Annual Report - jaarverslag.com · This annual report 2005 is a translation of the Dutch annual report 2005. Annual Report 2005 SNS REAAL Annual Report 2005 SNS REAAL Annual Report

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SNS REAAL Groep N.V.Croeselaan 1P.O. Box 84443503 RK UtrechtThe NetherlandsTelephone +31 30 - 291 52 00www.snsreaal.nl

Group CommunicationTelephone +31 30 - 291 48 76Fax +31 30 - 291 48 [email protected]

Investor RelationsTelephone +31 20 - 550 85 34Fax +31 20 - 420 48 [email protected]

Registered at the Trade Register of the Utrecht Chamber of Commerce under no. 16062627

This annual report 2005 is a translation of the Dutch annual report 2005.

Annual Report2005

SNS REAAL Annual Report 2005 � SNS REAAL Annual Report 2005 sns reaal in brief

Contents3 SNSREAALinbrief3 Mission5 Key figures SNS REAAL8 Management

9 ForewordbytheChairmanoftheGroupExecutiveBoard

�� ReportoftheSupervisoryBoard

�6 ReportoftheGroupExecutiveBoard�6 Highlights of 2005�7 Strategy3� Corporate governance35 Financial developments49 Risk management7� Funding74 Ethical business practice78 Human Resources Development80 Outlook

96 FinancialStatementsSNSREAAL�005�

96 Consolidated Financial Statements SNS REAAL�00 Notes to the Consolidated Financial Statements�76 Company Financial Statements SNS REAAL Groep N.V.�83 Most important group companies and other equity participations

�84 Otherinformation�84 Profit appropriation under the articles of association�85 Auditor’s report�86 Curricula vitae of the members of the Supervisory Board �87 Additional positions of the members of the Group Executive Board

1) Please refer tot pages 94 and 95 for a more detailed contents of the financial statements of SNS REAAL.

SNS REAAL Annual Report 2005 3SNS REAAL Annual Report 2005 sns reaal in brief

MissionSNS REAAL is keen to be the favourite financial retail specialist in the Netherlands.

To achieve this, we offer a coherent package of innovative banking, investment

and insurance products. A package that is tuned to the demands of today

and tomorrow. We focus in this context on the Dutch retail and SME business

markets – collectively referred to as the ‘retail-plus’ market – via multiple brands

and diverse distribution channels.

ProfileSNS REAAL is an innovative Dutch provider of bancassurance services focusing on the retail and SME business markets. The group has more than € 68 billion in total assets and 5,336 employees (FTEs). Retail and SME clients are mainly served through SNS Bank and REAAL Verzekeringen (Insurance). SNS REAAL also includes various sales labels that operate in specific markets: ASN Bank, BLG Hypotheken, CVB Bank, Proteq, SNS Securities, SNS Assurantiën and SNS Asset Management.

Our retail strategy is based on the needs of our clients. By constantly remaining alert to signs in society, we are able to provide our clients with easy-to-use products which address their needs. Our clients determine their needs. We provide effective solutions. SNS REAAL offers a limited range of products. Our focus enables us to deepen our product expertise, provide greater differentiation within each product group and to develop products with a shorter time-to-market. This lays the foundation for product leadership.

SNS REAAL sets store by providing quick and clear answers which address real issues and offer real solutions. Our aim is to convert our expertise into clear products and services to help our clients take control of their financial future.

SNS Bank serves its clients through its own branch offices, independent intermediaries, the internet and the telephone. REAAL Verzekeringen markets its products and services through independent intermediaries and Proteq through the internet. Our banking and insurance operations are supported by efficient processes and strict cost and risk control.

SNS REAAL has always attached great value to corporate responsibility. This can be seen in our development of sustainable savings, investment and insurance products, our specialised social investment research efforts, support for volunteer projects and sponsorship at national, regional and local levels.

Business principles§ Client oriented§ Professionalism§ Integrity§ Social commitment

SNS REAAL Annual Report 2005 sns reaal in brief4 SNS REAAL Annual Report 2005 sns reaal in brief

Strategicgoals§ Sustained value creation§ Focus on retail and retail-plus clients§ Growth

FinancialtargetsReturns§ Minimum 10% annual growth in net earnings per

share (2005: 12.2%)§ Minimum 12.5% return on shareholders’ equity a

year, after taxes (2005: 14.1%)

Efficiency§ Maximum 61.5% efficiency ratio for banking

operations (2005: 59.8%)§ Maximum 16.1% operating cost/premium ratio

for insurance operations (2005: 16.9%)

Solvency§ Maximum double leverage SNS REAAL

115% (2005: 105.3%)§ Minimum 11% BIS ratio SNS Bank (2005: 11.9%)§ Minimum 8% Tier 1 ratio SNS Bank (2005: 8.7%)§ Minimum 150% solvency for life insurance

operations (2005: 233%)§ Minimum 200% solvency for non-life insurance

operations (2005: 275%)

Ratings

SNS Bank S&P Moody’s FitchShort term A-1 P1 F1Long term A A2 A+Expectation Stable Positive Stable

SNS REAAL S&P Moody’sShort term A-2 Long term A- A3Expectation Stable Stable

Main brands SNS Bank REAAL Verzekeringen

Sales labels ASN Bank CVB Bank BLG Hypotheken SNS Securities SNS Assurantiën SNS Asset Management SNS Fundcoach Proteq

Competence centres Mortgages Savings & investments Life/Non-life insurance

Distribution channels Intermediaries Branches Call centre Internet Distribution partners

Service centres Payments Mortgages Securities Insurance

OperationalmodelofSNSREAAL

SNS REAAL Annual Report 2005 sns reaal in brief 5SNS REAAL Annual Report 2005 sns reaal in brief

Key figures SNS REAALIn€millions �005 �004 �003

Result

Income banking operationsNet interest income 595 571 587 Netcommissionandmanagementfees 114 109 92 Otherincome 55 16 18

Total 764 696 697

Income insurance operationsNetpremiumincome 1,745 1,650 1,737 Investmentincome 545 618 453 Investmentincomeonbehalfofpolicyholders 394 126 196 Otherincome 46 41 31

Total 2,730 2,435 2,417

Total consolidated income 3,471 3,130 3,165 Total consolidated expenses 3,064 2,816 2,866

Operating profit before taxationBankingoperations 258 195 190 Insuranceoperations 194 169 131 Group (45) (50) (22)Shareintheresultofassociatedsubsidiaries 9 44 58

Consolidated profit before taxation 416 358 357

Taxes 93 70 97 Third-partyinterests ‑‑ ‑‑ 17

Net profit 323 288 243

In€millions 3�-��-�005 3�-��-�004 3�-��-�003

BalancesheetTotal assets 68,088 59,972 52,691

Investments 9,211 8,233 8,740 Investmentsforinsuranceproductsonbehalfofpolicyholders 3,426 2,798 2,971 Mortgageloans 43,544 39,924 31,002 Loansandadvancestocreditinstitutions 4,949 3,421 3,071 Shareholders’equity 2,528 1,880 1,643 Capitalbase 4,144 3,323 2,799 Debtcertificates 25,654 23,464 16,061 Technicalprovisions,insuranceoperations 12,658 11,330 11,174 Savings 12,333 10,973 10,404 Amountsduetocreditinstitutions 3,4�9 �,44� �,344

Inpercentage 3�-��-�005 3�-��-�004 3�-��-�003

RatiosReturnonshareholders’equity 14.1% 16.6% 15.9%Growthnetoperationalprofit 24.7% 26.0%Numberofemployees(FTE) 5,336 5,383 5,545

SNSBank:Efficiencyratio 59.8% 63.1% 64.6%BISratio 11.9% 11.7% 11.9%Tier�ratio 8.7% 8.7% 8.3%

REAALVerzekeringen:Newannualpremiumequivalent(€millions) 200 172 168 Operatingcost/premiumratio,excludingcapitalisationofacquisitioncosts 16.9% 17.2% 16.4%SolvencyLifeoperations 233% 192% 195%SolvencyNon-lifeoperations 275% 261% 359%CombinedratioNon-lifeoperations 98.1% 93.6% 100.4%

SNS REAAL Annual Report 2005 sns reaal in brief6 SNS REAAL Annual Report 2005 sns reaal in brief

0

1,500

2,000

2,500

3,000

500

1,000

4,000

3,500

2001 2002 2003 2004 2005

€ millions

Income SNS REAAL

IncomeSNSREAAL

0

150

200

250

300

50

100

350

€ millions

2001 2002 2003 2004 2005

Net profit SNS REAAL

NetprofitSNSREAAL

0

8

10

4

6

12

16

2

18

14

%

2001 2002 2003 2004 2005

Return on shareholders’ equity SNS REAAL

Returnonshareholders’equitySNSREAAL

0

1,000

1,500

2,000

2,500

500

3,000

€ millions

2001 2002 2003 2004 2005

Shareholders’ equity SNS REAAL

Shareholders’equitySNSREAAL

SNS BankREAAL Verzekeringen

41%

59%

Compositionofnetprofit�005

0

4,000

5,000

2,000

3,000

6,000

7,000

1,000

2001 2002 2003 2004 2005

SNS REAALSNS Bank

REAAL Verzekeringen

Numberofemployees(FTE)

SNS REAAL Annual Report 2005 sns reaal in brief 7SNS REAAL Annual Report 2005 sns reaal in brief

SNS REAAL publishes its results in the 2005 financial statements for the first time on the basis of IFRS. The comparative figures for 2004 have been restated in accordance with IFRS, with the permitted exception of IAS 32 and 39 and IFRS 4. This means that the comparative information with respect to financial instruments and insurance contracts is prepared primarily on the basis of the old accounting principles of SNS REAAL. As a result, the figures in this transitional year are less comparable.

The comparative figures for 2003 are based on SNS REAAL Dutch GAAP and reclassified into IFRS categories for comparison purposes.

66

52

707274

68

646260585654

%

2001 2002 2003 2004 2005

Efficiency ratio SNS Bank

EfficiencyratioSNSBank

0

5%

10%

15%

20%

25%

2001 2002 2003 2004 2005

Operating cost/premium ratioEffect of capitalising the internal acquisition costs

Operatingcost/premiumratioREAALVerzekeringen

Net interest incomeCommission

Other income

7%

15%

78%

CompositionofincomeSNSBank�005

Net premium incomeInvestment income

Other income

2%

34%

64%

CompositionofincomeREAALVerzekeringen�005

0

8

10

4

6

12

16

2

18

14

%

2001 2002 2003 2004 2005

Tier 1 ratio BIS ratio

BISratioandTier�ratioSNSBank

0

200

250

100

150

300

450

50

500

400

350

%

2001 2002 2003 2004 2005

Life Non-life

SolvencyofREAALVerzekeringen

SNS REAAL Annual Report 2005 sns reaal in brief8 SNS REAAL Annual Report 2005 foreword by the chairman of the group executive board

ManagementSupervisoryBoardofSNSREAAL

Prof. J.L. Bouma, ChairmanH.M. van de Kar, Deputy ChairmanJ.V.M. van HeeswijkJ. den HoedD. HuismanProf. S.C.J.J. KortmannH. Muller

The Executive Board of SNS REAAL. From left to right Sjoerd van Keulen, Rien Hinssen, Ronald Latenstein van Voorst en Cor van den Bos.

Executive Board of SNS REAAL

S. van Keulen, ChairmanC.H. van den BosM.W.J. HinssenR.R. Latenstein van Voorst

SNS REAAL Annual Report 2005 sns reaal in brief 9SNS REAAL Annual Report 2005 foreword by the chairman of the group executive board

2005 goes down in history as another very good year for us. Net profit increased by

12.2% to € 323 million. The 14.1% return on shareholders’ equity also significantly

outperformed our target in 2005. The efficiency ratios for the banking and

insurance operations once again showed improvement.

We keep on growing! These results make us feel confident that SNS REAAL has found the right ‘format’. Commercially, the results also justify our conclusion that we have come yet another step closer to fulfilling our mission: to become the favourite provider of financial services for retail and SME business markets in the Netherlands.

SuccessfulstrategyThis financial and commercial success is down to our strong points:§ We have a uniform and clear strategy§ We focus fully on serving specific target groups§ We have consciously chosen to offer a limited number of core products§ Our focus is on the Netherlands§ This focus has made us a specialist in our area§ This focus has created a clearly organised organisation which is quick, flexible and innovative§ Because of this ‘absolute’ focus, we develop product and service concepts which are seen as innovative,

relevant, transparent and in line with today’s needs§ Our transaction processing centres and ICT systems are state of the art§ Our clients have a wide range of distribution channels to choose from§ We obtain rapid integration, efficiency and synergy benefits from our acquisitions§ Our staff are committed to the needs and interests of our clients, which they translate into good services§ We have a moderate risk profile

GrowthinmanyshapesIn 2005 we grew in many different ways – not only through better financial figures. The number of retail and SME clients has grown, as has the number of products relevant to them. Growth has also been experienced in our distribution with the expansion of our branch network in the Randstad area, the addition of new intermediaries, the new doors being opened up by the internet and our new sales partners. In 2005 we also added Nieuwe Hollandse Lloyd to our pearl necklace of successful acquisitions. These are all good reasons to make ‘growth’ the theme of this annual report.

