ING Groep NV (ING) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen. This is Yvonne welcoming you to INGs Q3 2010 conference call.

Before handing this conference over to Jan Hommen, Chief Executive Officer of ING Group, Patrick Flynn, Chief Financial Officer, and Koos Timmermans, Chief Risk Officer, let me first say that any forward-looking statements in today's comments are subject to a number of current views, assumptions and variables, including interest rates, foreign exchange rates, inflation rates, movements in security markets, including equity markets and underlying economic conditions and changes. These are set out in greater detail in our public filings which we would urge you to read.

The realization of forward-looking statements could be materially altered and unexpected movements in any or all of these and other variables.

Good morning, Jan, Patrick and Koos. Jan, over to you.

Thank you very much, and welcome everyone to the ING 3rd quarter conference call.

I'm happy to report that ING continues to make good progress towards our strategic priorities, and we have reached some important decisions with respect to the IPO process of our US insurance businesses.

Koos, Patrick and Matt Rider, our CAO of Insurance are with me here today, and we will later be available to answer questions after my presentation.

Slide two. You look at the numbers here; the Bank posted another strong quarter, a profit of EUR1.5 billion before tax. Operating results of Insurance Company increased for the third consecutive quarter, rising to EUR473 million compared with EUR393 million in the third quarter last year.

However, underlying results before tax were impacted by assumption changes on the variable annuities in both the US and Japan, and the net profit also included a write-down of goodwill related to US insurance.

As we work towards the separation and divestment of our Insurance Company, we are not ruling out the option of one IPO, but we have decided that we prepare for a best case of two IPOs, one European led IPO, and a separate IPO focused on the US.

As a result, we will implement a number of changes in the fourth quarter and the first quarter of 2011 that will improve the reserve adequacy of our US legacy block, as well reduce the earnings volatility going forward, and it will bring our US reporting more in line towards our US peers are doing. We will elaborate on these measures in the Insurance section of the presentation.

Slide three, you see that the Bank delivered another strong quarter; slightly down compared with the second quarter, but that included an EUR86 million capital gain on the sale of an equity stake.

The performance of the Insurance Company improved further in Q3. It's the third consecutive improvement in operating performance, driven this time by investment margin as we invested more cash balances.

Pre-tax results were negatively impacted by the VA assumptions and the changes in those assumptions to the tune of EUR356 million. The underlying net result for the Group was EUR1,043 million, up from Q3 but down from Q2, entirely due to the VA assumptions, changes that we did in the Insurance business; and net profit was impacted by goodwill impairments of EUR513 million that related to our US Insurance business.

You see on slide four that the Bank has good progress on the ambition towards 2013 targets. The business generated strong income growth in the first nine months, helped by healthy margins, lower market impacts, and excluding the impacts of markets, income rose by 6.2%.

Of course, the income ratio, excluding market impacts, improved to 52.9% in the first six months of this year, and risk costs are turning down towards more normalized levels; and return on equity is 17.1% if we use the original 7.5% core Tier 1 ratio assumption we put in our plan for ambition 2013. If we use the equity as we reported in our accounts, the return on equity for the bank is 13%.

On slide five, you see the plan for Insurance. I am encouraged to see the initial progress that we are making on the ambition towards 2013. We have healthy growth on the general accounts; the investment margins for Q3 standalone picked up to 92 basis points, although the improvement is not apparent yet in the fourth quarter rolling average.

The administrative expense as a percent of income were down slightly in the first nine months, and we are implementing measures to bring this ratio further towards the objective of 35%. Sales growth continues to exceed our 10% target, while we were able to maintain strict pricing discipline.

RoE is lagging, and was impacted by the assumption changes on the variable annuities. Therefore, further improvement is required, and we will focus on further improving our operations here.

Slide number six you see the capital ratios. The Bank improved its core Tier 1 ratio to over 9%, and insurance solvency ratio decreased 7 points but still at 261%, still a pretty healthy number. The reason for the decline was that the growth of our business caused a mild uptick in the required capital for solvency.

Slide seven, you see that Bank core Tier 1 capital increased by EUR4.1 billion in the first nine months, and at constant currencies, we generated EUR3.9 billion core Tier 1 capital, driven of course by healthy profit levels and a slight decline in risk weighted assets. This gives us a little flexibility in our capital management going forwards.

On slide eight, you see how well we are positioned relative to the new Basel III requirements. Changes will be important regarding capital and liquidity requirements, and although it's still uncertain what the final regulations will be, what we know we can say that we are mostly largely compliant already with the Basel III proposed legislation.

The impact that we see of Basel III and CRD 3 on risk weighted assets will be modest. They're basically very compliant on asset leverage and on capital, and the impact of implementing Basel III would be limited to about a decrease 70 basis points on our core Tier 1 of 9%.

And as you know, we are well positioned with our funding and our liquidity position, and we almost meet already the criteria of Basel III for more than 90% today.

Looking at the operational separation, it's gaining momentum. The Bank and Insurance will be operationally standalone by the end of this year. Final solutions will be in place for approximately 60% of all projects, and interim solutions will be in the form of transitional service agreements and will then over time gradually be phased out.

In the line with the agreement with the European Commission, the WestlandUtrecht Bank will be operationally and commercially standalone as of November 18 of this month.

Separation costs for 2010 are coming in at the low end of our previous expectations and they are expected for this full year to be at about EUR85 million. That's an after tax number.

Costs in 2011 and beyond are harder to predict, but I only can tell you that we will be very vigilant and keep the separation costs really under control.

And finally then, we made some important decisions on the Insurance divestment strategy and also on branding. Until separation, our business will continue to operate under the ING umbrella, the brand umbrella, but after separation, the Bank will retain the brands.

While we are not ruling out the possibility of one IPO, we now have decided to move forwards on two IPOs, one European led IPO that has solid cash flow and strong positions in developing markets, and a US focused IPO with a leading franchise on retirement services. This will really provide us optionality and flexibility; flexibility in timing and flexibility in execution, and also flexibility in where market environments in Europe and the US might be more attractive.

