Capital adequacy
The main task of the Group capital management function is to monitor, manage and plan the capital adequacy of ING Group, ING Bank and ING Insurance and to execute all related capital markets transactions. The benefits of a centralised capital management function are that maximum financial flexibility is created to pursue strategic objectives and to withstand financial stress and that the different requirements of shareholders, regulators, rating agencies and internal economic capital models can be properly balanced. At the beginning of each year, a funding plan and a securitisation plan are prepared describing all intended financings and other capital market transactions.
ING endeavours to employ its capital in the most optimal way. It is therefore important that business units receive the right incentives to only hold capital necessary to support the risks in their business and to upstream the remainder to ING Group. In turn they should be able to count on a capital injection if their business can grow profitably.
Free surplus is that part of available financial resources (capital) that exceeds economic capital employed. Many ING Insurance business entities need to hold more capital than economic capital due to regulatory and/or rating agency constraints. However, to the extent free surplus is not constrained, it is free to be employed elsewhere in the interest of furthering profitable growth. During 2007 in total EUR 5.8 billion of dividends were paid by ING Insurance Netherlands to the holding company of ING Insurance. As of 31 December, there remained tied-free surplus of EUR 3.5 billion and EU Solvency at 150% in ING Insurance Netherlands.
Significant work was put into the management of the corporate line Insurance during 2007. The corporate line contains capital management and general management items that are beyond the management control of the business units, such as capital funding, top-down hedges and special expenses not directly related to the business. A new foreign exchange translation risk policy was approved and also the new interest rate risk management policy was implemented. Capital Management executed in total EUR 6 billion of equity index option transactions during 2007 to protect the value of the ING Insurance equity stakes (also some of the equity positions of ING Bank were hedged on the corporate line of ING Bank).
In the course of selling life insurance policies ING Insurance Netherlands also sells mortgages. At the beginning of 2007 approximately EUR 17 billion of mortgages had accumulated within ING Insurance Netherlands, mostly at a mortgage subsidiary. This entity was transferred to ING Bank, where the assets can be funded more cheaply and the systems are in place to actively manage the prepayment risk. This transfer reduced the operating leverage of ING Insurance significantly. Subsequently, more mortgages were transferred directly from ING Insurance Netherlands to ING Bank, creating liquidity and thereby facilitating the implementation of the new asset allocation. In total EUR 12 billion of mortgages were transferred.