‘Controlled’growthControl processes also played a key role in 2005. The past few years our banking and insurance operations faced many new laws and regulations, such as the Dutch Financial Services Act, IFRS, Basel II and customer due diligence. Integrity and due care have come into their own as important concepts, not only in the banking and insurance industry but also in our organisation. Furthermore, we have continued to work unabated on strengthening our ‘defences’: our integrated risk control system. At the same time, we have continued to work with the same undiminished enthusiasm on our commercial activities and development projects for innovative products and service concepts.We have not allowed ourselves to become split by the ‘need’ to fulfil legal requirements and the ‘desire’ to grow. Regulatory projects and projects implemented to improve risk management and our management information are all on schedule. Commercially, we have also succeeded in launching new products – e.g. for

SNS REAAL Annual Report 2005 foreword by the chairman of the group executive board�0 SNS REAAL Annual Report 2005 foreword by the chairman of the group executive board

the lifetime benefits plans and disability insurance – and developing new areas such as ‘linking marketing’. The latter entails working with business partners to give our brand added emotional value whilst allowing us to express our commitment to society.

GrowthandinnovationApart from growth, ‘innovation’ is a key theme in our organisation. Rather than implying a giant leap forward, for us innovation means taking lots of small steps in the right direction. We are continuously working on our product package to realise improvements for our clients. Yet that’s just the beginning. For we also remain dedicated to process and distribution method innovation with a view to improving and building on client services.

We have been particularly innovative with our alliances. We promote thinking ‘outside the box’: searching for attractive partnerships outside our own line of business. We not only think differently; we do things differently. Examples are our shareholdership in Route Mobiel and the aforementioned linking marketing. Experience has taught us that people are more likely to engage our services under the motto of ‘SNS REAAL is up for something different’. For us, innovation is therefore a mindset of going that extra mile.

GrowthandbusinesscultureWe do not see these challenges as marginal activities. Innovation is necessary to prove our added value in the highly competitive financial market. We want to keep surprising our clients in a positive sense. This must therefore become part of our culture. It is vital for our staff to see their jobs as stimulating, to pursue their dreams as real professionals and--just as importantly--to take pleasure in their work. By the same token, they need to be encouraged and supported to develop themselves. We will therefore be investing more heavily in training and education.

We are keen to open up more doors to a healthy financial future for our clients. Our staff do their utmost in this respect by supporting them with true commitment to our clients’ goals. We pave the way for these objectives with our corporate responsibility: transparency, accessibility and integrity. Our company continues to strengthen its commitment to corporate responsibility: it is becoming a permanent component of our operational plans. In everything we do, the social, ethical and environmental aspects have to be taken into consideration. We are delighted that our staff are clearly showing their commitment to society, for instance by doing voluntary work through LaLuz and Workmate.

Growthplansfor�006The rather reflective nature of this foreword should be seen in connection with – or as a counterpart to – the vast amount of facts provided in this report. Lest this Chairman’s Statement end on a less factual note than it began, let us mention a few plans which we hope to set in motion in 2006 and which can be seen from the perspective of growth and innovation in partnership with and to the benefit of our clients.

§ We will improve wealth creation for our clients via innovative products along the lines of SNS Savings Mix and services such as SNS Managed Account and ‘Fund Account’.

§ We will continue to work on the strengthening of our market position in the field of healthcare and disability insurance.

Rather than implying a giant leap forward, for us innovation means

taking lots of small steps in the right direction.

SNS REAAL is up for something different.

SNS REAAL Annual Report 2005 foreword by the chairman of the group executive board ��SNS REAAL Annual Report 2005 foreword by the chairman of the group executive board

§ We will continue to pursue the development of our distribution network, for example by teaming up with providers of non-financial products.

§ The SME business line will be strongly supported via our Entrepreneur Desks and the internet.§ The branch network in the Randstad area will be further expanded.§ The positioning of SNS REAAL will be strengthened.

This list is not exhaustive; we feel safe in saying that our clients and the market may expect to be regularly – and pleasantly – surprised by us in 2006. And to complete the circle: we keep on growing. That was a fact in 2005; for 2006 it’s our goal. We are confident we will be able to achieve this together with our staff.

On behalf of the Executive Board of SNS REAAL,

Sjoerd van KeulenChairman

SNS REAAL Annual Report 2005 report of the supervisory board�� SNS REAAL Annual Report 2005 report of the supervisory board

2005 was another very good year for SNS REAAL. All divisions recorded favourable

commercial and financial figures. The strategy is working. SNS REAAL is

increasingly named and recognised as a retail specialist with a special position in

the Dutch market for financial services. We wish to thank the management and

staff for their commitment and compliment them on the results of their work.

Report of the Supervisory Board

FinancialstatementsandprofitappropriationThe Supervisory Board approved the financial statements for 2005 at the meeting of March 2006. Prior to this meeting, the Audit Committee scrutinised these financial statements and discussed its findings with the Supervisory Board. KPMG, the external auditor, issued an unqualified auditor’s report to accompany the financial statements. As part of the profit appropriation, it is proposed to the shareholders’ meeting to transfer the entire profit to shareholders‘ equity.

AppointmentstotheSupervisoryBoardMr. Muller was re-appointed Supervisory Director at the shareholders’ meeting on May 2005. The Central Employees’ Council used its increased power of recommendation under the new structure legislation to nominate Mr. Muller.

Mr. Huisman, who was scheduled to step down in 2006, stated that he did not want to be considered for re-appointment. This means that Mr. Huisman stepped down with effect from the shareholders’ meeting in March 2006. The Supervisory Board is very grateful for the manner in which Mr. Huisman served SNS REAAL with his expertise and experience throughout the years.

The vacancy that arises will be filled in the near future. The Board is considering a further increase in members to the previous number of eight. Please refer to page 186 of this annual report for the curricula vitae of the members of the Supervisory Board.

CompositionoftheGroupExecutiveBoardandBoardsofDirectorsThe composition of the Group Executive Board remained unchanged in 2005. The four-year contract with the Chairman expires in 2006. Partly due to the positive developments at SNS REAAL during the past few years, the contract with Mr. Van Keulen will be extended for two years.Portfolios are divided as follows within the Group Executive Board. As CEO, Mr. Van Keulen’s portfolio also includes the group staffs for Legal & Compliance, Group Audit, Human Resources Development, Group Communications, Group Affairs and Foreign Affairs, as well as SNS Securities. As CFO, Mr. Latenstein has the group staffs for Balance Sheet & Risk Management, Financial Reporting & Information Management, Management Accounting, ICT, Taxes and Facilities in his portfolio, as well as SNS Financial Markets en SNS Asset Management. Mr. Hinssen is a member of the Group Executive Board as well as Chairman of the Board of Directors of SNS Bank. Mr. Van den Bos is a member of the Group Executive Board as well as Chairman of the Board of Directors of REAAL Verzekeringen. Please refer to page 187 of this annual report for the additional positions of the members of the Group Executive Board.

The Supervisory Board approved the appointment of Mr. Kroeze as CFO in the Board of Directors of SNS Bank at the meeting of August 2005. Mr. Kroeze therefore succeeds Mr. Th. Janssen who – as already stated in the annual report for 2004 – continued his career outside SNS Bank with effect from April 2005.

SNS REAAL Annual Report 2005 report of the supervisory board �3SNS REAAL Annual Report 2005 report of the supervisory board

MeetingsoftheSupervisoryBoardDuring the year under review the Supervisory Board met nine times in the presence of the Group Executive Board. The Supervisory Board meets once a year, prior to its regular meeting, without the Group Executive Board. During this meeting the Supervisory Board considers its own performance, its relationship with the Group Executive Board, the quality of information available to the Supervisory Board, the performance of its own committees and the composition and scope of the meeting agenda. The performance of the individual members of the Group Executive Board will also be discussed at this meeting. Aside from its regular meetings, the Supervisory Board convened to be informed in depth about embedded value and other insurance topics of a financial nature.

The meetings of the Supervisory Board are prepared in a consultative meeting attended by the Chairman and Deputy Chairman of the Supervisory Board, the Chairman of the Group Executive Board and the Chief Financial Officer. Aside from certain permanent items, the agenda of the meeting of the Supervisory Board contains a wide range of topics. The first include the reports of the Audit Committee and the Remuneration, Selection and Appointments Committee. The Supervisory Board discusses the quarterly risk reports and the management reports from the Group Executive Board four times a year. ‘Strategic projects’ also constitute a permanent part of the agenda. One of these projects concerned the acquisition of Nieuwe Hollandse Lloyd. The Board was also informed about the progress of the ‘In Control’ Programme and the Strategic Risk Analysis prepared by the Group Executive Board and Boards of Directors.

The Supervisory Board continued to share its thoughts on the group’s capitalisation with the Group Executive Board in 2005. Given the growth strategy, the Supervisory Board continues to believe that it would be wise to have prepared the raising of capital for possible acquisitions of larger market players.

The Board was informed by the Board of Directors of SNS Bank and the Board of Directors of REAAL Verzekeringen in two consecutive meetings about the market trends and internal developments in the banking and insurance operations. Presentations were also given by two of the bank’s sales labels: ASN Bank and CVB Bank.

Various steps have been taken in response to the Dutch Corporate Governance Code. A whistleblower protection scheme was approved by the Board at the start of 2005. The regulations of the Supervisory Board, the Audit Committee and the Group Executive Board were also updated to reflect the Code. A profile for the Supervisory Board was recreated as well (please refer to www.snsreaal.nl for the regulations and profile). The shares of SNS REAAL have been decertified and Stichting Adminis-tratiekantoor SNS REAAL (the share trust) dissolved. All SNS REAAL shares are now held directly by Stichting Beheer SNS REAAL. The sole priority share held by Stichting Beheer will be exchanged for an ordinary share and is thus cancelled.The Group Executive Board has stepped down from the board of the trust. Now consisting of all Supervisory Directors of SNS REAAL, the board of the trust subsequently decided that four Supervisory Directors would step down in favour of two independent board members, one of whom would function as the chairman of the trust.

The Supervisory Board has exchanged thoughts with the Group Executive Board on the strategy and has agreed that the present course should be continued. Operational Plan 2006-2008, which is based on this strategy, was approved by the Supervisory Board at its meeting in December 2005. This is indeed another ambitious – yet feasible – plan which is called for by the tough competition.

TheAuditCommitteeThe Audit Committee, consisting of Messrs Van Heeswijk (Chairman), Den Hoed and Huisman, met six times during the year under review. All meetings are attended by the Chairman of the Group Executive Board, the Chief Financial Officer, the external auditor and the head of the internal audit department. Once a year, the Audit Committee holds a separate meeting with both the external auditor and the internal auditor in the absence of the Group Executive Board.

The Audit Committee has been closely involved in the preparations for IFRS. The new principles have led to a significant number of changes in SNS REAAL’s balance sheet and income statement. The organisation and the external auditor have taken great efforts to provide and evaluate the half-year IFRS figures for 2005 to schedule. Preparation of the annual figures for 2005 ran smoothly thanks to their hard work. The Audit Committee has accordingly expressed its gratitude.

SNS REAAL Annual Report 2005 report of the supervisory board�4 SNS REAAL Annual Report 2005 report of the supervisory board

The management reports of the Group Executive Board, various risk reports and the ‘litigation statement’ are permanent agenda points at the Audit Committee’s meetings. The quarterly, half-yearly and annual figures are discussed in detail at these meetings. The audit report, management letter and actuarial report are carefully reviewed in the presence of the external auditor and the external actuary. The internal auditor reports to the Audit Committee via quarterly reports. Implementation of the action points ensuring from these reports is overseen by the internal auditor. Permanent agenda points are also the year plans of the internal and the external auditor, as well as the evaluation of the performance of the internal and the external auditor.

The Audit Committee is informed separately about a number of larger projects which are vital to the organisation. One of these is the In Control project, which was set up in order to issue an In Control Statement at a time still to be determined.

Remuneration,SelectionandAppointmentsCommitteeThe Remuneration, Selection and Appointments Committee prepares a yearly report on the Group Executive Board’s remuneration. The first remuner-ation report for 2004 was published on SNS REAAL’s internet site. The Committee, consisting of Messrs Van de Kar (Chairman), Bouma, Kortmann and Muller, met four times in 2005. Points on the agenda included the amount of variable remuneration for the management and the introduction of a form of long-term incentive plan.

The members of the Committee hold year-end discussions with each member of the Group Executive Board separately after the financial year has been closed. The degree to which the budget and the operational plans have been met, and the year-end meetings themselves, are used as input to set short-term variable remuneration.

In June 2005, the fixed salary of the members of the Group Executive Board was increased by 2%, which is in line with the increase according to the collective labour agreement applicable to the staff of SNS REAAL. The variable remuneration of the members of the Group Executive Board for 2004 amounted to 40% of their fixed salary. This bonus was paid out in April 2005. The variable remuner-ation for financial year 2005 will be set on the basis of the advice of the Remuneration, Selection and

Appointments Committee at the meeting of the Supervisory Board in March 2006.

For complete information on the remuneration of the Group Executive Board in 2005, please refer to page 169 of the financial statements for 2005 and to the remuneration report for 2005 which will be adopted at the May meeting of the Supervisory Board and published on SNS REAAL’s internet site.