Also, with respect to Solvency 2, there still is a lot of uncertainty, and it could well be that not until late 2012 it may be decided what this outcome will be. And we cannot take any risk here; we need to prepare for the fact that this may be introduced.

So in terms of valuation, we believe that the US focused IPO would benefit from a New York listing and a large investor base in the US. And furthermore, I think that US investors are more familiar with the VA business and with the valuation.

Let's look at the Bank. The Bank continues to show strong profits. Together with lower risk costs and lower negative market impacts than a year ago, this has resulted in strong underlying pre-tax results of EUR1.5 billion.

Our pre-tax result was slightly down compared with the second quarter because that included an EUR86 million gain on the sale of an equity stake.

Interest margin of the Bank remained relatively stable over the past year. The decline in Q2 was largely explained by a swing in financial markets, and that was reversed in the third quarter.

Interest margin on the core lending and the [course of] business is stable. There was increase in margin in Retail Benelux and ING Direct, and somewhat lower margins on new business lending to large corporates. Over time, we would expect this to decline, but we for the next quarters, we foresee that margins will continue to hold up well in most of our markets.

Cost income ratio at 53.4%. Expenses increased by 11.9% in Q3, but that was largely related to foreign exchange. If we exclude foreign exchange and also market impacts and the one-off release that we had in Q3 last year, then expenses were up by only 4.1%, and mainly explained by higher marketing expense, selective investments and opportunities for growth, and systems improvements because we continue to invest in the long term future of the Bank.

And of course, the income ratio excluding market impacts was 53.4%, but I must say a slight deterioration from Q2, but cost discipline remains high and is an important focus, and the 50% cost income ratio target for 2013 still stands.

You see that risk costs declined to EUR374 million. That's about 40 basis -- 45 basis points average risk weighted assets. The coming quarters, we anticipate our risk costs will remain in line with the average that we have seen in the last nine months, and that was at about 53 basis points. The new risk guidance is below our previous guidance that we provided in the call that we had at the end of Q2.

The next slide that you see, slide 16, the non-performing loans, they declined from 2.2% to 2.1%. Non performing loans from net corporates and SME and the Benelux declined for the first time since the start of the crisis, and at ING Direct, the non-performing loan rate for mortgages continues its downward trend.

You see that on slide 17 you see that retail banking online result before tax increased further, driven by a higher interest rate, higher results and lower impairments, and almost all businesses showed a performance improvement compared with last year and the second quarter of this year. Belgium was lower because of releases, one-off releases in the third quarter last year.

Commercial Bank are doing well. Excluding real estate, the profits increased again in the third quarter, and the quality of earnings also improved as the core lending activities offset the decline in the financial markets. And you see that the real estate losses have narrowed to EUR6 million now this quarter.

Turning to Insurance, we see strong improvement in operating result reaching EUR473 million in the third quarter, which is the third consecutive quarterly improvement.

I think I'm satisfied with the operating performance, given the low interest rate environment and [improved] investment profile that we have elected.

Results before tax were impacted by assumption changes on the variable annuities in both US and Japan, but before I move to non-operating impacts, I would like to spend a few minutes on the operating results and detail.

You see slide 21; the spreads on the general account increased substantially this quarter, driven by reinvestments of cash in the Benelux and lower expenses in the US. Investment margin increased to 87 basis points, and the actual investment spreads standalone was 92 basis points and has really trended upwards in the last three quarters.

If you look at slide 22' the current low interest rate environment, if that were to persist a number of years, and I think that's an important slide, we believe our operating income would only marginally be impacted by it. The vast majority of our income is coming from fees and premium-based revenues, and investment income only represents 21% of the total, so a structurally low yield curve would lead to a modest decline in the investment spreads.

However, we have flexibility to reduce the creditor rates, which would limit the impact of low interest rates on the investment spreads to about 10 basis points, or just 2.5% of operating income.

So [I think also here] about our positions. Technical margin and the fee both increased in the quarter. Technical margin going forward I think you need to calculate more or less at a level of EUR200 million. It can be a little lumpy from time to time, but that has to do with -- that the expected mortality results from time to time can deviate from the assumptions we have made.

Administrative expense, they were up at constant currency 3.9%, but compared with the second quarter, they were up by 1.1%. Cost discipline is important, as you know, in our management, and the US will work on a program that they will reduce their expense next year by another EUR100 million. That will come later in the presentation.

When you look at the individual regions of the Insurance organization, most businesses showed an improvement on operating performance. Only the Benelux was lower, but that had to do with the seasonality of high dividend income and one-off expenses in the previous quarter, which is -- especially the high dividend income is I think standard in Europe. Operating results in the US increased 37%, driven by higher margins.

Slide 26, net results of the Insurance and the impact by the assumptions on the VA. You see that we started with the result of EUR473 million operating result. The VA assumptions brought it down by EUR356 million, some other operating impacts, and the end result, an underlying pre-tax profit of EUR18 million.

But then we had special items, goodwill and other special items, mainly restructuring, that brought the result down to a net profit -- a net loss of EUR656 million.

When you look at our sales, our sales are continuing to go strong. Sales measured in APE were very healthy this quarter at almost EUR1.2 billion, and particularly strong in Asia and Latin America where we continue to benefit from the strong distribution of our leading Life and Pension franchises. In Asia, the sale of COLI products, the [reallowance] in the first quarter of 2010 continued to be doing well, and we also had new products in Hong Kong and Malaysia.

The measures we have taken on the VA, on the US VA have reduced the DAC and have stabilized the reserves, but induced earnings volatility in the past. Here you see that the measures that we are taking how they are helping. The US RBC ratio, the capital ratio improved to 425%. Reserve in adequacy on the Legacy VA is reduced by EUR1 billion, and the DAC balance is reduced by EUR1.5 billion.

