that money back into your hands so you could reinvest it? So not necessarily the duration, which I guess is different, but when will you expect to get all the cash back for each year?

It's Koos. First, if we look at the primary objective of the portfolio, Alt-A, both the interest rate as well as the cash duration for this portfolio, if you look at the interest rate, indeed it's a two-year average duration is our target. So that is why we are aiming for more floating-rate type of instruments in the portfolio, because we do want a certain amount of repricing in our portfolio. And if I take there as an example, we got between 35% and 37% of the portfolio of the asset side is, from an interest rate perspective, repricing every year.

Now, it is a different story from a cash perspective. So if I give you from a cash perspective the statistics, it is more EUR2.5 billion per quarter is what is running off on the asset side and what we have to reinvest in the markets.

Then if you want to bring that to, for instance, a certain part of the portfolio and say, like, okay, what does it mean for a different tranche, the biggest driver is of course the CPR, so the constant prepayment rates, and those are quite fluctuating, because what we, for instance, have is if I take the negative amortization RMBSs, in general, if I look at it -- and again, not interest rate, right? Because interest rate, this is all relatively short. But from a contract point of view, we calculate right now, with the weighted average life of something in the order of eight years at a 10% constant prepayment rate, but this constant prepayment rate has been fluctuating, like last year, in '07, it was more 25%. And to give you an indication, if the constant prepayment moves up, for instance, from 10% to 15%, then you end up with a six-year weighted average life.

So it is difficult to make a precise estimate of when this runs off. The global statistics is EUR2.5 billion per quarter. But again, these weighted average lives, they are a little bit all over the place, to be honest, because yes, it's driven by both interest rates and interest rate movement. And that should boost the constant prepayment rates. But at the same time, credit spreads are wider, so not everybody is prepaying. So that is why at the moment we are more working with a 10% weighted average life and relatively -- or 10% constant prepayments and a relatively long weighted average life.

Based on historical experience, given where the Fed funds are, you would have thought there would be much more prepayments going on. But the bank funding rate and the bank rates and the LIBOR rates are still much higher still, and also due to the credit spreads.

However, if rates stay low and as the spreads continue to narrow, the delta difference will become larger and there will be more opportunities for people to prepay. But it has not been at the pace of what we saw in the last interest rate downturn in 2002, early 2003. But I think we just have to wait and see how this develops.

Okay. And has anyone asked what the mortgage result was in ING Direct in the first quarter, or have you told the answer?

Do you mean in terms of how much we invested in mortgages?

No, what the profit was, or loss, for the mortgage business, because I know you look at these things on a product basis.

I don't know if I have that handy. We spent EUR80 million in total of net investments in mortgages across the group. Sorry, EUR80 million in total for all products, EUR7 million in savings, which is essentially Japan, EUR52 million in mortgages and EUR21 million in payment accounts.

So EUR52 million was the acquisition costs for mortgages.

Yes.

And then you had a book of EUR96 billion, I think, at the year end, EUR97 billion?

Yes, so we made roughly about EUR30 million in the mortgage in the quarter.

So you made a net profit, a pretax profit?

Yes.

Good. All right, thanks.

(OPERATOR INSTRUCTIONS). We have no further questions at this time. Please continue with any further points you wish to raise.

Okay. Well, we would like to thank you for your attention today. And again, we have a lot of data out there, so there is a lot for you to read through. We hope it's helpful to you this quarter, and we look forward to speaking to you in August with our second-quarter results. Thank you.

Ladies and gentlemen, this concludes the ING first-quarter 2008 results conference call. Thanks for participating. You may now disconnect.