For 2006, the remuneration policy will be updated pending approval of the shareholders’ meeting. The fixed salary of the members of the Group Executive Board was increased at the start of 2006 by 2%, which is equal to the increase for the staff of SNS REAAL under the collective labour agreement.

The structure of the short-term bonus scheme will be maintained. However, the bonus rates will be changed to 40% at target and 50% maximum for members of the Group Executive Board and 50% at target and 60% maximum for the Chairman.

The proposed change to the remuneration policy concerns the introduction of a long-term bonus scheme for members of the Group Executive Board and senior management. The long-term bonus scheme fits within the development of SNS REAAL to become a more performance-minded company, but is also designed to tie the top management to SNS REAAL for a longer period and remunerate them more in line with the market.

The longer term bonus is awarded annually on the basis of the realisation of the return on share-holders’ equity. In line with the SNS REAAL policy is the so-called performance hurdle that is set at a level of 12.5% return on shareholders’ equity. If the return amounts to 12.5%, this leads to a so-called ‘at target’ longer term bonus percentage of 30% for the members of the Group Executive Board. If the return on shareholders’ equity is 17.5% or more, the long-term bonus for the members of the Board can increase to a maximum of 40% and, for the Chairman of the Group Executive Board, to a maximum of 50%.

The bonus amounts are awarded conditionally and may, as long as the conditions are met, become unconditional after a period of three years, the so-called ‘vesting period’. The long-term bonus is paid in annual stages.

SNS REAAL Annual Report 2005 report of the supervisory board �5SNS REAAL Annual Report 2005 report of the supervisory board

After approval of the shareholders, the long-term bonus scheme will take force with retroactive effect to 1 January 2006.

CreditCommitteeThe Credit Committee, consisting of Messrs Bouma (Chairman), Van de Kar, Kortmann and Muller, met twice during the year under review. These meetings are used to discuss the consumer and commercial lending policies. Progress on larger projects such as Basel II was also discussed. Commercial loan applications and revisions for amounts above €25 million are submitted to the Credit Committee for approval.

ContactswiththeCentralEmployeesCouncilTwice a year, different representatives from the Supervisory Board attend the consultation meetings between the Central Employees’ Council and the Group Executive Board. The consultation meeting where the budget 2006 was on the agenda was attended by the Chairman and Deputy Chairman of the Supervisory Board, Messrs Bouma and Van de Kar. Another consultation is attended by two Supervisory Directors by rotation. The minutes to these meetings are also used to keep the Supervisory Board up to date about important issues involving staff consultation.

Mr. Bouma also attended a meeting of the Central Employees’ Council to explain SNS REAAL’s capitali-sation; Mr. Van de Kar explained the remuneration of the Group Executive Board at another such meeting.

Utrecht, 9 March 2006

On behalf of the Supervisory Board,J.L. Bouma, Chairman

SNS REAAL Annual Report 2005 report of the group executive board�6 SNS REAAL Annual Report 2005 report of the group executive board

2005 was another very good year for SNS REAAL. Net profit increased by 12.2% to

€ 323 million. These financial and commercial trends have encouraged us to carry on

unabated with our strategy to make SNS REAAL the favourite retail specialist in the

Netherlands.

Highlights of 2005FinancialSNS REAAL, SNS Bank and REAAL Verzekeringen have met all of their financial targets.§ Net earnings per share increased by 12.2% to

€ 1.55.§ Return on shareholders’ equity remained high at

14.1%.§ SNS Bank’s efficiency ratio improved again to

59.8%.§ The operating cost/premium ratio for

REAAL Verzekeringen improved to 16.9%. § Once again, the BIS and Tier 1 ratios more than

met their internal and external targets.§ The solvency ratios for Life and Non-life also

significantly outperformed their internal and external targets.

Commercial§ SNS REAAL’s mortgage portfolio increased in 2005

by €3.6 billion to € 43.5 billion. The portfolio grew by € 18.8 billion in comparison with the year 2001; market share increased during that period from 7.2% to 8.3%.

§ Savings increased during the same five years from € 8.7 billion to € 12.3 billion. Market share grew slightly from 5.7% to 6.0%. There was a € 1.4 billion increase in 2005.

§ In the past five years, the gross regular Life premium has grown rapidly from € 616 million to € 859 million, an increase of 39.4%. The market share of the new production of regular-premium private life insurance policies rose in these five years from 6.5% to 15.2%.

Realisedin�005§ SNS Bank and REAAL Verzekeringen launched new

products for lifetime benefits plans. § SNS Bank has started to link its marketing with

business partners who can give SNS Bank added emotional value.

§ SNS Bank’s branch network in the Randstad area has been expanded on the way to the goal of 25 branch offices in the region.

§ REAAL Verzekeringen introduced a new pension product for the SME sector.

§ The SNS Fundcoach format – offering a large number of specialised investment funds – has proved to be successful: assets under management grew strongly with over € 250 million to € 296 million.

§ REAAL Verzekeringen concluded new cooperation agreements, including one with De Goudse for absence insurance.

§ Strong increase in demand for sustainable banking: ASN Bank’s clientele has grown to well over a quarter of a million.

§ An innovative activity by REAAL Verzekeringen is the placing of news bulletin screens at railway stations.

§ CVB Bank has increased its number of intermedi-aries by 65 to 425.

§ REAAL Verzekeringen acquired Nieuwe Hollandse Lloyd and successfully integrated it into its own organisation.

§ REAAL Verzekeringen’s authorised agents and non-life insurance operations have grown organically and owing to the recent acquisitions.

§ REAAL Verzekeringen is doing business with a growing number of the top 200 intermediaries.

§ Risk management has become stronger in both organisation and implementation.

§ SNS REAAL’s pension fund has been made independent.

§ As part of corporate responsibility, steps have been taken to establish SNS REAAL Water Fund with assets of $ 50 million to be invested in water-related projects.

SNS REAAL Annual Report 2005 report of the group executive board �7SNS REAAL Annual Report 2005 report of the group executive board

SNS REAAL’s mission is to become the favourite retail specialist in the Dutch

financial market. We target retail clients and SMEs, which we refer to collectively

as the retail-plus market. By remaining alert to their financial needs, we offer

a balanced package of products and services via a wide range of distribution

channels with the emphasis on mortgages, wealth creation (savings & investments)

and insurance (life, pension & non-life). What makes us different? Our ability to

innovate, our ‘intelligent’ and relevant products, our speed and flexibility and,

finally, our complete focus on our clients and the market in general.

Strategy

To achieve this mission, SNS REAAL devised a strategy a number of years ago whose success has dictated that it will be continued in the coming years. The realisation of cost/benefit synergies between SNS REAAL’s various activities is very important in achieving the following goals.

The main objective of SNS REAAL is to strive towards sustained value creation. This means that we are keen to create value for our shareholders, clients, staff and society. We achieve growth and return for our shareholders, at the same time keeping risks under proper control. We offer our clients high value and relevant products and services, and our staff opportunities to grow and develop. Our added value for society is down to our sustainable development as a business: social, ethical and environmental considerations are built into our decision-making.

CreatingvalueforshareholdersRequired return of 12.5% netThe available funds need to be employed as efficiently and effectively as possible. New activities – from separate products to business units – are selected on the strength of their added value and return whilst taking account of the related risks. For the return on shareholders’ equity, we require a return of at least 12.5% after tax on the invested capital. The return on shareholders’ equity realised in 2005 was much higher than this at 14.1%.

Risk control on a higher levelGreat efforts were taken to strengthen risk management in 2005. Risk control is a permanent aspect of all processes and activities within our

Goal 1Sustained value creationGoal 1Sustained value creation

Strategic goals� Sustainedvaluecreation� Focusingonretailandretail-plusclients3 Growth


organisation. SNS REAAL has a moderate risk profile. Yet this does not keep us from striving towards further improvement: one of our priorities for the coming years.

Diversification of incomeThe combination of a bank and an insurer produces various kinds of income – interest, fees and commissions, premiums, returns on investment – so that this cash flow can develop relatively evenly. The ‘natural hedge’ we enjoy as a bank and insurer also has a stabilising effect: a change in interest rates essentially produces an increase in income on one side and a decrease on the other.

Cost control, synergy and economies of scaleStrict cost control is vital to any player on the retail and retail-plus market. As proof of our success in this area, the efficiency ratio of our banking and insurance operations alike (leaving aside the temporary effect of acquisitions) has been improving for years. Our efficiency ratios rank among the best in the Dutch financial market.

We have realised economies of scale and synergy by merging and centralising departments and staffs. Furthermore, since 2004 the names (SNS REAAL, SNS Bank, REAAL Verzekeringen) now have a logical ring to them and all use the same logo (the kalei-doscope). Product development is a joint effort for all labels within the group, and our administrative back-office centres process the products of all banking and insurance labels. The added value of this synergy is clear.

(New) acquisitions help us achieve economies of scale and cut costs. We have lots of experience in the swift and careful integration of acquisitions, such as demonstrated in recent years by the acquisition of portfolios from Zurich Nederland, the life insurance portfolio of Univé and the shares of Nieuwe Hollandse Lloyd.

Straight Through ProcessingWe constantly strive towards making the adminis-trative processing of our products more efficient. Standardisation and high-value, rapid processing are vital to any retail specialist. Growth in turnover, along with taking on a limited number of new staff and a slow rise in staff costs, has led to increased employee productivity.

The next step in machine processing – one of strategic importance to SNS REAAL – is Straight

Through Processing (STP), which has now reached an advanced stage. STP means that the lion’s share of the administrative process from product application to delivery is computerised. All the necessary details can then be entered and processed directly in the computer systems of any random branch or intermediary in one go. This standardisation saves time and money whilst preventing errors and boosting – thanks to automatic checks and improved management information – the quality of risk control. The staff of the relevant departments can then concentrate fully on more complex proposal and acceptance business and, particularly, on serving our clients. Expectations are that the entire STP project, which began two years ago, will be completed in 2009.

SNS Bank’s benchmark bondsSNS Bank is active on the international capital markets and successful in raising funding. The capital market has recognised its strong credit profile, which means there is great demand for the bank’s debt instruments. SNS Bank has become the benchmark for single A financing.

CreatingvalueforclientsBuilding lasting relationships with clientsThe group’s sustained value creation naturally depends in part on the ability to build and maintain lasting relationships with clients. After all, a true retailer gives clients its undivided attention. We anticipate their future wishes. To keep pace with the future needs, we frequently survey our clients’ satisfaction and their financial requirements.

Accessibility, transparency and integrityWe have chosen to build our relationship with clients around three main themes: accessibility, transparency and integrity. ‘Accessibility’ implies that our services literally and figuratively know no threshold, whilst ‘transparency’ means that the price, conditions and risks of our products and services are clear. Among other things, ‘integrity’ shows that our employees are properly qualified and take the proper steps to exercise due care when dealing with clients. But it goes beyond that: integrity plays a key role in all our relationships with staff, clients and business partners. The same goes for our products, which must satisfy the requirements of care and relevance to our clients.

PricingWe offer our clients a complete package of products and services known for its quality, good service and


excellent processing. Our aim is to provide value for money, at a reasonable rate in all respects.

CreatingvalueforstaffAttracting, developing and retaining talentSNS REAAL invests in its staff and therefore also in the group’s sustained development. We attract a lot of talent and provide training and development. We offer extensive programmes to develop management abilities, talent and leadership. We also assist with professional education and on-the-job training. We plot out a career path for each candidate, which can lead to vertical, horizontal and diagonal moves inside the group.

Mobility between the business units promotes creativity, which is good for innovation and synergy. Focused planning is used to ensure that we fill at least three quarters of all future vacancies at senior management level with in-house candidates.

CreatingvalueforsocietyCorporate responsibilityA healthy business develops in harmony with the world around it. SNS REAAL has had close ties with society from its very beginnings: corporate responsibility is part of our DNA. Corporate respon-sibility therefore is and remains a key element in our decision-making on all activities undertaken by the group. We strive towards sustainable value creation throughout our entire operations. This runs from reducing the amount of paper we use to encouraging and facilitating volunteer work and the establishment of the SNS REAAL Water Fund. More detailed information on these efforts can be found in the chapter on ‘Ethical business practice’.

Independent pension fundSNS REAAL’s pension fund became independent on 1 January 2005. This has helped control the group’s pension charges and make pension agreements with the staff at arm’s length. With the independent pension fund, the group’s income statement has become more transparent since it no longer reflects value fluctuations in the pension fund’s investments. Moreover, the investment and actuarial risks of the portfolio are now for the account of the pension fund itself.

Goal 2Focusing on retail and retail-plus clients

SNS REAAL focuses completely on the Dutch retail and SME business markets. This retail strategy is

known for its heavy emphasis on target groups, products and processing. Growth, innovation, standardisation and ‘client-mindedness’ play crucial roles in our retail strategy. Distribution runs through a wide variety of channels and processes.

Retailstrategy:five-foldfocusWe are convinced that financial retail markets share various traits with other consumer markets: tighter margins, a wide product range, critical and highly demanding clients and growing use of the internet. These characteristics form the foundation of our retail strategy: we seek to make our knowledge, expertise and information available to clients and intermediaries so they can take care of their financial business with as few steps and as easily as possible.