But it leads to a higher degree of volatility, as you can see on the bottom, o the right side of the slides. As a result, we are working on a number of changes now for Q4 and Q1 that will improve the reserve adequacy of the US Legacy VA business, it will reduce the earnings volatility going forwards, and it will bring accounting and hedging for the US business more in line with what US peers are doing.

Starting in Q4, the US Legacy VA business will be reported as a separate line of business, and that will improve transparency. This fact will trigger a DAC write-down of approximately EUR1 billion, and the EUR1 billion is based on numbers at the end of Q3, and the reduction is needed to bring the reserve adequacy up to the 50% confidence level.

From Q1, we are studying a number of changes that will bring our accounting much more in line with what US peers are doing, and that will include the introduction of a reversion to (inaudible) assumptions for determining DAC that will reduce the earnings volatility going forward, the move towards fair value accounting of reserves for Guaranteed Minimum Withdrawal Benefits as of January 1, 2011, in order to better reflect the economic value of the guarantees. That will allow us to substantially increase hedging of interest rates on the Legacy VA book without causing significant earnings volatility.

And also as of September, the difference between the current book value of the reserves and the estimated fair value is between EUR1 billion and EUR1.3 billion. And that would be reflected, but then with the numbers as they are on January 1, in the shareholders' equity as of January 1, 2011, and will strengthen the reserves by the same amount.

So again, combined, these measures are expected to improve the reserve adequacy on the US VA to well above 50% confidence. It will reduce the [K] factor to below 50%, substantially reduce the interest rate risk on the book, reduce the earnings volatility, and will allow us to recognize earnings on this book, with small positive run rates going forwards.

Also our US management, slide 30, is taking steps to further sharpen the focus and to enhance profitability, and the focus will be on the leading Retirement Services and strong Individual Life business. We will close the wholesale distribution channel for annuities, but we will continue to distribute our rollover annuity products only through our own distribution channels.

Additional cost savings from administrative expense and headcount, a reduction of about 680 FTEs are expected, and will result in a reduction of -- and will result in a savings of cost of about EUR100 million per year starting in 2011.

So let me wrap up and say our business is making significant progress. We continue to strengthen the Insurance franchise to eventually bring down two strong companies to the market.

And we are now ready to take your questions.

Thank you. (Operator Instructions). The first question is from Spencer Horgan. Please go ahead.

Thank you very much. Just in terms of the Bank firstly maybe, the interest margin you've talked about before declining to 120 basis points over time, and obviously continues to run above that level. I was just wondering, does the news that we've had on Basel III increase your optimism that maybe long term the interest margin could remain above 120 basis points?

Then the second question is in terms of these various charges you're intending to take in the Insurance business, I assume it doesn't really change the statutory solvency ratios, but is there going to be any need to move capital around the Group back into the Insurance business; so for example, upstream it from the Bank into Insurance, or can you contain this within Insurance?

Thanks.

The question is on interest margin longer term and the impact that Basel III may have. Koos, will you take that one?

Yes. Spencer, it's a bit early to say that, because on the one hand you could say that Basel III will lead to a reduction of expansion of balance sheet, and therefore the ability to produce loans will become less in the financial institutions, and that leads to better loan pricing. On the other hand, the liquidity rules are not completely clear, and there could be a fight for savings money, and that could have a margin narrowing effect.

So -- and to be honest, the precise rules on liquidity, they are not 100% crystallized out, so I find it too early to already say Basel III will have an upward or a downward effect. But overall, loans will be a positive; on the savings side will be a bit negative; but the extent to which we don't know yet.

Okay, Spencer, then the question on the will there be capital from Bank to Insurance. I think at this moment, we are looking at planning that Insurance will take care of its own capital but are needed -- if needed. We stand ready to make capital available, because we have, let's say as a Group, still the interest to create the highest possible value for the Group. So if that adds to the value of the Group, we certainly will take that position and make capital available when needed.

Okay, great. Thanks.

Thank you. The next question is from Duncan Russell. Please go ahead.

Good morning. First one is, you were talking in the press release about IPOs. Just to be clear, you're not ruling out trade sale or spin-off of the Insurance assets are you?

Second question then is, what would make you do one IPO rather than two IPOs? I can't think of the reason why you would do one IPO, so could you just elaborate on that?

And then third one, could you give us the MCV of the US Life business please?

Thank you.

Okay, Duncan, can we rule out anything? No, we cannot rule out anything. All options are always on the table. So I think that's pretty clear.

One or two IPOs, you cannot think of one -- a reason to do one. Well, I can think of a reason to do one, but then market circumstances then would be really, really very good. And it's so easy to do one that you say let's go ahead, because it's easier to do one IOP operationally than two.

But if you look at where markets are, if you look at where our businesses are, the location, the timing and the flexibility that you want to have, I think at this moment preparing for two IPOs is the best way to go. And should this incredible paradise show up, yes, then one IPO is still possible, but I would say at this moment we prepare for two.

And the -- Patrick, the MCV?

MCV, yes, we don't disclose MCV at this point.

Okay, what's the book value then of the US for the quarter?

We gave that at the end of the fourth quarter, and we'll probably do an update at the end of the year, but we don't disclose book values by business. In total, it was EUR21 billion for all of insurance.

Okay. Thanks.

Thank you. The next question is from Farquhar Murray. Please go ahead.

Hi. Morning, gentlemen. Just two questions, if I may. Firstly, just regards to the accounting standard for the variable annuity book. Are we right in thinking that's FAS 157, or have you elected fair value option under IFRS?

And then secondly, with regards to the EUR1 billion to EUR1.3 billion hit in the start of the year next year, can you just give us a sense of what the sensitivities are around that number, particularly to interest rates if wed indeed we need to change or flex that number?

And then finally -- actually, I'll throw in a third actually -- on the interest hedging strategy, do you know what the costs of that will be on a recurring basis?

Thanks.

Farquhar, we'll ask Matt Rider to answer the first two questions, and Koos to do the last one.

