DBRS Confirms Rating on ING Canada Following Sale by ING Groep

DBRS is today confirming its Issuer Rating for ING Canada Inc. (ING Canada or the Company) at A (low) with a Positive trend following the announcement on February 3, 2009, that ING Groep N.V. would be selling its 70% interest in the Company for cash proceeds of over $2.1 billion. DBRS has always rated the Company on a stand-alone basis since ING Groep had earlier designated the Company as a non-core business segment and had provided for the transition of the ING brand and the declining role of its designated directors in the event of its decreasing ownership in the original 2004 IPO prospectus.

Like most global financial institutions, ING Groep has come under some earnings pressure in the context of the global credit market weakness. It is therefore not surprising that it has chosen to sell down its stake in the Company at this time. DBRS expects that shortly after closing, the Company will rebrand itself while retaining the more well-known Grey Power and belairdirect brands. While there were minor expense synergies derived from operating under the ING Groep, most of the advantages related to shared governance and controls, which are easily portable. No management or board changes are anticipated.

The Company’s rating and Positive trend remain unchanged as the Company continues to outperform the industry in terms of its underwriting performance, which is a largely a reflection of its scale advantages and execution disciplines. While the current economic climate raises the level of uncertainty for many companies, the property and casualty industry is generally insulated from broader economic developments given relatively inelastic demand for its products. The troubled investment environment, while impacting the Company more than many of its peers, has nevertheless been addressed in part by the reduction in exposure to common equities. As a result, the Company’s Minimum Capital Test (MCT) increased to 205% from 188% at year-end 2007, representing excess capital in its insurance subsidiaries of $357 million versus the Company’s internal target of 170% and an additional $70 million of liquid assets at the holding company. With no outstanding debt, the Company’s financial flexibility remains excellent and potentially enhanced with the removal of a major shareholder which is currently suffering from its own financial stress.

The Company experienced weather-related deterioration in its personal property lines underwriting results in 2008 which resulted in an increase in the Company’s combined ratio to 97.1% from 95.2% in 2007. This was reflected in a 21% reduction in net operating income (excluding investment losses) in 2008. In addition, weak equity markets resulted in losses on equity securities and related derivatives of $288 million in 2008, which reduced net income to $128 million (ROE of 4.4%) from $508 million in 2007 (ROE of 15.4%). The net effect of impairments and outright sales has been to reduce the Company’s common equity portfolio by $900 million since year-end 2007 to just $800 million or 12% of its investment portfolio from 23% at year-end 2007. This represents a significant de-risking of the investment portfolio, which had always been somewhat exposed to common equities as a result of the Company’s chosen investment strategies.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Property and Casualty Insurance Companies, which can be found on our website under Methodologies

This is a Corporate (Financial Institutions) rating.