Permanent innovation plays an important role in our retail strategy. And to our mind, that goes beyond product development, sales and processing: innovation has an impact on all staff and every aspect of our organisation. Incidentally, ‘innovation’ should not always be taken to mean creating new trends; sometimes just a small, relevant, client-oriented improvement can do the trick.

The main points of our retail approach outlined below are explained in further detail in the chapter on SNS Bank and REAAL Verzekeringen.

Focus on clientsSNS REAAL’s main brands and sales labels focus primarily on the retail and SME business markets. The bank and insurer also have larger companies and the government as their clients for business services and pension products.

Our success as a financial retailer is largely due to our staff and their contact with clients. The quality of their services is pivotal to our overall level of service. Their genuine interest in our clients and their finances lays the foundation for everything we do. Incidentally, we take ‘clients’ to mean not only the people who ultimately avail themselves of our products and services but also the intermediaries whom we do so much business with.

Focus on product developmentWe offer financial products and services with focus on three categories only: mortgages, wealth creation (savings & investments) and insurance (life, pension & non-life). We seek to become the product leader


in these core products: a trendsetter capable of responding swiftly to the needs of clients to develop innovative products with a short time-to-market. We strive to make our products as transparent as possible to give clients clarity on their structure, conditions and risks.

The retail and SME business markets share a common ground. That’s why we opted for a retail approach to SMEs by grafting many of our banking and insurance products for the business market to our products for the retail market. At the same time, we also develop special products (many of them standard) for the business market. Standardisation promotes rapid product development and efficient processing, which certainly have their advantages – especially where costs are concerned.

Focus on processingWe are leading in this area as well. For our services, we are constantly working on making our client processes and systems faster and easier to use. Our aim is to reduce the amount of forms our clients and staff are required to use to a bare minimum. Smooth processing helps to give more meaning to our ‘client focus’ – not just by chance one of our business principles – as our clients see that their banking and insurance business is taken care of quickly and correctly. Careful documentation is also important to our duty of care towards our clients.

Our sales and processing systems are highly computerised. The quality of the back office is vital to any financial retail specialist: product leadership calls for high quality processing. We therefore remain committed to making improvements in this area, such as with Straight Through Processing.

Focus on distributionOur products are sold via our intermediaries and branch offices as well as over the telephone and the internet. REAAL Verzekeringen is successful in the use of the various types of distribution via intermediaries. Only Proteq concentrates on direct distribution.The main reason for SNS Bank’s multichannel approach is to give clients a choice: it’s entirely up to them how to engage our services. In this connection, we offer as many do-it-yourself products and services via the internet as possible whilst providing advice via the other channels. Given this innovative market approach, we are constantly working on new distribution channels, for example by teaming up with providers of non-financial products.

Focus on positioningThe aim of our advertisements is to strengthen our brand name and market position. As a specialist and trendsetter, we are faster, more efficient and more effective than the largest financial institutions; and this difference shows. We are innovative and even a bit brazen. We are genuinely interested in our clients, which is why our staff ’s attitude towards them is so important. ‘Client-mindedness’ is therefore an emphatic part of our education and training programme. By the same token, our management training programmes are sharply focused on the culture and values of our organi-sation.

Profitable growth is high on SNS REAAL’s agenda. We have been recording high growth figures for years now thanks to our organic and non-organic growth. We are vigorously pursuing our policy in this area. Extra emphasis within our growth strategy has been placed on products for wealth creation, disability insurance and the business market. Yet growth naturally must go hand in hand with our other strategic goals: it must create added value and fit in with our retail and retail-plus strategy.

OrganicgrowthGrowth marketsSNS REAAL offers an excellent package of banking, investment and insurance products with the focus on mortgages, wealth creation (savings & investments) and insurance (life, pension & non-life). Further information on the trends for 2005 in these markets can be found in the sections on SNS Bank and REAAL Verzekeringen. Expectations are that growth in the mortgages market and the market for individual life insurance products will be limited in the coming periods, which makes it all the more important to focus on rapidly growing markets as well. Our emphasis lies on the following markets:§ Wealth creation Wealth creation for clients is one market with

growth potential. Here the emphasis is on savings, investment and insurance – particularly for pensions – to keep pace with an ageing society and people’s own responsibility to provide for old age. Various new banking and insurance products were already added to our product package in this area by the end of 2005

Goal 3GrowthGoal 3Growth

SNS REAAL Annual Report 2005 report of the group executive board ��SNS REAAL Annual Report 2005 report of the group executive board

in the wake of the new lifetime benefits plans in the Netherlands.

§ Disability insurance We see disability insurance as the second market

with attractive growth potential. This is yet another area characterised by ‘less government’ and ‘more market’. The new Work and Income (Ability to Work) Act, which replaces the Occupa-tional Disability Insurance Act, seeks to move people partially incapacitated for work back into the workforce. Employers and employees alike can insure themselves against the drop in income in the case of complete or partial incapacity for work; here the aim is to offer group and individual insurance contracts. By extension, REAAL Verzekeringen has been working closely with De Goudse to offer a sick-pay product under its own label. This insurance helps employers manage illness and incapacity for work during the two-year bridging period under the new Act.

§ SME services SNS Bank and REAAL Verzekeringen have both

proclaimed their services to the business market as a top priority. SNS Bank aims for growth in the number of clients in the business market on the basis of standardised services and especially in segments with a low risk profile. In the name of speed and efficiency, business products are offered to this end which are derived from products for the retail market. At the same time, we also develop special products for the business market.

REAAL Verzekeringen’s acquisition of Nieuwe Hollandse Lloyd has significantly strengthened its position in the business market. Aside from the economies of scale, its special expertise in transport insurance and underwriting has grown as well. This has also given our authorised agents operations a strong boost: the number of authorised agents now totals 135.

Growth in distributionWe are keen to continue growing in all of our distribution channels. The branch office network in the Randstad has expanded within a few years to include 16 branch offices. It is expected that a further five or six will be added in 2006.

SNS Bank and REAAL Verzekeringen are both working to improve their internet facilities. For banking clients, efforts are under way to make it easier for them to switch between advice and do-it-yourself products and services. The impact of the extranet on the bank’s and insurer’s interme-

diaries continues to grow as a source of all kinds of information and a means of making direct entries and changes in our systems.

REAAL Verzekeringen does business with a rapidly growing part of the top 200 intermediaries and has been forging an increasing number of alliances with them. Aside from the usual distribution channels, new ways of marketing our services are always being developed, such as white labelling, direct sales via Proteq and ventures such as Route Mobiel.

Telephone sales and services have seen significant growth for the retail market via SNS Direct and the business market via SNS Business Line. At the same time, business people continue to avail themselves of the internet for do-it-yourself work and our Entrepreneur Desks for advice.

Non-organicgrowthAside from growing on its own accord, SNS REAAL has made a number of successful acquisitions in recent years. Recent examples include the acquisition of Zurich Nederland in 2003, Univé’s life insurance portfolio in 2004 and Nieuwe Hollandse Lloyd in 2005. The staff and operations of the companies were swiftly integrated into REAAL Verzekeringen.

At the end of 2005, Van der Hoop Bankiers transferred their bond portfolio worth approximately € 80 million to SNS Securities. A limited number of asset management, equities advice and bonds trade staff transferred from Van der Hoop to SNS Securities as part of the deal.

We will continue to pursue our acquisition policy and expect to find more opportunities in today’s insurance market than in the banking market. All acquisitions, however, must fit in with SNS REAAL’s strategy. They must help us achieve our financial goals in respect of profit growth, return and efficiency ratios whilst complementing the target groups and activities in our retail strategy.

SNS REAAL Annual Report 2005 report of the group executive board�� SNS REAAL Annual Report 2005 report of the group executive board

To help SNS REAAL achieve its strategic goals, SNS Bank focuses on sustained and profitable growth in the market shares of its core mortgage and wealth creation products. On top of that, extra emphasis will be placed on services for small and medium-sized businesses in the coming period. SNS Bank has been developing innovative products and leveraging distribution to this end.

9.3%growthinmortgageportfolioWe seek to command a growth in market share (measured in the number of new mortgages) for our core mortgage product group. In 2005, the portfolio increased by € 3.6 billion to € 42.5 billion, which resulted in a 8.3% market share at year-end 2005 (see graph 1). We expect even tougher competition in this market in the future. We hope to achieve our targeted market share by penetrating further into the Randstad area, boosting sales via our intermedi-aries and focusing our branch network even more on advice and acquisition (see also under ‘Leveraging distribution’, page 23).

StronggrowthininvestmentWith signs of economic recovery in the air, the equity markets improved strongly in 2005: the AEX was up by 25.6% from 348 to 436. In the light of the past, many clients still prefer to play it safe by spreading their investments in sound investment funds. As a result, SNS Beleggingsfonden have seen strong growth in new investments and returns. Assets under management increased from € 1.7 billion to € 2.2 billion. In 2005, € 229 million in new funds flowed in. All investment funds showed a positive return. At year-end 2005, there was a total of fifteen investment funds.

We seek to promote wealth creation for our clients in 2006 and beyond by making them amply aware of all the different investment opportunities we offer and by giving them access to these by means of as many distribution channels as possible (see table 1). The innovative approach adopted with SNS Fundcoach also produced a sharp rise in assets under management with more than € 250 million to € 296 million. Opening the door to investing in a large number of specialist investment funds, SNS Fundcoach has already attracted several tens of thousands of potential investors with its free mini-

course on ‘smarter investing’. Its success is proof of the growing interest in investment in general and in investment funds in particular.

In the sphere of investments, the impetus for wealth creation is primarily expected from two unique products: Fund Account and Managed Account. Investors can use the Fund Account from SNS Fundcoach to build a portfolio with prominent national and international investment funds which would otherwise remain out of reach for smaller investors. Investors can open a Managed Account with SNS Bank to have portfolios with as little as €20,000 actively managed. Portfolio performance and recent transactions can be accessed via the internet round the clock.

Wealthy private investors and institutional investors can also turn to SNS Securities for specific investment services; SNS Asset Management is the specialist in the field of sustainable institutional investment (see pages 26 and 77 respectively).

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2001 2002 2003 2004 2005

€ millions

The mortgage portfolio of SNS Bank

� ThemortgageportfolioofSNSBank

SNSFundcoachWebchat

In October 2005, SNS Fundcoach presented an innovative service for clients and other interested parties: SNS Fundcoach Webchat. This interactive Web television puts people in direct touch with the manager of their favourite investment fund. The fund manager gives a brief presentation before moving on to a Q&A session. This service helps to make investment funds more transparent. Guests have included Mathieu Negre (Fortis Turkey Fund) and Peter Håkansson (East Capital funds).


BoardofDirectorsofSNSBank

M.W.J. Hinssen, ChairmanC.H. van den Bos, Deputy ChairmanB.A.G. Janssen, Deputy ChairmanH.K. KroezeM. MenkveldG.T. van Wakeren

��.4%increaseinsavingsOur goal is to increase and sustain our market share in savings above 6%. This market share increased from 5.7% to 6.0% in 2005. Because of the sluggish economy, savings have grown substantially in recent years. Including interest, savings grew by 12.4% to € 12.3 billion in 2005 (see graph 2 on page 24).

It is expected that there will be a further growth in savings in the coming period in addition to the growing demand in equities as the economy gains momentum. The needs for savings and investments to provide for old age will also continue to grow given the prospects of an aging society and less government assistance. SNS Bank has been anticipating these needs by offering tailored products, such as lifetime benefits plans, and new savings products.

LeveragingdistributionTo parallel the addition of new do-it-yourself opportunities for clients over the internet, emphasis in the branches has been shifting from servicing to acquisition and advice. After all, our multi-channelling approach means making it easier for clients to switch between advice and do-it-yourself products and services. SNS Bank is constantly making improvements to its advice and do-it-yourself concepts. A further internet service was added in July 2005: SNS Snelverzekeraar for quick and easy Non-life insurance at low cost.

SNS Bank strives towards a good national spread for its branch network. Accordingly, efforts were set in motion several years ago to expand the network in the Randstad area where the bank traditionally had few branches. Following the opening of the branch office in Amstelveen, the Randstad network now

includes 16 branches. And with another five or six expected in 2006, the target of 25 branches is now in sight. SNS Bank has a total of 167 branches in the Netherlands, which is eight less than at year-end 2004.

SNS Bank at present has more than 300 ATMs, one third of which are installed at a location away from a bank branch. An innovative development is the ‘direct marketing’ that is realised with these ATMs, with information appearing on the screen that is specifically geared to each customer withdrawing money.

CVB Bank now provides its banking services via 425 intermediaries, which has given it a well spread and close-knit network throughout the Netherlands (see also the insert on page 26). This has made it possible to offer financial services in places where banks have been withdrawn in recent years.

ExtraattentionforintermediariesSNS Intermediair maintains contact with a large group of intermediaries who together provide a substantial part of SNS Bank’s new business, particularly in mortgages. In 2005, account management was further focused on core clients (measured in products and in growth potential).

� Investing: something for everyone

Do-it-yourself

SNS Effectenlijn Fund Account (SNS Fundcoach)

SNS Effectenlijn[Securities Line], for theactive ‘do-it-yourself’investors, for yearsrated best internet broker amongcommercial banks.

SNS Fundcoach isan ‘investment fundssupermarket’ thathelps investors to puttogether themselvesa sound investmentportfolio.