So with respect to the accounting standard, the decision as to whether it's a FAS 157 or FAS 133 would likely be more of a FAS 133 under US GAAP. We would likely go to more something to full fair value. We would like to be under IFRS. We'd like to sink them up as much as possible, but that decision has not been made yet.

I think importantly on the interest rate sensitivity, it will be a little bit sensitive as you get into the -- as you restate your figures for the January 1 equity. However, that's also a bit of a question as to what extent we begin to hedge that interest rate exposure starting within this year.

So I think probably not exactly the right thing to give you a sensitivity on that because it depends both in terms of the liability, but also to the extent that we would begin to hedge that.

And if you look at the interest hedge, what does it do for your results? In essence, the most likely form of hedging would be receiver swaps. Those would be mark-to-market as of January 1 against those liabilities. But on a cash flow basis, yes, you're receiving fixed versus paying floating, so your first year you expect to collect more money out of that.

Okay. Just a follow-on. Can I read from the comment on interest rate sensitivity that you're probably intending to hedge that reasonably quick?

The speed at which we want to hedge this, we will look forward over how are we going to do that over the fourth quarter and into the first quarter. We don't want to give an exact timing on that, and we just do whatever is reasonable in markets.

Thanks a lot.

Thank you. The next question is from Chris Hitchings. Please go ahead, sir.

Thanks very much indeed. A couple of issues. Presumably, the fact that there isn't an overall Insurance CEO very much rules out the one IPO at the moment. You would have to do something about that. So I'm wondering just what the strategy of the management changes is and a bit more background to them.

Secondly, you've impaired I think the goodwill on the CitiStreet acquisition. Does that reflect what is going on in CitiStreet? And can you give us an update there?

Thirdly on ING Direct US, I think you took in some reversals of impairments into the NIM in first and second quarter. Could you quantify what they were in the third quarter?

Thank you.

Okay, first question on the CEO. No, I think we -- it is not a matter of we had the CEO, yes, I know, because that is -- I think that is not the important issue. The important issue, what is the most successful way to go to market, and I think that is what we have decided, two IPOs, and that had consequences, and so that is the basis for our decision, not whether you had one or two CEOs available. You can always have a CEO available.

CitiStreet?

The CitiStreet -- yes, the impairment is for the entire segment. It does relate to CitiStreet, but does not imply the CitiStreet acquisition was not a success. In fact, it's the opposite. Cost synergies there are running well. We expect EUR50 million run rate savings, which was offset by integration costs of less than that EUR25 million to EUR30 million.

Going forward, we would hope those cost synergies will accelerate to the EUR70 million mark, so we're very pleased with the CitiStreet acquisition.

In respect to your other question on ING Direct, the impact on the income was EUR55 million in the third quarter which is a small reduction from the EUR64 million in the previous quarter. We had a methodological change in how we amortize that premium over time which led to that reduction.

Okay. Thanks very much.

Thank you. The next question is from Thomas Nagtegaal. Please go ahead.

Good morning, gentlemen. Thomas Nagtegaal, RBS. I have three questions from my side. First of all, could you explain a little bit how you're going to do the VA interest rate hedging? Are you going to give away all potential upside when interest rates rise again?

Second, what will be the impact of the DAC impairments on, let's say, annual VA earnings? So how much annual DAC amortization do you -- will be reduced?

And third, Basel III, how you gave this 70 base points impact at this point in time. Could you give an indication how much it will be over four years' time? How much of the deferred tax assets are you going to use? Do you have any view on that?

Thanks.

The hedge; Matt, are you doing that?

Yes. Yes, let me take the hedging. This is standard stuff for interest rate hedging. We would do it with a combination of swap options and swaps.

In terms of the amount of interest rate exposure that we would be hedging, you asked if we would be giving up all the upside as a consequence of rising interest rates. The answer is no to that, because we will only move the WB block to market. Now after moving that block to market, we would expect something on the order of about 40% of our interest rate exposure to be hedged. So we've not given up the upside but we have eliminated some of the downside. So I think that's actually quite important.

With respect to the impact going forward on VA earnings, you'll notice that we take down the DAC by about EUR1 billion. So obviously, that is going to be an increase over many years in terms of what we would have otherwise reported. But I think that -- I think in the last quarter, we reported something on the order of -- something like EUR100 million loss. We would -- per quarter, we would expect to see something on the order of some nominally positive gains, so you can get a difference from that.

Okay, thanks. And the Basel III question?

Yes, for the Basel III question, the 70 basis points was indicated if we would do this right now. So that is ignoring future earnings. But if we extract from that part, the biggest issue there is 70 basis points now, is 50 basis points two years later because of the write-down of DTAs. So that is in effect the part where you said the difference between a (inaudible) start or a start as per 2012 and ignoring earnings is 20 basis points.

Okay, thank you very much.

Thank you. The next question is from Farooq Hanif. Please go ahead.

Morning. I've just got a few questions. Firstly, just on the US business and its earnings going forward, I just want to bring together all the comments that you've made. Are you basically suggesting that we could have slightly higher than the current US operating profit run rate as the total earnings of the US business, that's with the VAs and everything else all together? That's question number one.

Question number two is, you're going to rebuild your reserving in the US to above -- you're well above the 50% confidence level. What comfort can you give us that this brings you into line with peers, and is there any case to be made that you'll be more conservative than peers as a result of this?

Third question is on the US, on the two IPO base case, what would be in the US and what would be in the European listing in terms of the geographical businesses that you have?

Thank you.

So with respect to the operatings in the US going forward, I think that's right; that you would expect some Kind of a marginal increase in earnings as we go forward as a consequence of these changes.

I think quite importantly though that if we start to see some positive movement in equity markets more so, then you will see more of that sort of operating result coming through over time.

