Four questions to help understand the charge on US Insurance Closed Block VA assumption review

ING Group issued a press release on 7 December 2011 about its US Insurance Closed Block variable annuity business. Here are some questions and answers to help understand the news.

2. What does today’s announcement mean with regard to our plans to repay the Dutch state?

State repayment has been funded by capital generation at ING Bank. Today’s announcement doesn’t have a material impact on the results of the bank, so it doesn’t have a direct impact on ING’s ability to repay the final tranche to the government. ING has already repaid EUR 9 billion to the Dutch government, including EUR 7 billion of principal.

There is EUR 3 billion in principal currently outstanding. ING intends to repay that as soon as possible, but in the current environment – with increasing regulatory capital requirements and the ongoing crisis in the Eurozone – we need to be very prudent.

3. Does this earnings charge have any impact on ING’s IPO base case scenario?

The timing of this announcement is entirely separate to the IPO process. ING continues to prepare for the base case of two IPOs for the Insurance/IM businesses and are progressing well with the internal preparations. However, as ING has always said, the ultimate timing of an IPO will depend on market conditions.

4. Variable annuity, assumption, closed block: what do these terms really mean?

With variable annuity products, customers entrusted a sum of money (or “premium”) to ING in return for a stream of income when they retire. Their premium was invested in mutual funds chosen by the customer. The amount of money built up at retirement depends on the performance of the funds that the customer had chosen to invest in.

Many customers also chose variable annuity products with guarantees. For instance, even if the mutual funds in the annuity performed below expectations, a policy may have guaranteed a certain minimum capital at retirement. When that guaranteed capital exceeds the amount of money built up in the policy, as is now frequently the case because of the impact of the financial crisis and recession on markets, it negatively affects the profit ING expects to earn from a variable annuity over the life of the product.

It also leads to lower-than-expected surrenders of policies, because when markets are volatile, the guarantee frequently provides customers with a more attractive investment than they could get elsewhere. ING is required under accounting rules to reassess the value of these guarantees and the “lapse,” or surrender, assumptions annually, with any changes flowing through our profit and loss account. Closed block refers to the fact that these products are no longer being sold—we decided in early 2009 to stop selling this type of variable annuity.