Management

SNS Vermogens-beheer

SNS Managed Account

Vermogensbeheer[asset management]promotes ‘personal’management ofindividual portfolios(minimum € 250.000).

The SNS ManagedAccount is availablefor assets of atleast € 20.000. Theclient can monitorhis portfolio oninternet, including thetransactions that theassets manager hasperformed.

Withadvice

SNS Vermogens-Prisma

SNS Effecten Adviesdesk

SNS VermogensPrismais an advisory conceptthat staff use whenadvising clients abouttheir wealth creation.

The EffectenAdviesdesk [securitiesadvisory desk]advises investors inputting together theirindividual portfolios.


Special attention has also been turned to new clients in the Randstad area.Intermediaries can access file status and obtain information on interest rates, conditions and special offers over the extranet. To accommodate Straight Through Processing for mortgages in the future, the processing of mortgage applications by intermediaries has been centralised at one Intermediary Service Desk in Arnhem, where the mid office is located. Incidentally, this office is responsible for the acceptance of mortgages for all the sales channels of SNS Bank. The result is greater uniformity, a higher level of service and improved risk control. STP has already been implemented for payments, savings and investment transactions.

Howclientsseethings:innovative,personal,accessibleSNS Bank sees innovation not only though the lens of product innovation but also seeks to have this show in its services to clients. We want clients to see SNS Bank as a bank with a personal, accessible and transparent approach. The aim is to facilitate their banking business with an innovative approach that opens up new doors for them.

One of the ways to strengthen the client/bank relationship is to give our staff special client-service training. After all, the bank’s ‘face’ is a reflection of our staff: they make all the difference. In connection with this, a uniform advice concept was implemented in the branch organisation in 2005.

Another way is by linking marketing: working with business partners who give the SNS Bank brand added emotional value and highlight our commitment to society. In brief, this is a serious approach to changing the stiff image of banks in the past into that of an innovative, attractive bank ‘with a fresh way of thinking’.

For instance, SNS Bank supports the Bart Foundation, which helps people with a serious impairment or illness make their dreams come true. By working with Mojo Concerts, the largest organiser of concerts and music festivals in the Netherlands, SNS Bank hopes to be associated with music and entertainment. And Jetix, one of the largest broadcasting stations for young people, is another way to tap the youth market. SNS Bank and VNU have also teamed up to produce Sprout, a magazine targeting a completely different group: SMEs. SNS Bank’s unique approach can also be experienced at www.caleidoshop.nl, an internet

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Savings with SNS Bank

� SavingswithSNSBank

SNSBank:moreaccessiblethaneverbefore!

SNS Bank’s busiest branch is ‘snsbank.nl’, with tens of thousands of website visitors every day. And that number is rising sharply. Two years ago we registered 12 million clicks; 22 million in 2004 and more than 31 million in 2005.

These figures prove that clients have little difficulty using modern technology to get in touch with the bank. They make use of ATMs, use the phone (also mobile), e-mail, are active on the internet and – most recently – even participate in chat sessions. In practice, clients have no problem switching to one or more of these ways of contacting the bank; in fact, most of them prefer using the direct channels for all their banking business.

At the bank itself, the systems are so integrated that all information can be pulled up on-screen with one push of a button. Whenever clients call, our staff can therefore address their needs straightaway: quick, easy and efficient. And with video chatting, i.e. with the agent on screen during the conversation and the ability to exchange all manner of documents online at the same time, the call centre will soon be able to assist clients on a more personal level than ever before.

Contact between clients and the bank is therefore much more frequent than in the days of branch offices alone. And what’s just as important: clients are very satisfied with all these new possibilities!

shop offering a modern line of clothes specially designed for the bank. SNS Bank donates part of the proceeds from caleidoshop.nl to the Bart Foundation.


ServicesforSMEclients:onthewaytoprofitablegrowthAside from our goal to become the favourite retail specialist, we also strive to become the financial retailer for SMEs, ranging from sole proprietors to medium-sized enterprises. Associations, foundations, institutions and local governmental agencies are also included in this category. In the light of its growth target, SNS Bank recently proclaimed serving business clients a top priority.

Now that the economic conditions are looking up, businesses are gaining more confidence and moving back into the black. The number of sole proprietors is on the rise as well. Based on standardised services, use of the internet and advice, the aim is to achieve focused growth amongst the number of clients in the business market. With a view to boosting the return on business clients, growth in segments with a low risk profile is targeted in particular.

Products and services for business clients are marketed and advertised over the internet, the telephone and in the branches. The business page at snsbank.nl offers an increasingly wide range of products which can be purchased without any human intervention. For simple queries and advice, clients can turn to the SNS Business Line, which also sells an increasing portion of simple products.Entrepreneur Desks have been set up at 14 of SNS Bank’s larger branches for a wide range of quick services and more extensive advice. Furthermore, five Business & Institutions units – spread throughout the country – concentrate on profes-sional advice, particularly for more complex loans and business payments. Specialists from SNS Assurantiën are called in to provide support and advice on business insurance.Just like with retail clients, business clients have a choice between various do-it-yourself products and services and individual advice. Most new clients – the total number of business clients grew by 4,000 in 2005 – find their way to the bank via the business internet page.

The close ties with retail products are evident not only in distribution but also in the product package. Many business products have been derived from their retail counterpart, which is good for standardisation, efficiency and speed of offer. These made-to-measure products are developed by taking a broad-based product and giving it special features. Successful examples

include Zakelijk Internet Sparen Super – internet super-saving for businesses – and the SNS Bedrijfs-hypotheek met Kapitaalverzekering – a business mortgage with endowment insurance. Special mortgage products for business clients such as the Rentebeschermer – an interest rate cap – have been developed as well.

‘Bill,yourbankingbuddy’

Bill is a payment system in MSN Messenger which was specially developed for young people to pay for purchases at Web shops and transfer money to other buddies. Bill also offers attractive discounts on music and entertainment. Bill is in fact a debit card on the internet that is linked to a private account at a Dutch bank – not necessarily at SNS Bank. Due to real-time payment processing in the systems at SNS Bank, Bill is quick and safe. It is an attractive way to tap the youth market and to accentuate how innovative SNS Bank really is. At the start of 2006, Jetix TV’s young viewers awarded Bill the Jetix Concept Award for best multimedia concept for young people.

Synergyincomplexfinancing

One example of synergy is the arrangement made by one of the Business & Institutions units with a business client: a combination of business financing and real estate investment. SNS Bank financed a shopping centre plus hotel, SNS Assurantiën arranged the insurance of the buildings, SNS Financial Markets capped the interest rate, Masterlease (a trade name of Masterfleet, where SNS REAAL Invest holds a 40% interest) offered a lease for a fleet of cars and REAAL Verzekeringen submitted a proposal for the staff ’s pension provision. That’s how synergy was achieved for such complex financing.


Witruimte tussen logo en pay-off is de totale hoogte van het ovaal+zwart.

Specialisedsaleslabels

SNS Bank has a range of different sales labels for specialised market segments. Two of these – ASN Bank and SNS Asset Management – are dealt with in the section on ‘Ethical business practice’, because of their focus on sustainability. SNS Fundcoach can be found on page 22.

CVB Bank, the intermediary bank, signed on 65 new intermediaries in 2005, thus bringing the total number of intermediaries to 425. Its package of banking, investment and insurance products was expanded, such with the addition of the CVB Levensloopregeling, which allows employees to save for extended leave. A record number of special mortgage and savings offers were run in 2005. The mortgage portfolio grew by 10% to € 3.1 billion. Funds entrusted increased by 26% to € 1.4 billion. Independer proclaimed CVB Bank the ‘bank that provides the most service in the Netherlands’; in another survey by Effectory, the bank was nominated the ‘best company to work for in the Netherlands’ in the category of companies with fewer than 100 FTEs.

BLG Hypotheken is specialised in the sale of mortgages via intermediaries. The award for Pensioen Optimaal Hypotheek – BLG’s most extensive pension mortgage – for THE mortgage product of 2005 placed BLG in the spotlights in the general and professional press. The Independer survey amongst bank clients awarded BLG second place with its ‘readiness to assist clients’, ‘clear information’, and its ability to ‘fulfil promises’ scoring particularly high. ‘Imago Blauwdruk Hypotheekverstrekkers’, the annual survey on intermediaries, bestowed honours on BLG once again – this time with its Silver Megaphone for the company with the best performance in image, appreciation, absolute preference and attractiveness amongst established and potential intermediaries. BLG was cited in particular as being ‘well organised’ and able to ‘fulfil its promises’. In 2005, BLG Hypotheken recorded € 2.1 billion (+15%) in new business, thus leading to a portfolio of € 8.1 billion.

SNS Securities is a securities broker. ‘Sales teams’ serve the domestic and international institutional clients with specialised fixed-income products and advice with respect to Dutch Small & Midcap shares. In addition, SNS Securities is active in the field of trading shares, corporate finance and asset management. In 2005, SNS Securities again showed strong performance in the results and positioning of its Small & Midcap strategy. Just as in 2004, Starmine and AQ-rating classified the research product of SNS Securities as one of the best in the market. This supports the further expansion of the Small & Midcap segment.

SNS Assurantiën is SNS Bank’s national insurance group which focuses primarily on the business market. Cooperating closely with the Entrepreneur Desks and the Business & Institutions units from its four offices throughout the country, SNS Assurantiën serves businesses with complex insurance and pension arrangements. Alliances have been forged with various arrangement partners. The authorised agent and back office activities of SNS Assurantiën are accommodated in SNS Assuradeuren.


With a number of years of strong growth behind it, REAAL’s ambition is to achieve a top-5 ranking in the overall insurance market and a top-3 ranking in a number of segments by means of broad and focused growth. In particular, REAAL is keen to grow in the four strategic pillars of ‘individual life insurance’, ‘pensions’ (group life insurance), ‘non-life’ and ‘healthcare’ (especially disability insurance). Its approach is product leadership with innovation in all areas. More emphasis will be placed on business clients with a view to balancing the retail/business premium ratio in the future. Non-organic growth is clearly on REAAL’s agenda.

Individuallifeinsurance:marketsharekeepsgrowingIn five years’ time, REAAL Verzekeringen’s market share in the production of new regular-premium private life insurance contracts increased sharply from 6.5% to 15.2%. Recurring life premiums rose by 10.1% to € 838 million in a stable life insurance market.

This is mainly the result of organic growth. Verkoop Intermediair, which focuses on the large group of intermediaries with a wide range of products, generated its highest sales ever in 2005 with a 75% increase in premiums. The number of business clients grew significantly as well. Verkoop Interme-diair aims to make its contact with primarily the top 200 agencies more or less permanent.

Aside from the efforts of REAAL Verzekeringen’s own sales organisation, the acquisition of the life insurance portfolios from Zurich Nederland (2003) and Univé (2004) contributed to this growth. One of REAAL’s skills is its ability to integrate new acquisitions quickly and utilise these new economies of scale. Expectations are that the life insurance market – which in many senses is fiercely competitive – will grow in the coming period, thus further increasing REAAL’s market share.

The Special Distribution department, which concen-trates on large distribution partners and mortgage chains, was characterised in 2005 by further growth in production, stronger account relationships and the addition of new accounts. Tailored products are developed with these business partners and often

sold under the distributor’s name. In 2005, the market share in single-premium contracts dropped to 7.7%, mainly because REAAL refused to follow suit with the rates offered by some of the larger insurance companies. An increase in market share is forecast for 2006 in this limited growth market.

Pensions:substantialgrowthThe upward trend of recent years continued in 2005. The pension business, which sells group and semi-group pensions via specialised intermediaries and actuarial consultancy firms, has further expanded and intensified its partnership with these professional pension providers. Given the round after round of legislative changes, employers require quality advice and a professional pension administrator. Add to this the consequences of the Financial Services Act and it becomes clear that a specialist and high value sales channel for pensions is just what the market needs.

Great efforts were taken in 2005 to incorporate all of these legislative changes, such as the Equal Opportunity Act and the tax restrictions on early retirement and pre-pension schemes, into the contracts. In spite of these legal requirements, the pension portfolio has grown substantially. New changes are in the making, such as the New Pensions Act to replace the Pension and Savings Funds Guarantee Act. The market’s growing need for ‘individual’ schemes has indeed led to growth, whilst the retrenchment in group pensions owing to the switch from final-pay to average-pay schemes has had a negative impact on the pension market.

The administration contract with Stichting Pensioen-fonds FNV was extended in 2005 thus continuing the years of intensive cooperation between FNV

BoardofDirectorsofREAALVerzekeringen

C.H. van den Bos, ChairmanM.W.J. Hinssen, Deputy ChairmanA.F.J. BakkerJ. BovenN.J. JongeriusJ.H. Wilkes


0

250

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2,000

1,750

1,500

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€ millions

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3 NetpremiumincomeREAALVerzekeringen

and REAAL Verzekeringen. A simpler and clearer yearly pension statement has also seen the light of day, which means that REAAL already satisfies the requirements of the Dutch Association of Insurers. All pension administrators will communicate in this manner with effect from 1 January 2007.

Non-lifeinsuranceoperations:inheavymotionIdentified as a core business several years ago, non-life insurance has been in heavy motion – partly on account of acquisitions. Here too, organic and non-organic growth go hand in hand. The acquisition of the retail and business non-life insurance portfolio from Zurich Nederland (2003) was followed up in 2005 with the acquisition of Nieuwe Hollandse Lloyd, which largely strengthened our position in the business market.