The other question with respect to the reserving and how we're going to move that, and the fact that we will end up with reserving well in excess of the fiftieth percent of our confidence level, you asked whether that would bring us more in line with US peers. It would be difficult for us to comment on the amount of reserve adequacy that US peers have. So that's point one. But I think that, at least in terms of the accounting for the WB benefit, and bringing that more toward a market value basis, and being able to hedge interest rates going forward, that is really the thing that brings us into line.

The movements that we make in terms of separating out the VA as a new line of business, the consequence that that has on writing off DAC, we know that has a positive impact on earnings; that has a positive impact clearly on reserve adequacy for us; it has a positive impact on getting our K factors down to more normal levels, but it's difficult to comment about those things relative to US peers.

If I may just -- also just follow-up. You're writing off quite a lot of DAC and you'd be left at the current level with EUR0.5 billion. You're going to move to an accounting policy that really doesn't vary that much if you move to mean reversion. And you never gave us the book value of just the VA business, but I'm guessing there isn't going to be much book value left as a result of this. Is that right?

Well, true, the book value will be written down significantly, and we would expect to see clearly more stable and -- stable earnings at a more positive level going forward.

The point I'm trying to make is -- if you could just give us a qualitative answer that would be really helpful. The book value of the VA business as a proportion of the US, is that going to be quite a small proportion now?

It will clearly be smaller.

Okay, thanks.

Okay, your question on the IPO, the two IPOs, what's included, of course, in the US we will include the Life and the Retirement Services. In the European, we will include the European organization, both the Benelux, Eastern Europe, the Rest of Europe and Asia. We have not decided yet what we will do with LatAm, where it will fit. We're still evaluating what the best option is and that will take some time.

Also with respect to the Investment Management business, the main business will continue to be in the Netherlands, in Europe, but at the same time, if you do a US IPO, then probably the investment management in the US will go with the US, but we'll make arrangements so that we have partnerships and that our customers, who are global customers, will have the benefit of the knowledge, the expertise, the products, the distribution. That all will stay for them as is when we were one Company.

Okay, thank you very much.

Thank you. The next question is from Nick Holmes. Please go ahead, sir.

Yes, hello there. Thank you very much. A couple of questions I'm afraid to say yet again on your variable annuity book. The first is coming back to the confidence level. Now you say that the reserve strengthening takes it above the 50%. I wondered if you could tell us how much above the 50%, what sort of level. And I think 90% is your normal confidence level for reserves, isn't it? So the question is, how much would it take to get you to 90%?

Second question is on the mean reversion. I just wondered why you haven't done this before. I know you've considered it many times, going back to the Michel Tilman area. Why basically haven't you done it, and why are you deciding to do it now?

Thank you.

So with respect to the confidence level, what we do in the fourth quarter is we'll write off DAC to the level of the 50th percentile confidence level. That'll take EUR1 billion of DAC off. And then in the first quarter, we'll move to market value on GMWB, so now you'll effectively get a bit of a cushion between EUR1.0 and EUR1.3 billion.

In terms of percentage levels, that might be something in the area of 70%, but we haven't calculated that one yet.

Now with respect to the --

Sorry, could I just very quickly ask, so would it take another EUR1 billion to take it up to 90%, which is the normal level, isn't it?

No, I would -- okay, so I want to comment a bit on the 90th percentile level. So certainly, the 90th percentile rule that we have within ING is an ING rule. It is predominantly more European based, and as we move towards more of an IPO scenario, the rules in the US are going to be far more dominant. So I don't even really want to comment on the 90th percentile level in the United States because it's frankly irrelevant among US peers.

Okay.

Now w3ith respect to the mean reversion, we actually had done mean reversion years ago. We switched it back so that we would be more truing up the DAC balance and so on. But now, as we look to do the two separate IPOs, one US focused, we observed that virtually all US insurance companies do mean reversion. So this is just one other element to put us more in line with US peers.

Okay, thank you very much.

Thank you. The next question is from Johnny Vo. Please go ahead.

Morning. Just a couple of quick questions, just on the NIM. You're still being positively impacted by re-pricing of the assets. When does that effect roll off, and what will be the impact there? And just on the insurance, can you just talk qualitatively about the economic capital of the Insurance businesses and where it has moved to as of today?

And finally, just in terms of the DAC write-down, why did you choose to write down so much of the DAC when you could have probably written it down to the level of the 50% confidence and moved to a mean reversion approach which would be broadly in line with the US peers? Why did you decide to really reset it heavily?

Thanks.

Patrick, the NIM?

Good morning, Johnny. In respect of net interest margin, what we are seeing is that, as we answered earlier, that it has been stable and resilient over the past five quarters at 140 odd basis points. Looking forward, we're seeing growth in mortgages at good margins which we think will help sustain that margin going forward and similar pricing of the loan book.

So we think those factors on balance are probably going to be -- outweigh some of the negative effects on the investment book where we may get lower spreads on re-investing there.

So broadly, it's a positive outlook and it's consistent what we've seen over recent quarters. We think it will continue.

Okay.

With respect to economic capital of the insurance companies, it's is not a number we disclosed in a quarter, so I would be uncomfortable even disclosing qualitatively what that might be. I don't have the numbers in front of me.

And then with respect to the DAC write-down, why so much; so I think the first point here is that we follow the IFRS accounting rules in our accounting policies, and this DAC write-down is simply a consequence of separating the VA book into a new line of business, full stop.

Now having said that, I think it's important to get the US into an IPO-able situation, so writing off a significant amount of DAC reduces a lot of equity, reduces a lot of expensive amortization going forward, and puts us in a place where we can begin to report earnings going forward, especially as we come out of the -- especially as equity markets being to improve further.

Yes, but given that you're moving to a mean reversion, that alone is going to reduce the amortization expenses for the period, I suppose?

It'll reduce the volatility but not the level.

Oh, right. Okay, thanks.

Thank you. The next question is from Jan Willem Weidema. Please go ahead.

