January 28, 2010 ING Verzekeringen N.V. Primary Credit Analyst: Mark Button, London (44) 20-7176-7045; mark_button@standardandpoors.com Secondary Credit Analyst: David Harrison, London (44) 20-7176-7064; david_harrison@standardandpoors.com Table Of Contents Major Rating Factors Rationale Outlook Financial Profile: Elevated Leverage Owing To Material Intra-Group Hybrids www.standardandpoors.com/ratingsdirect 1
Major Rating Factors Strengths: Very strong capital adequacy. Strong enterprise risk management. Strong local competitive positions across a number of markets. Highly diverse profile. Counterparty Credit Rating A-/Negative/A-2 Weaknesses: Uncertain impact of restructuring of the ING Group. Challenging operating environment. Exposure to investment markets. Elevated financial leverage. Rationale The long-term counterparty credit rating on ING Verzekeringen N.V. (INGV) reflects its position as the holding company for the insurance operations of the ING group. INGV is rated two notches below the 'A+' operating company rating, which reflects Standard & Poor's Ratings Services' standard holding company gapping for European insurers. INGV continues to benefit from close links with ING Groep N.V. (ING; A/Stable/A-1) in managing capital and liquidity, although this support is likely to be temporary owing to the plan to separate the banking and insurance operations of ING. The rating also recognizes the inherent strengths supporting the 'A+' rating on the main operating entities of INGV. The INGV operating companies' ratings reflect the insurance group's very strong capital adequacy, strong local competitive positions across a number of markets, highly diverse profile, and strong enterprise risk management. These positive factors are partially offset by a challenging operating environment, exposures to investment markets, elevated financial leverage, and the uncertain impact on ING's insurance operations from the restructuring of the ING Group. We consider ING's insurance operations as 'not strategically important' under our group rating methodology following the strategic decision by ING to dispose of its insurance operations before the end of 2013 under its European Commission-agreed restructuring plan. ING's insurance operations exhibit wide geographical, product, and distribution diversity. INGV has a significant presence in the relatively mature markets of The Netherlands and North America and has built strong positions in the higher growth markets of Asia, Central and Eastern Europe, and Latin America. This diversity has provided a degree of strategic flexibility as ING responded to the financial crisis. There is, however, some uncertainty over the future profile of the INGV group following the announcement in October 2009 of the separation of the insurance and banking operations of the ING group. It is unclear whether the separation will take the form of a single initial public offering (IPO) of INGV or the sale or IPO of individual regions or business units. ING has taken a number of actions over the past two years to replenish capital and reduce risk to mitigate the adverse impact on its capital adequacy from the financial market turmoil. The group injected a net 5 billion of Standard & Poor s RatingsDirect on the Global Credit Portal January 28, 2010 2
equity and hybrid capital into the insurance operations during 2008 and significantly reduced its interest rate risk exposure by disposing of ING Life Taiwan. Direct equity risk has also been cut through hedging and disposals and certain credit exposures de-risked, including an Alt-A transaction with the Dutch state to reduce risks relating to these securities. This has supported ING's insurance operations' very strong capital adequacy. Capital quality has weakened over the past two years as capital support from the group has included a significant amount of hybrid-funded double leverage, increasing the amount of leverage in the capital structure. Given the current weak earnings performance, we view this increase in leverage as adding incremental risk to INGV's profile. We anticipate leverage reducing from its current elevated levels as ING executes its restructuring program. Standard & Poor's considers INGV's enterprise risk management (ERM) program to be strong (amended from excellent in November 2009) and we expect this risk management infrastructure to help prevent the group from experiencing any major losses that are outside of its risk tolerance. The factors supporting our assessment of ERM include strong risk management culture; strategic risk management; and risk controls for credit, market, asset-liability management, insurance and new product risks. The main offsetting factors are the adequate controls of operational and emerging risks. De-risking initiatives and the challenging operating environment continue to dampen underlying earnings performance, although INGV is anticipated to return to profit in 2010 following weak results in 2008 and 2009 owing to material investment-related losses. Earnings volatility has been significantly reduced through asset disposals and hedging, although real estate revaluations and credit impairments remain key earnings sensitivities. INGV's business model remains heavily weighted toward investment markets. The execution of ING's restructuring program also adds some uncertainty to the earnings outlook, although the benefits of cost