Not only has the scale of the non-life insurance operations increased, but the specialist expertise in transport insurance and underwriting has grown as well. Moreover, a special pension product for SMEs was launched in 2005 and the non-life package (REAAL Bedrijven Totaalplan) was placed on a higher level. The product package for retail clients was already completely renewed (Traffic Package, Home-owner’s Package, Total Plan, new legal aid insurance) by the end of 2004.

Authorisedagents:strongboostThe acquisition of Nieuwe Hollandse Lloyd gave the authorised agents operations a strong boost. Totalling far less than one hundred several years ago, the number of authorised agents increased by six in 2005. The 25 from Nieuwe Hollandse Lloyd have now brought the total to more than 130. The goal of doing business with half of the total of 300 ‘serious’ authorised agencies is coming into clear view, just as is the targeted top-3 position in this market. The authorised agents operations have added proposal software, analysis tools, training and marketing support to the support programme. REAAL has the fullest confidence in its authorised agents operations, which grew in by 40% in 2005. Premium income, including Nieuwe Hollandse Lloyd, rose to € 140 million.

Mortgages:successful‘specialoffer’forthesummerREAAL sells mortgages under the label of various financing institutions, essentially in combination with its own life insurance or unit-linked insurance. In consultation with one of the lenders, a special

mortgage offer was run in the summer months with a substantial discount on interest rates. The special offer, which also presented REAAL to the interme-diaries as an attractive mortgage partner, proved very successful and resulted in new business of €1.4 billion in mortgages.

Goal:toachievebroadandfocusedgrowthtoatop-5positionREAAL Verzekeringen is keen to continue its strong growth and aims to command a top-5 position in the overall insurance market. In keeping with this goal, a top-3 position has already been achieved in various segments (individual life insurance, authorised agents). Seeing that the total insurance market is divided nearly equally between retail and commercial, rapid growth has been targeted for insurance premium turnover on business clients. Since about two thirds of the premium income comes from private clients, REAAL will tighten its focus on businesses. Acquisitions play a key role in these plans.

Continuingcomputerisation

REAAL Verzekeringen has been using STP for mortgages and part of its non-life insurance contracts for several years now. No less than 65% of all mortgage applications run via InSupport, of which 75% automati-cally generate a proposal within five seconds. Of all motor insurance applications and revisions, nearly 30% are automatically accepted. That is no less than 75% of all cancellations of motor insurance contracts and more than 30% of all applications for home-owner’s policies. A total of 15% of all retail non-life insurance applications are received via Meeting Point.


Proteq:rapidgrowththroughinnovation

Proteq is REAAL Verzekeringen’s direct sales channel that operates under its own label as independent insurance company. Clients can use Proteq’s completely new internet site to purchase the most common policies directly. This means ‘input from the source’ (consumers submit their own application via internet) in combination with automatic acceptance so that the customer can see immediately whether the insurance has come into effect. Proteq thus capitalises on the rapidly growing demand in the consumer market.

The medical expenses insurance policy for cats and dogs (‘Dier & Zorg’) was also very successful in 2005. The distri-bution is organised via veterinary practices and the policy can also be concluded via internet. The quality of care for pets is continually increasing in the Netherlands and Proteq takes advantage of this by means of cooperation with the veterinary channel.

Route Mobiel is also experiencing rapid growth. As shareholder and insurer behind this concept, Proteq is also benefiting from this successful alternative for the traditional motoring organisation. ‘Cross selling’ on the developed portfolio is an important point of attention for 2006.

In 2006, Proteq will further substantiate its internet proposition and the brand will be widely introduced by means of the ‘Prinses Pecunia’ campaign. An innovative new distribution concept, announced in 2006, is the partnership with the ‘Kruidvat’ retail chain.

ContinuingtoleveragestrongpointsIn this respect, REAAL will continue to leverage the strong points which have contributed to its present growth: top-notch products, sound administrative processing and a flexible organisation which identifies and avails itself of opportunities. These points also include continuing to think in terms of innovation. It appears from the 2005 National Life Insurance Performance Survey, performed by IG&H Management Consultants, that clients regard REAAL as ‘an innovative and low cost insurance company, highly regarded in the life insurance market’. The product leadership is clearly recognised and the intermediaries indicate that the name awareness of REAAL Verzekeringen among consumers has substantially increased.

The innovation is evidenced by the launching on the market of entirely new products such as those within the scope of the lifetime benefits plan, disability insurance and the Work and Income (Ability to Work) Act (the new Occupational Disability Insurance Act) (see the insert below and on the next page). In addition to major projects such as Straight Through Processing, practical improvements are continually being made to our information and processing flow. In the field of distribution, new channels are being developed all the time, ranging from increased internet offerings and white labelling to spectacular services like Route Mobiel. We are always on the lookout for innovative business partnerships.

IntermediariesremainmainsaleschannelIn spite of the broader distribution mix, intermedi-aries still constitute the main channel. We therefore listen carefully to what they have to say about our services. The results of the Client Values Survey, which was conducted for the third time in 2005, were positive: aspects such as ‘alert’, ‘practical’ and ‘reliable’ scored much higher than the last time the survey was taken.

There is growing interest in the training offered by REAAL Verzekeringen to the intermediaries. REAAL College, which focuses on staff at REAAL’s interme-diaries, saw an increase in the number of partici-pants from about 1,400 (2004) to more than 2,000. The programme naturally pays ample attention to the new legislation (such as the Financial Services Act) and the requirements for the industry’s duty of care. Interest in REAAL Business School, which offers a practice-oriented management course developed for directors and managers of large intermediaries

and for independent intermediaries, is also on the rise.

Links between the systems are being realised at a rapid pace as well. Intermediaries and REAAL can maintain contact via Meeting Point and InSupport, for example (see insert on page 28).

StronggrowthinnameawarenessJust as ‘innovation’ has become part of the staff ’s mindset, ‘REAAL. Realist in insurance’ has an increasingly familiar ring to it amongst established and potential clients. REAAL Verzekeringen’s assisted brand name awareness now exceeds 90%. We have taken an innovative approach to this area as well: screens with news bulletins have been placed on the platforms at five train stations to show that REAAL is in touch with the times.

SNS REAAL Annual Report 2005 report of the group executive board30 SNS REAAL Annual Report 2005 report of the group executive board

REAALLevensloop:flexible,withachoiceofcombinedsavings,investmentsandinsurance

This lifetime benefits plan allows staff to set money aside for extended leave: earlier retirement, a trip round the world, parental leave, etc. Employers are required to offer and administer such schemes.

REAAL Verzekeringen has developed a product for this purpose – REAAL Levensloop – which has advantages for companies and staff alike. Employers can use a group scheme to offer their people financial benefits in the form of higher interest on their savings whilst showing that they are, furthermore, a good company to work for. They can also spare themselves a lot of work: REAAL Verzekeringen ensures that the lifetime benefits plans are smoothly and efficiently administered.

Aside from the higher interest, the advantage for employees is that they can access their lifetime benefits accounts online over the internet. A calculator helps work out what they can save in the course of time.REAAL Levensloop also gives them influence over their return depending on whether they combine savings and investment. In the latter case, investment funds from SNS Bank or ASN Bank are selected on the basis of the employee’s investment profile and horizon.

The insurance aspect is unique: REAAL offers endowment insurance with its Levensloop Bonusregeling. In the Standard version of this product, REAAL Verzekeringen pays an attractive annual bonus on the accumulated savings while the policyholder is alive; in the event of death before the maturity date, the next-of-kin receives half of the accumulated savings. The Extra version of this product is a pure endowment policy, although a higher annual bonus is paid when the policyholder is alive, which means a better return and faster growth. REAAL’s flexible Levensloop products enable employees to tailor their lifetime benefits plan to their exact needs.

Disabilityinsurance:strategicpillarforREAAL

At the start of 2005, REAAL Verzekeringen declared disability insurance as one of its four strategic pillars. The goal is to command a top-5 position in this market within five years. REAAL started offering a range of disability insurance products in 2005 and will continue expanding this line in the coming years.

The sick-pay products which were launched in 2005 help employers manage illness and incapacity for work in their company such as by reimbursing the cost of prevention and reintegration. After all, employers need to do their utmost to get sick employees back to work during the two-year bridging period.

December 2005 saw the launch of REAAL ’s group insurance addressing the Work and Income (Ability to Work) Act; these contracts protect employees during the two-year bridging period from a drop in income if they are incapacitated for work by 35% or more. A substantial drop in income is possible under the new Work and Income (Ability to Work) Act which came into effect on 1 January 2006.

These sick-pay and disability insurance contracts form a logical whole and enable employers to offer such loss-of-income insurance as a good secondary term of employment.

Furthermore, the acquisition of Nieuwe Hollandse Lloyd (NHL) has strengthened REAAL’s position in the individual disability insurance market. Disability insurance products feature prominently in NHL’s non-life portfolio. With a view to strengthening the position in the personal disability insurance market further in the coming years, REAAL has converted the supplementary disability insurance benefits on life insurance products into a new non-life product: REAAL Inkomensverzekering Privé, which offers personal loss-of-income insurance.

Intermediaries can use these products to position themselves as expert advisors for employers, employees and business owners/directors and majority shareholders.

SNS REAAL Annual Report 2005 report of the group executive board 3�SNS REAAL Annual Report 2005 report of the group executive board

SNS REAAL Groep N.V. considers an effective management organisation and proper

control over business processes to be vital. The group has a management structure

which strives to achieve numerous goals, such as cohesion and synergy amongst

the various business units. SNS REAAL Groep N.V. has decided to all intents and

purposes to observe most of the Dutch Corporate Governance Code.

Corporate governanceManagementstructureThe Group Executive Board of SNS REAAL Groep N.V. has four members. SNS REAAL Groep N.V. is what is known as a two-tier company. The company has a Supervisory Board with all the powers granted by law to supervisory boards of two-tier companies and a number of supplementary powers in the regulations of the Group Executive Board and the Articles of Association.

SNS REAAL Groep N.V is the sole shareholder of SNS Bank N.V. and REAAL Verzekeringen N.V. Both chairmen of the Boards of Directors of SNS Bank N.V. and REAAL Verzekeringen N.V. are also member of the Group Executive Board. SNS REAAL is convinced that this management structure helps to create the greatest possible synergy between the group entities. This synergy is further boosted by having the chairman of the Board of Directors serve as each other’s deputy chairman.

The Supervisory Boards of SNS REAAL Groep N.V., SNS Bank N.V. and REAAL Verzekeringen N.V. have the same members. The Supervisory Board oversees the policy of the Group Executive Board and supports it with advice.

DutchCorporateGovernanceCodeThe Code was adopted by the Tabaksblat Commission on 9 December 2003. It contains 21 principles and 113 best practices in respect of the management, supervisory board, shareholders and the annual general meeting (AGM), financial reporting and the auditor.

The Code is applicable to all Dutch companies with a stock exchange listing. These companies are required to discuss in the annual report their

compliance with the Code’s principles and best practices in respect of the company’s management or the supervisory board. In the case that these principles or best practices have not been observed or if the company does not intend to observe them in the current and subsequent financial year, it must explain the reasons for this in the annual report.

StepstakenAlthough SNS REAAL Groep N.V. is not listed on the stock exchange, various steps have been taken to observe most of the Code:§ The Articles of Association of SNS REAAL Groep

N.V. have been brought into line with the Code.§ The regulations of the Group Executive Board

and the Supervisory Board have been updated. Moreover, it has now been decided to amend the regulations so that the rule concerning conflict of interest will also cover possible situations where there is a conflict of interest by a member of the Group Executive Board or the Supervisory Board during the exercise of an executive or supervisory position at a company belonging to SNS REAAL.

§ The shares of SNS REAAL Groep N.V. have been decertified. All depositary receipts were held by Stichting Beheer SNS REAAL. SNS REAAL Groep N.V. and the trust believe that this share certification has become outdated, such as reflected by the Code. The trust office has since been dissolved. Upon decertification of the shares, Stichting Beheer SNS REAAL became sole shareholder. The sole priority share held by Stichting Beheer will be exchanged for an ordinary share and is thus in effect cancelled.

§ The composition of Stichting Beheer SNS REAAL’s board has been drastically changed. The board always consisted of the members of the Group

SNS REAAL Annual Report 2005 report of the group executive board3� SNS REAAL Annual Report 2005 report of the group executive board

Executive Board and Supervisory Board. In 2004, all members of the Group Executive Board stepped down from the board of Stichting Beheer SNS REAAL. Four of the members of the Supervisory Board will also step down from the board of Stichting Beheer SNS REAAL in 2006. Two independent board members will be appointed, one of which will act as chairman of the board of Stichting Beheer SNS REAAL.

§ The term for the members of the Supervisory Board has been limited to three four-year terms; the current members of the Supervisory Board can only be reappointed twice for a term of four years.

§ A Remuneration, Selection and Appointments Committee has been set up in addition to the Audit Committee, which was installed in 2001.

§ A whistleblower protection scheme has been adopted and implemented.