Good morning. Jan Willem Weidema, ABN Amro. On the timing of the IPO, as you mentioned, the earnings and market conditions is key for the timing of the IPOs. Can you comment on what kind of investment margin and admin expense ratio you will be aiming for before IPO in the businesses?

Secondly, the decisions you've announced today, will those influence the free-flow that you're targeting for the IPOs?

And thirdly, on WestlandUtrecht Bank, do you consider integrating that into the European Insurance business? And would that also be sufficient for the European Commission?

Okay, the timing of the IPO and what type of margins and expense ratios will we have? Well, that's a long term forecast that I think we want to be a little careful with. I can tell you that the timing, as we are looking at this, is as follows. It takes a bit of time, let's say between eight months and 12 months, before you can do an IPO. There are a lot of things that need to be getting ready for legally, tax-wise, accounting-wise. You need to do a restatements. So a lot of preparation including -- in this case, we also need to build up a lot of corporate services.

So I would say it takes roughly a year planning-wise. So some time late 2011 at best but more likely somewhere in 2012 that we can go to market with an IPO.

What will margins be at that time? I think we have said that we want to reduce our expense ratios in 2013 to 50% for the Bank cost income ratio, and we want to be at 35% for the Insurance Company.

What will be the investment margin at that time, or interest margin? Yes, I think that's one of the questions that markets will determine at that time. As Patrick was saying earlier, at this moment, we see the interest margin to hold up quite well. But further than that, let's say the next month or two quarters, we cannot look.

With respect to the free-flow before the IPO, what do you mean by that exactly?

How much of the Insurance business will be listed in percentage terms?

All of the insurance business at the end will go in either one of two IPOs. Nothing will stay behind. All the Insurance business will go. And that was the condition that we had agreed upon with the European Commission.

With respect to WestlandUtrecht Bank, we have, at the 18th of this month, we have completely operationally and commercially established this as a separate company. We have hired investment banks to look at what we can do with the business, potential interested parties. And that's the phase we are in right now. I cannot make any further comments on what the result will be of that exercise. But in due time, when we are ready to come forward with that, I think we will let you know.

Okay, thanks. One more question on the free-floats. Earlier, you seemed to be willing to wait from the outcome of Solvency 2. And as you indicate, maybe already in 2011 you will IPO the Insurance business, which gives you less time to retain earnings. So that I would guess then for a first tranche of the IPO you would have to [list] more.

Oh, I see. No, I did not understand you, I'm sorry. No, w What we will do, we will time -- I was giving you the best possible that we could do in timing-wise, the earliest that was possible. We will look at of course what our market is doing. If we have a good production of earnings in the Bank and in the Insurance Company, if that creates lots of flexibility for us, then we may not have to do an IPO, we can maybe do other things as well but still put these businesses in the marketplace.

But as one of the questions earlier was, can you do a spin? Yes, it's possible, but then we need to have the earnings capability and also the timing to implement and execute that.

So what I am saying is here now, the two IPOs, plus what we are planning, gives us maximum flexibility and maximum optionality to take that route that is the most advantageous value-wise and given what the markets are doing.

Okay, thank you.

Thank you. The next question is from Benoit Petrarque. Please go ahead.

Yes, good morning, Benoit Petrarque from Kepler in Amsterdam. Just one question on Basel III. You see a EUR11 billion increase in risk weighted assets. It's just 3% of the total risk weighted assets. I just say that because total risk weighted assets on the financial market division is EUR32 billion, so it's just 30% increase of the risk weighted assets allocated to this division. It sounds a bit low compared to European banking peers. So can you just discuss if you feel comfortable with this EUR11 billion or you think it could be actually at the end a bit higher?

And also, [formative] market risk, how much is [CVA]? Can you detail that a bit?

Thanks.

I think if you look at the Basel III risk weighted asset, there is various components. The EUR11 billion refers to the pure Basel III rules. Then we have the new trading regime, and on the trading regime you're talking in total about an EUR8 billion risk weighted assets. Indeed, if you look at our total amount of trading risk weighted assets in the Bank, it is relatively low. It's not EUR32 billion. The trading risk weighted asset is around EUR6 billion or EUR7 billion.

Therefore, it is a considerable increase of the trading risk weighted assets but then again, the trading risk weighted assets are low because our trading relative to our lending is low.

But this EUR11 billion includes trading, higher market risk, basically?

If you take the EUR11 billion that is Basel III and if you take the eight that is the new trading risk rules and what we call the so-called Basel 2.5.

Okay, thanks. Okay.

Thank you. The next question is from Marcus Rivaldi. Please go ahead.

Good morning, everyone. A couple of questions, maybe more fixed income focused around the structure of the IPOs. Obviously, you've got a lot of debt at the sub-holding company, INGV. So should we assume that maybe the US business gets sold separately, and then INGV with its accompanying debt is separately IPO'd with owning the European and the other operations?

And finally, could you give an update please on discussions with the EC over state aid repayment and your latest thinking around the ability or otherwise for you to redeem debt as expected?

Thank you.

Yes I think it's too early to go into the details how we will do the IPO, what structure that it will be. All I can say is we will be extremely careful and extremely vigilant in making sure that we get the best possible deal done. Not only value-wise but also structure-wise. And we will take every aspect into account, not just the economic aspect but also the aspect of where we put the debt.

At this moment, we have no discussions with the European Commission on state aid or on debt repayment. But as you can see from our balance sheet and the fact that we have a strong core Tier 1, we are looking, evaluating what options we have to do a repayment to the Dutch state. But at this moment, we have no concrete, let's say, options on the table, but still evaluating, and if there is an attractive option, we will certainly look at that.

Then your last question had to do with --?

I think you covered it. I just -- a quick follow-up though. If I was a debt holder in INGV, should I anticipate maybe staying in a -- with ING Group post these IPOs? That's really the issue. Or maybe expect I should be floated off with maybe the European parts of the business, the Insurance business.

Well, you will have plenty of time to evaluate that because it will take some time before we get into any particular direct action. For the time being, it is business as usual, be it that the Bank and the Insurance company are operationally separate, but for the time being, they're still on the one holding Company.