reduction program should increasingly benefit the net result. Liquidity: Strong and well-managed across INGV Liquidity is strong and well managed at ING's insurance operations. Liquidity is supported by 5 billion in combined euro and U.S. dollar commercial paper (CP) programs, and INGV is an issuer under ING's 45 billion debt issuance program. INGV, through ING America Insurance Holdings Inc., makes extensive use of its CP program, and this represents the primary refinancing requirement for the insurance group in the short term, although about 500 million of senior debt matures in 2010. INGV has 1.25 billion of subordinated bonds that are callable in June 2011, creating a potential refinancing requirement in addition to a further 600 million of maturing senior debt in 2011. At the end of third quarter of 2009, we estimate that INGV had just under 1 billion of liquid assets available to meet holding company liquidity needs. INGV's short-term investment liquidity is further enhanced by a facility of 2 billion from its sister company, ING Bank N.V. (A+/Stable/A-1), although the insurance business has, more recently, provided liquidity to the banking operations of ING. INGV has further facilities with various international banks, totaling an additional $650 million and 750 million. Outlook The negative outlook on ING Verzekeringen and certain operating insurance subsidiaries reflects our view of the significant execution risks associated with the divestment of ING's insurance operations, and the potential for strategic and operational disruption to the underlying businesses. We may lower the ratings if we see evidence that www.standardandpoors.com/ratingsdirect 3
the performance of ING's insurance business is being impaired by the uncertainty surrounding its divestment. We also anticipate that the capital adequacy and capital quality of divested businesses will be consistent with the current ratings. If this assumption is proven incorrect, this could also lead to a downgrade. The outlook could be revised to stable if the group demonstrates a high level of resilience in underlying performance as measured by new sales, margins, client balances, and underlying profits. Financial Profile: Elevated Leverage Owing To Material Intra-Group Hybrids INGV is an intermediate holding company of the ING group. ING's insurance operations are consolidated under INGV and accounted for about 33% of the ING group's International Financial Reporting Standards equity employed in subsidiaries at third quarter 2009. The long-term counterparty credit rating on INGV is lower than the long-term counterparty credit ratings on its operating subsidiaries to reflect the structural subordination of holding company creditors to operating company policyholders. INGV seeks to manage its balance sheet within defined tolerances of 25% for hybrid equity and 15% for debt leverage. INGV's capital profile weakened during 2008 as the group used its financial flexibility to raise hybrid equity to support capital adequacy in operating units. As a result, the profile of INGV's adjusted capital base at Sept. 30, 2009 was 62% equity shareholders' funds (65% at year-end 2008), 26% hybrid securities (26%), and 12% senior debt (9%). INGV's flexibility to manage its capital base within tolerances is currently more limited, although disposals are expected to generate cash proceeds to improve the capital structure. Current elevated leverage and dampened underlying earnings are likely to result in sustainable fixed charge cover ratios in the 3x-5x range. In third quarter 2009, INGV paid its first dividend ( 350 million) to ING since third quarter 2008, reflecting the strengthening of its balance sheet during the quarter. We anticipate capital flows between INGV and ING to be reviewed on a quarterly basis to manage capital ratios in line with targets. The close ties with ING in managing group capital and liquidity is evidenced by the profile of INGV's funding. About 67% of INGV's hybrid capital was held by ING at Sept. 30, 2009. ING Verzekeringen N.V. (Consolidated) Financial Statistics* --Year-ended Dec. 31-- Q3 2009 2008 2007 2006 2005 2004 Hybrid equity ratio (%) 29.6 28.8 18.7 15.6 19.0 14.3 Senior debt leverage (%) 12.1 8.7 15.1 15.7 15.3 16.6 Debt leverage (%) 24.9 21.4 18.2 16.2 18.7 16.6 Financial leverage (%) 38.1 35.1 30.9 28.8 31.4 28.5 Fixed charge cover (x) N.M. N.M. 10.5 8.9 N.A. N.A. *2009-2005 are based on International Financial Reporting Statistics, 2004 is based on DAP. N.A.--Not available. N.M.--Not meaningful. Ratings Detail (As Of January 28, 2010)* ING Verzekeringen N.V. Counterparty Credit Rating Commercial Paper Foreign Currency A-2 A-/Negative/A-2 Standard & Poor s RatingsDirect on the Global Credit Portal January 28, 2010 4
Ratings Detail (As Of January 28, 2010)*(cont.) Senior Unsecured (21 Issues) A- Senior Unsecured (1 Issue) A-2 Subordinated (2 Issues) Counterparty Credit Ratings History 26-Oct-2009 03-Sep-2009 31-Mar-2009 10-Dec-2008 23-Aug-2005 BB A-/Negative/A-2 A/Stable/A-1 A+/Negative/A-1 AA-/Negative/A-1+ AA-/Stable/A-1+ *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Additional Contact: Insurance Ratings Europe; InsuranceInteractive_Europe@standardandpoors.com Additional Contact: Insurance Ratings Europe; InsuranceInteractive_Europe@standardandpoors.com www.standardandpoors.com/ratingsdirect 5
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