§ In 2005, a ‘Business Control Framework’ was developed that will be implemented further in 2006 (see box on page 33). This Framework is partly intended to enable SNS REAAL Groep N.V. to include an ‘In Control Statement’ in the annual report at a time still to be determined.

DeparturesfromtheCodeThe Code states that the company also observes the Code if the AGM approves the corporate governance structure and sanctions the departures from the Code. In this context, SNS REAAL Groep N.V. and its shareholder are of the opinion that it would be better to depart from a limited number of best practices at this time. This concerns the following:

Best practice II.1.1: ‘Board members are appointed for a period not exceeding four years. Reappointments are made for periods not exceeding four years.’The chairman of the Group Executive Board was appointed in 2002 for a term of four years. He will be reappointed in 2006 for a term of two years. The other members of the Group Executive Board were appointed for an indefinite duration in accordance with the statute governing their appointment before the Code existed. SNS REAAL Groep N.V. does not find it desirable to alter their employment contracts to reflect this best practice. As soon as a new board member is appointed, consideration will be given to whether it is in the interest of the company and the stakeholders to have this changed. With a view to attracting board members of the desired calibre, the company is convinced of the importance of maintaining its freedom to contract individuals on an individual basis.

Best practice II.2.7: ‘The maximum compensation for involuntary dismissal is equal to one year’s salary (the ‘fixed’ part of remuneration). If the maximum compensation of one year’s salary is apparently unreasonable for a board member who is dismissed in his first term, the maximum compensation is twice his yearly salary.’The employment contracts of the current members of the Group Executive Board were in existence before the Code and depart from this best practice. The employment contracts will not be altered to reflect this best practice.

Best practice III.2.1: All supervisory directors, with the exception of a maximum of one person, are independent within the meaning of best practice III.2.2.’ The premise of the Code is that a supervisory director does not qualify as independent if he sits on the board of a legal entity holding at least ten per cent of the shares in the company. Stichting Beheer SNS REAAL holds more than 10% of the shares in SNS REAAL Groep N.V. Three of the seven members of the Supervisory Board of SNS REAAL Groep N.V. sit on the board of Stichting Beheer SNS REAAL. Although the majority of the members of the Supervisory Board are therefore independent, three of them are not considered to be independent in the light of the above. SNS REAAL Groep N.V. is of the opinion that a distinction can and must be drawn between the nature and object of its majority shareholder and that of the majority shareholders of many other companies. The majority shareholder in this case is a trust (thus without any members or shareholders) with a limited object. One of the trust’s goals is to promote SNS REAAL’s interests. This goal is anchored in the trust’s constitution. When fulfilling their task, SNS REAAL’s supervisory directors are also required by law to concentrate on the best interest of the company and its associated business. Given this common ground, SNS REAAL sees no reason to change the current situation. Incidentally, the composition of the board of the majority shareholder has already been drastically changed as stated above.

Best practice III.6.2 ‘Supervisory directors do not take part in discussions and decisions concerning subjects or transactions in which they have a conflict of interests.’The board of Stichting Beheer SNS REAAL consists of the full Supervisory Board. It has been decided that four Supervisory Directors will step down in favour of two independent board members. Depending

SNS REAAL Annual Report 2005 report of the group executive board 33SNS REAAL Annual Report 2005 report of the group executive board

BusinessControlFramework

SNS REAAL is keen to be THE favourite financial retail specialist in the Netherlands. Strategic and financial goals have been set to this end which the Group Executive Board uses for managing the organisation. The Boards of Directors of SNS Bank and REAAL Verzekeringen are responsible for the day-to-day business within the policy frameworks defined by the Group Executive Board. They constantly strive towards a responsible balance between taking and controlling business risks. Responsible or ‘controlled’ business therefore calls for proper risk management for activities and processes at all levels of the organisation.

We have paid a lot of attention in recent years to strengthening our risk management. Please refer to the chapter on risk management (see page 49 etc.) for further information on these contract-related and organisational aspects. This does not mean there is no room for placing risk control on an even higher level, especially in terms of its transparency and integration.

A business control framework has been set up for SNS REAAL in its totality with a view to getting every aspect of our business under control and issuing an In Control Statement. This transparent and integrated framework sets down what we wish to achieve and how we intend to fulfil these goals, including the guarantee of proper work and accountability at every echelon. This framework, which was initiated in 2005, will be further implemented in 2006 and strengthens the regular planning and control system within our organisation. It thus provides a significant part of the infrastructure for the internal control from the Group Executive Board, resulting in the related statements whenever required.

Great effort is taken to anchor the risk policy in the operational processes, including the entire financial reporting. In this respect an important role is played by the careful definition of control targets, i.e. the objectives set per risk category on the basis of strategy, risk policy, law and regulations and best practices. The key risk indicators defined on this basis are grouped with other business target-derived performance indicators into Business Balanced Score Cards. Internal management statements are properly substantiated by means of a system covering departmental risk assessments.

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upon the specific circumstances, a situation may occur that three members of the Supervisory Board who also form part of the board of the trust have a conflict of interest in respect of certain subjects or transactions in connection with their position on the board of the trust. SNS REAAL Groep N.V. believes that such a conflict of interest will actually seldom occur in view of the special objectives of the trust. For this reason it has been decided that (i) the three members of the Supervisory Board who sit on the board of the trust will not participate in discussions and decisions within the Supervisory Board in respect of agreements between SNS REAAL Groep N.V. and the trust and (ii) that they will in principle participate in discussions and decisions in the Supervisory Board in all other cases.

OtheraspectsoftheCode–GroupExecutiveBoardRegulationsThe tasks and procedures of the Group Executive Board are set down in regulations which are approved by the Supervisory Board. The regulations are published on SNS REAAL’s website.

External directorshipsNone of the members of the Group Executive Board sits on the supervisory board of a listed company. The regulations state that members of the Group Executive Board must obtain permission from the Supervisory Board before accepting an offer to sit on the supervisory board of a listed company. Other material external directorships must be reported to the Supervisory Board. In accordance with the Code, the regulations state that no member of the Group Executive Board may sit on more than two supervisory boards of listed companies.

Remuneration and securities holdingsThe members of the Group Executive Board are bound by the Regeling Privé- Beleggingstransacties SNS REAAL (the group’s rules on private investment transactions) and the Reglement Bezit en Transacties Effecten SNS REAAL (the group’s rules on securities ownership and transactions), which satisfy the requirements of the Code.

OtheraspectsoftheCode–SupervisoryBoardRegulationsThe tasks and procedures of the Supervisory Board (including their interaction with the Group Executive Board and the AGM) are set down in regulations. There is also a set of regulations for the Audit

Committee and for the Remuneration, Selection and Appointments Committee. All regulations are published on SNS REAAL’s website.

Remuneration and securities holdingsThe Supervisory Board’s remuneration is set by the AGM. The remuneration of the supervisory directors is not linked to the company’s performance. The members of the Supervisory Board are also bound by the Regeling Privé-Beleggingstransacties SNS REAAL and the Reglement Bezit en Transacties Effecten SNS REAAL. ProfileIn 2005 the Supervisory Board created a profile for its intended size and composition. The Supervisory Board will discuss every change to this profile at the AGM and with the Employees’ Council. The profile is published on SNS REAAL’s website.

CommitteesThe regulations of the Audit Committee and the Remuneration, Selection and Appointments Committee indicate the role and responsibilities of the committees and how they are to fulfill their tasks. The report of the Supervisory Board states the key issues which have arisen.


SNS REAALSNS REAAL, SNS Bank and REAAL Verzekeringen have met almost all their objectives and targets in the area of further growth and improvement of the operating efficiency. These financial and commercial trends have encouraged us to carry on unabated with our strategy to make SNS REAAL the favourite retail specialist in the Netherlands. In doing so, we pursue a healthy balance between risk and return.SNS REAAL maintains its moderate risk profile by focusing on the core products – mortgages, wealth creation and insurance – in combination with the focus on standardisation of products and clearly defined client groups.

SNS REAAL acquired Nieuwe Hollandse Lloyd (NHL) on 20 September 2005, representing an important strategic step in the field of non-life insurance activities. As from that date, NHL has contributed € 3.4 million to the net profit of SNS REAAL for 2005.

In 2004, almost all employee pension entitlements were placed with the independent pension fund of SNS REAAL. With effect from 1 January 2005, future risks and actuarial profits are no longer for the account of SNS REAAL, because SNS REAAL has changed from a so-called group defined-benefit scheme to a group defined-contribution scheme (with the exception of former employees of Zurich Nederland and NHL). From this date on SNS REAAL will only pay a fixed premium for the pension scheme.

For the first time SNS REAAL publishes its results on the basis of IFRS. The figures for 2004 are also presented on the basis of IFRS, with the permissible exception of IFRS 4, IAS 32 and 39. This means

that the comparative information with respect to financial instruments and insurance contracts is prepared primarily on the basis of the old accounting principles of SNS REAAL. As a result, the figures in this transitional year are not so easy to compare. The analysis of the result does contain an approxi-mation on the basis of more comparable results (see table 2 on page 37).

ResultThe net profit of SNS REAAL increased by € 35 million from € 288 million for 2004 to € 323 million for 2005 (+12.2%). Banking and insurance operations both showed an increase in profit. SNS Bank achieved an increase in profit of € 53 million to € 204 million (+35.1%). The net profit of REAAL Verzekeringen grew by € 12 million to € 140 million (+9.4%).

The results of SNS REAAL are influenced by develop-ments in interest rates, share prices and actuarial

Net premium incomeInvestment income

Net interest income

Commission and other income

57%

19%

18%

6%

4 Compositionofincome�005

2005 was another very good year for SNS REAAL. Net profit increased by 12.2%

to € 323 million, with a growth in total income of 10.9% to almost € 3.5 billion.

The net operating profit increased by no less than 24.7%. In addition, the operating

cost-premium ratio of REAAL Verzekeringen improved from 17.2% to 16.9% and the

efficiency ratio of SNS Bank from 63.1% to 59.8%.

Financial developments


In€millions �005 �004 Change

Result

Income banking operationsNet interest income 595 571 4.2%Netcommissionandmanagementfees 114 109 4.6%Otherincome 55 16 243.8%

Total 764 696 9.8%

Income insurance operationsNetpremiumincome 1,745 1,650 5.8%Investmentincome 545 618 (11.8%)Investmentincomeonbehalfofpolicyholders 394 126 212.7%Otherincome 46 41 12.2%

Total 2,730 2,435 12.1%

Otherincomeandeliminations (23) (1) ‑‑

Total income 3,471 3,130 10.9%

Technicalexpenses,insuranceoperations 2,095 1,837 14.0%Acquisitioncosts,insuranceoperations 167 122 36.9%Valueadjustmentsonfinancialinstrumentsandotherassets 60 71 (15.5%)Staffcosts 443 451 (1.8%)Othercosts 299 335 (10.7%)

Total expenses 3,064 2,816 8.8%

Shareintheresultofassociatedcompanies 9 44 (79.5%)Taxes 93 70 32.9%

Net profit 323 288 12.2%

In€millions 3�-��-�005 3�-��-�004 Change

BalancesheetTotal asset 68,088 59,972 13.5%

Investments 9,211 8,233 11.9%Investmentsforinsuranceproductsonbehalfofpolicyholders 3,426 2,798 22.4%Mortgageloans 43,544 39,924 9.1%Loansandadvancestocreditinstitutions 4,949 3,421 44.7%Shareholders’equity 2,528 1,880 34.5%Capitalbase 4,144 3,323 24.7%Debtcertificates 25,654 23,464 9.3%Technicalprovisions,insuranceoperations 12,658 11,330 11.7%Savings 12,333 10,973 12.4%Amountsduetocreditinstitutions 3,419 2,442 40.0%

Inpercentage 3�-��-�005 3�-��-�004

RatiosReturnonshareholders’equity 14.1% 16.6%Growthnetoperatingprofit 24.7% 26.0%

SNSBank:-Returnonshareholders’equity 14.9% 12.0%-Efficiencyratio 59.8% 63.1%-BISratio 11.9% 11.7%-Tier�ratio 8.7% 8.7%

REAALVerzekeringen:-Returnonshareholders’equity 12.9% 16.8%-Newannualpremiumequivalent(€millions) 200 172 -Operatingcost/premiumratio,excludingcapitalisationofacquisitioncosts 16.9% 17.2%-SolvencyLifeoperations 233% 192%-SolvencyNon-lifeoperations 275% 261%-CombinedratioNon-lifeoperations 98.1% 93.6%

SNSREAAL


The 12.2% growth in profits resulted from a more rapid increase in income than in expenses. Total income increased by € 341 million in 2005 to € 3.5 billion (+ 10.9%) whilst total expenses increased by 8.8% to € 3.1 billion.

IncomeTotal income of SNS Bank grew by € 68 million to € 764 million (+9.8%). Thus net interest income rose by € 24 million (+4.2%) to € 595 million, and net commission and management fees increased by € 5 million to € 114 million (+4.6%). Other income increased by € 39 million to € 55 million (+243.8%) following the improved result on derivatives and other financial instruments (€ 40 million). This increase is the effect of a positive development in the interest rate curve, combined with an increase in the market value of derivatives and ineffectiveness in the application of hedge accounting.