Okay, I appreciate that. Thanks for the clarification.

Sure.

Thank you. The next question is from Frederico Salerno. Please go ahead.

Yes, good morning. I was just wondering on the IPOs, again, sorry. Is it fair to assume you will prioritize a sale or an IPO of the US business over the European one, or not necessarily?

And then the second thing, do you have an update on the timing of the judgment by the European Court of Justice at all at this time?

Let me start with the IPO question. Yes, I think what we will do is, as I said earlier, we'll take every aspect into account. And when markets open up, the markets are there, and when we are ready, I think we have the option to go either in the US or either go into the European market.

I think that will be determined at the time. It's difficult to determine that now. I think we are flexible, and that's the purpose of having done this flexibility and optionality.

And with respect to the European Courts, we have -- I note that -- I've seen some filings for them with the European Court, but there are no decisions here yet.

So do you think mid-2011 basically?

Yes, that's most likely, but you need to ask the European Court what their timing is. I don't know.

Okay, thank you.

Thank you.

Thank you, the next question is from Tony Silverman. P3lease go ahead.

Yes, Tony Silverman, Standard & Poor's Equity Research. I'd just like to come back to the net interest margin on banks. Do we take the message from what you're saying that the 140 basis points is obviously as you've said sustainable for a quarter or two, but do you regard it now as a sort of through cycle likely average, just putting Basel III to one side if we can for the moment? Or are we really returning to the earlier question, has the 120 points guidance changed at all?

Second question was just thinking about the US insurance IPO going forwards, you're going to have a run-off of the A book, and really a lot of fee-based business and the general account I think, which is not enormous, obviously sizeable, but is that going -- what will the capital requirements of that going forwards? Is this one in the wrong ballpark that it may only have EUR1 billion or EUR2 billion capital requirements altogether anyway?

And just out of curiosity a third question; in short, what will the brand names of the insurance -- what sort of brand names will you chose. Might they be completely different, or will they not have ING in their title at all?

Thank you.

Okay. Tony, in respect of the interest margin for the Bank, yes, Basel III, as Koos mentioned earlier, is a bit of a game changer. It's not clear how that will pan out.

What we can see for the immediate future is, as I said earlier, we think that the margins should remain robust. We're seeing the potential for positive margin re-pricing in respect of mortgages. So on balance, we think it should stay strong for as far as forward really as we can see which is the next couple of quarters.

And I think it's a bit premature to think about what the through the cycle [margins] will be in Basel III. I think that needs time really to play out and see how the impact in terms of deposit pricing and loan credit spreads evaluate over time.

Okay, with respect to the question on the brands, because your second question we could not pick up.

Did you hear that Matt? Okay. We have someone that could understand your second question. So Matt Rider will answer that one. Do you want to do that first, Matt?

Yes, so your question was on the ongoing businesses in the US and the capital requirements of that given an IPO. So basically, what would the US business be composed of? The first, obviously, is the run-off, the A business. But also there's a very -- it's a tremendous Retirement Services business and a fantastic Life business, and that would be ongoing.

I would note that the general account assets in the US are about GBP70 billion, so certainly no inconsequential.

With regard to the capital requirements going forward, as Jan said, I think we have a little bit of time to think about how to do the capital structure for a standalone US business, but I think we see progress in the capital ratios from an RBC standpoint in the quarter. I think last quarter we were somewhat below 400% RBC; now we've raised it up to 425%. So the amount of available capital's been increasing.

Okay, and the question related to the brands. Yes, if we do two IPOs we need to -- and the Bank will continue to own the ING brands. Of course, we will have to start working on and are working on what will be the brands and the brand name for the two companies.

Again here, we have some time. For the time being, they continue to operate under the ING brand. And when we get closer to the IPO, I think we will be using that and the publicity around that then to introduce the brand name for the two companies.

Okay, thank you.

Thank you. The next question is from Farooq Hanif. Please go ahead.

Hi, there. I hope you don't mind some follow-up questions. Just firstly, I wanted to ask a question about cash flow. Could you give us some indication of what the cash generation for the US business is, Insurance business and the Insurance business as a whole? To what extent are the earnings a good guide to cash generation? And I'm talking really about the situation where this post reserving, post DAC write-down, just in a steady state from next year.

And could you also comment, especially on the US, to what extent that the cash is dividendable? That's question number one.

Question two is, just going back on the write-down, the EUR1 billion in 4Q and the up to EUR1.3 billion in the first quarter as a pre-tax number, what is the tax impact?

Maybe on the first one -- and I didn't quite get the second one. Sorry about that. But with respect to the cash flow generation, yes, we're still trying to figure out a good way to be reporting this going forward, because I think that within the US really what matters is the cash flow on your statutory accounts. And so far it's been, if you look across all the insurance businesses, the cash flow has been sufficient to support the generation of new business, interest on the debt that we have.

But I think, importantly, we've been building up some capital within the businesses, especially in the US. So we need a good way to frame that a bit better going forward.

So basically, you're saying you can't really answer it at the moment. Do you think earnings are a good start? And what deductions do you think we should make for capital required?

Yes, I'd prefer not to comment on that now. I'd rather get this a little bit better because I don't want you to be making strange adjustments to an IFRS earnings number. We need to come back to you on that one.

But I guess maybe a slightly different question. The fact that your RBC ratios in the US have just improved to quite a solid level, would it be fair to assume that any tied up surplus that you have is being released if necessary?

I'm sorry I didn't catch the last bit of your question. We are building capital. It's up to 425%. That's a very good level. As a standalone company it might need to be a little bit higher than that, but that's where it ends.

I guess what I was just trying to say was that because your statutory capital ratio is so high now, does that make you more comfortable about being able to release capital from the US if necessary?

No, I think we're comfortable with where it is right now.

Okay. And the second question which you didn't hear was just understanding the tax impact on the DAC write-down and the move to fair value in the VA business.

Okay, on the DAC write-down, that is a P&L impact, which will be tax affected, EUR1 billion pre-tax, estimate EUR700 million after tax. Importantly, in respect of the move to fair value, this is a change in accounting policy, so it is reflected in equity not in P&L. So the number we gave, the estimate of between EUR1 billion and EUR1.3 billion is the net effect that goes through equity. It is not a P&L element, so tax is not relevant.

One element, the DAC write-down is a P&L charge, which is tax affected in the fourth quarter. The second is a change in accounting policy, which is reflected in equity with restatement of prior periods and is not P&L.

Okay, that's very clear. Thank you very much.

Thank you. The next question is from [Brian Montelloni]. Please go ahead.

Thanks, just a follow-up actually on Marcus' question earlier. Given the strong capital position of the ING Group, is there any reason first to not expect ING to call a 8.439% Tier 1 security in the US by the time the notice period ends at the end of this month?

Well, we have -- when we do make calls for [hybrids], we have to consult the European Commission and ask for their permission for that. So we are in the process of doing that. I cannot make any further comments here.

Thank you.

Thank you. The next question is from Lemer Salah. Please go ahead.

Well, good morning, everybody. I have a question with regard to the variable annuity product.

On slide 29, you have mentioned that GMWB will be hedged by employed [ROE] hedging. My first question is why not a mixture of ROE and delta hedging, which seems to me more efficient in a challenging market?

My second question regards also the variable annuity product. Are you incorporating the cost of hedging into the price of the VAs? Or do you ignore it since you run it off?

Thank you very much.

Maybe on the first one without getting too technical, we are delta hedging the ROE. So in essence, we are not going into all kinds of strange options but to hedge this, but you basically what you do is you take your basis point values and you look at the simplest instrument to start to hedge that. So in effect what we are hedging is the ROE.

If you look at delta hedging on VA, maybe you refer more to the equities. That is something which we always continuously have delta hedged.

With regards to pricing and cost, yes, in general what we do is we have in the past priced these products given a certain amount of hedging cost in there. But it's a closed block, so we are not selling more VAs. So in that sense, new pricing or things like that are not relevant for this.

So the cost comes at ING's account, the additional hedge costs?

The cost is in the US. There is a margin which we are making on the VA product and then whether it is sufficient with the hedging depends on future volatilities amongst other. So -- but that is something like the cost price is fixed and the hedging cost is something which is highly depending on market and market volatility as of now and going forward.

Thank you.

Thank you. The next question is from Raghu Hariharan. Please go ahead.

Hi, there. It's Raghu Hariharan from Citi. Can I just add one observing question on the VA?

The first question was, your decision to choose FAS 133 versus FAS 157, I guess using FAS 157 you can use your own debt -- credit as well as your discount rate, and I was wondering why you would chose FAS 133.

And the second one is just a clarification. Once you move your accounting reserves higher, what is the delta between your regulatory reserves and your accounting reserves once you take the charge?

Let me take that one. So the FAS 133 -- you're absolutely right, the FAS 133 would not allow you to use your own credit spread, whereas the FAS 157 would. And therefore, if you're using FAS 133, it's actually easier to hedge the real interest rate exposure rather than trying to do some hybrid between interest rate exposure and your own credit risk. So we choose for that.

With respect to the accounting difference between the -- let's say the newly restated GMWB reserves on a market value basis and where our reserves are on a regulatory basis, they're actually very close. I think there was a question earlier about the overall impact on all these changes on our statutory accounts, and the fact of the matter is it's quite de minimis.

Okay, thank you.

Thank you. The next question is a follow up question from Farquhar Murray. Please go ahead.

Hi, there. Sorry just one very quick follow-up, again on the Variable Annuity business. The assumption change for the US business is about EUR21 million, which is obviously a very trivial number indeed. I just wondered if there's a kind of balancing effect within that number, i.e., if there are bigger gross impacts going on? And in particular, I was just wondering if you could give some color around what you are actually experiencing in terms of utilization and (technical difficulty) relative to your pricing and operational assumptions.

Thanks.

Yes, on the VA assumption changes, I think you noticed that there was actually a larger impact on the Japan business. Why is that? Because we frankly mark the liability much, much more to market. So when you see this -- it's a EUR21 million impact on assumption changes in the US, let's remember that this is an SOP sort of reserve so there's a lot of smoothing and blending along with that.

Now if you look at must the WB portion of those liabilities, we would estimate that there would be something on the order of a EUR200 million change on a market value basis, and we've included that impact in the range of estimates that we give in our change to fair value in 1Q. So that gives you a little bit better idea of the magnitude on a market value basis.

And then with respect to giving some color on what we're experiencing, I think you know that we review our assumptions every year. We typically do this in the third quarter. This is part of our normal process. And if we see credible experience that is different that our management best estimate and causes us to adjust that, then we do it in the current quarter. And beyond that, we would expect to have changes and experience assumptions going forward, based on the data that we get as it comes in.

But if we come back to say the EUR200 million, is that a positive from a longer position, say, across the [gross of the book] offset by some utilization. I just want to get a sense of what did you tweak in that.

I'm sorry, you're going to repeat that question. You were breaking up a bit.

Oh, apologies. Can you hear us now?

Yes, that's better. Thanks.

Okay, apologies about that. Just within the EUR200 million, I'm just trying to get a sense of what numbers you were tweaking; i.e., is it longer consistency but more utilization? And where have you experienced the kind of changes that you've obviously made there.

Yes, it's generally lapse assumptions. Those are the ones that are affected in this quarter.

Okay, thanks.

(Operator Instructions). Gentlemen, there appear to be no further questions. Please continue.

Okay, I thank you all very much for being on the call. We're going back to work because we have a lot of things to do.

Thank you very much and have a good day.

Thank you, sir. Thank you, ladies and gentlemen. This does conclude today's presentation. Thank you for participating. You may now disconnect.