Total income at REAAL Verzekeringen increased by € 295 million to € 2.7 billion (+12.1%). The new annual premium equivalent with Life operations increased by € 28 million to € 200 million (+16.3%). Regular premium Life insurance rose by € 77 million to € 838 million (+10.1%), while single-premium Life insurance decreased slightly by € 9 million to € 584 million (-1.5%) amid strong price competition.Non-life premiums increased by € 27 million to € 323 million (+9.1%), of which € 19 million relates to the acquisition of Nieuwe Hollandse Lloyd.

assumptions. These factors lead to volatility in the results of SNS REAAL.

The result of SNS REAAL is derived from the underlying results of SNS Bank and REAAL Verzekeringen. The volatility of the result and the equity of the bank and insurer have increased both due to the introduction of IFRS in 2005 as well as the nature and scope of the activities.

SNS Bank limits the volatility of result and equity by means of hedge accounting. However, the consequence is that possible ineffectiveness in the application of hedge accounting may have material effects on the result. In addition, the accounting principle with respect to penalty interest contributes to increased volatility of the SNS Bank result.

At the moment REAAL Verzekeringen is confronted with an increase in the volatility of result and equity since under IFRS only the market value changes of assets are accounted for in the result or equity. Due to the application of IFRS, developments in the interest rates, share prices or real estate may have a consid-erable influence on the investment income, technical costs or adequacy of the technical provisions. Finally, the actuarial assumptions that the insurer applies to, for example, mortality, maturity, lapse and profit sharing leads to an increased volatility. This is because the assumptions are based on estimates that are subject to changes over time. This has an influence on the amount of the technical expenses and technical provisions. As the technical provisions item amounts to € 12 billion, a minor amendment to the actuarial assumptions can lead to a significant change in the technical expenses.

The comparability of the net profit of SNS REAAL for 2005 and 2004 has been outlined in table 2 through the adjustment of the effects of non-recurring items, an approximation of the firsttime adoption of IFRS and normalisations.

The summary shows that the net operating profit of SNS REAAL for 2005 increased by 24.7% to € 323 million. The comparable net profit, with net operating profit adjusted for the effect of capitalising internal acquisition costs, the effects of the supposed results with respect to the realisation policy, the effect of fair value of derivatives and normalised penalty interest, improved by 20.5% from € 258 million in 2004 to € 311 million in 2005.

� ComparablenetprofitSNSREAAL


Net profit 323 288 12.2%

Non-recurringitems:-BookprofitonsaleSNSREAALInvest ‑‑ (29)

Net operating profit 323 259 24.7%

IFRSitems:-Capitalisationofinternalacquisitioncosts

REAALVerzekeringen ‑‑ 32

-RealisationpolicyoninvestmentsREAALVerzekeringen ‑‑ (48)

-FairvaluederivativesSNSBank ‑‑ 15

Normaliseitems:-Penaltyinterestsforearlyredemption

SNSBank (12) ‑‑

Comparable net profit 311 258 20.5%


The new production for Non-life was € 35 million and increased by € 9 million (+34.6%) in comparison with 2004.

The investment income for the account and risk of REAAL Verzekeringen fell by € 73 million to € 545 million in 2005 (-11.8%). Applying the IFRS principles IAS 32 and 39 with effect from 2004 instead of 2005, and taking account of a supposed realisation policy in 2004, investment income would have stayed at pratically the same level as in 2004: € 545 million.

The investment income on behalf of policyholders showed a strong increase in 2005 of € 268 million to € 394 million (+212.7%) because of an improved climate on the stock exchange. The investments of policyholders primarily consist of equities, which led to significant benefits from the positive stock market price development in 2005.

ExpensesThe increase in income was also accompanied by an increase in expenses of € 248 million to € 3.1 billion (+8.8%). The technical insurance expenses, including profit sharing and rebates, rose by € 258 million to € 2.1 billion (+14.0%). The technical insurance expenses for own account dropped by € 93 million to € 1.3 billion (-6.6%), partly due to the lower production of single-premium policies at the life operations and the lower claims at the non-life operations. The technical insurance expenses on behalf of policyholders rose by € 351 million to € 782 million (+81.4%). This increase is the effect of the improved investment income for insurance contracts on behalf of policyholders. External acquisition costs increased by € 45 million due to increased production via intermediaries and authorised agents. The increase in expenses was limited by lower additions to credit provisions (resulting in lower Value adjustments for receivables) and the capitalisation of internal acquisition costs with effect from 1 January 2005.

As part of the implementation of IFRS 4, SNS REAAL has decided to bring the accounting of the internal acquisition costs more into line with the matching principle. With effect from 2005, the internal acquisition costs are amortised over the average term of the periods for which the premiums are received. The impact on the 2005 result of the change in this accounting principle amounts to € 43 million before tax (€ 30 million after tax).

The capitalisation of the internal acquisition costs in

2005 had a cost-reducing effect of € 23 million on the Staff costs and € 20 million on the other operational expenses in 2005. If the acquisition costs had been capitalised in 2004, the cost-reducing effect on the Staff costs would have been € 25 million and on the other operating expenses it would have been € 22 million in 2004.

The low tax burden for 2005 amounts to 22.4%, but is nevertheless higher than the tax burden for 2004. The lower tax burden in 2004 was mainly the effect of a higher participation exemption and a higher release from the tax provision.

Return on shareholders’ equityWith 14.1% (year-end 2004: 16.6%), return on SNS REAAL shareholders’ equity remains high and substantially exceeds the minimum requirement of 12.5%. The return on shareholders’ equity of SNS Bank increased from 12.0% in 2004 to 14.9% in 2005.Following additions to the shareholders’ equity of REAAL Verzekeringen, including unrealised exchange gains and losses on the ‘available for sale’ portfolio under IFRS (€ 149 million), shareholders’ equity increased by € 384 million to € 1.2 billion in 2005. Despite an improvement in net profit, this led to a drop in the return of the shareholders’ equity to 12.9% (year-end 2004: 16.8%). This is higher than the internal requirement of 12.5%. The return for the non-life business was 18.4%.

Both in 2004 and in 2005, the number of outstanding ordinary shares of SNS REAAL was 208,801,030 with a nominal value of € 1.63 per share. The earnings per share for 2005 are € 1.55 (2004: € 1.38).

BalancesheetThe SNS REAAL’s net assets have grown with € 8.1 billion at year-end 2004 to € 68.1 billion (+13.5%).

Group equityCompared to 2004, the group equity of SNS REAAL rose by € 648 million from € 1.9 billion to € 2.5 billion. This increase in equity was caused by the net profit for 2005 (€ 323 million), the nonrecurring equity adjustments following the first-time adoption of IFRS 4, IAS 32 and 39 (€ 159 million) and direct movements in equity (€ 166 million, in particular because of unrealised revaluation adjustments on investments).

The capital base of SNS Bank increased by € 110 million to € 2.6 billion (+4.4%). This was caused by the increase in shareholders’ equity of € 131 million as a consequence of the result for the financial year


amounting to € 204 million less the already paid interim dividend of € 73 million to SNS REAAL. Under IFRS, the participation certificates amounting to € 298 million are recognised under the liabilities but remain part of the Tier 1 capital for solvency reporting purposes. Benefits paid to the holders of participation certificates are presented under IFRS as interest charges within the net interest income.

The capital base of REAAL Verzekeringen increased by € 379 million to € 1.3 billion (+40.3%). This was caused by a rise of shareholders’ equity, mainly as a result of profit in the year, the revaluation reserve, and the rise of the cash flow hedge reserve.

The double leverage, representing the relationship between the net asset value of the participating interest and the shareholders’ equity of SNS REAAL, decreased from 114.3% in 2004 to 105.3% at year-end 2005 mainly following dividend payments made by SNS Bank and REAAL Verzekeringen.

SolvencyThe strong solvency position of SNS Bank remains unchanged. At year-end 2005, the Tier 1 ratio of SNS Bank was 8.7% (2004: 8.7%) of the risk-weighted assets. The BIS ratio at year-end 2005 was 11.9% (2004: 11.7%).

The solvency of REAAL Verzekeringen increased substantially, both in the Life and the Non-life operations. At Life, it increased from 192% to 233%, and at Non-life from 261% to 275%.

Adequacy testUnder IFRS 4, an adequacy test should be performed with each external report. The adequacy test for REAAL Life indicates that the provisions are more than sufficient based on prudent assumptions. The adequacy test for REAAL Non-life shows that the provisions are adequate.

MortgagesCompared to year-end 2004, the mortgage portfolio of SNS REAAL increased by € 3.6 billion to € 43.5 billion (+9.1%). The market share of SNS Bank, measured in the number of new mortgages, came to 8.3% (2004: 9.1%). At year-end 2005 € 7.6 billion of the total mortgage portfolio was securitised.

InvestmentsInvestments increased by € 1.6 billion in 2005 to € 12.6 billion at year-end (+14.6%). Of this increase, € 1.0 billion relates to investments for own risk

and € 628 million to investments on behalf of policyholders. The increase in investments for own risk results mainly from new premium income and the acquisition of NHL.

SavingsAt year-end 2005, savings amounted to € 12.3 billion and thus showed a rise of € 1.4 billion (+12.4%) compared to the previous financial year. The successful SNS SpaarMix and Ideaal Sparen products are responsible for the biggest share in the increase in savings.

Technical provisions, insurance operationsTechnical provisions for insurance operations increased by € 1.3 billion as a result of the increased

5

4

9

10

7

8

11

13

%

6

12

2001 2002 2003 2004 2005

BIS ratioTier 1 ratio

Core Capital ratio

6 SolvencyratiosSNSBank

0

200

250

100

150

300

450

50

500

400

350

%

2001 2002 2003 2004 2005

Life Non-life

5 SolvencyREAALVerzekeringen


production of insurance products. The most significant effects on the balance sheet as at year-end 2005 following the acquisition of Nieuwe Hollandse Lloyd are the increase of € 356 million in the investments for own account and risk, of € 263 million in the investments on behalf of policyholders and of € 566 million in the technical provision for insurance operations.

FundingSNS Bank has various funding programmes. In addition to the increase in savings, the financing of the growth of mortgage receivables (€ 3.6 billion) has taken place by means of the issuance of debt certifi-cates (€ 2.2 billion). During 2005, the bank issued € 2.6 billion in privately negotiated loans. At year-end 2005, € 15.9 billion was outstanding under the Euro Medium Term Note programme. The bank also makes use of its Australian A$ 3 billion MTN programme. In 2005, this programme was used to issue an A$ 600 million loan. In 2005, the bank continued with its securitisation of mortgages by issuing its 9th and 10th Hermes transactions of € 1.5 billion each.

ResultsongroupactivitiesThe group activities include the business units that are managed directly from within SNS REAAL and whose income and expenses are not attributed to SNS Bank or REAAL Verzekeringen. SNS REAAL Invest forms part of these group activities. The net result on group activities decreased from a profit of € 8.3 million for 2004 to a loss of € 20.9 million for 2005. This was primarily caused by the lower profit of SNS REAAL Invest, which fell from € 38 million in 2004 to € 5 million in 2005 following the disposal of a major part of its participations in 2004 in the context of winding down activities. The costs of the group activities concern the holding company and funding costs.


SNS Bank

SNS Bank presents an excellent result for 2005. A net profit of € 204 million was realised for the year, an increase of € 53 million (+35.1%) compared to the previous financial year. The operating profit before taxation rose by € 63 million from € 195 million in 2004 to € 258 million in 2005 (+32.3%). In 2005, SNS Bank realised a substantial increase in the total income of € 68 million to € 764 million (+9.8%). As a result of strict cost control combined with falling additions to credit provisions, total expenses increased by only 1.8% in 2005 to € 507 million.

ResultThe figures have been influenced by IFRS effects, therefore underlying trends are not so easily visible. The net profit of SNS Bank for 2005 and 2004 has been made more comparable in table 3 through normalisation and an approximation of the firsttime adoption of IFRS.

The summary shows that the net operating profit of SNS Bank for 2005 increased by 35.1%. Adjusting net operating profit for a supposed effect of fair value on derivates in 2004, and normalising for penalty interest in 2005, the comparable IFRS net profit would lead to a increase of 15.7% from € 166 million in 2004 to € 192 million in 2005.

NetinterestincomeInterest income grew by € 24 million to € 595 million (+4.2%). Targeted sales efforts in the mortgage field and the relatively high income from penalty interest had a positive effect on the interest income.

The mortgage portfolio showed an increase of 9.3% to € 42.6 billion. Targeted actions and innovative products supported this development. In addition there was an increase in interest income combined with a slight rise of the risk-weighted assets resulting in an improvement of the balance between the interest margin and the risk-weighted assets of 2.8% in 2004 to 2.9% in 2005.

As a result of the introduction of IFRS, the income from penalty interest is accounted for immediately as interest income, whereas these results were amortised in the past. In 2005, the bank received € 90 million in penalty interest which – mitigated by the application of hedge accounting and the penalty

interest of early redemption of funding – had a positive effect of € 46 million on the net interest income. An amount of € 28 million was accounted for as penalty interest in 2004.

RetailFor the Retail segment, the net interest income for 2005 is € 561 million, an improvement of € 27 million (+5.1%) compared to 2004.Total income of the Retail segment increased by € 60 million in 2005 (+9.7%) to € 676 million at year-end 2005. Despite a net mortgage production increase by € 3.6 billion (+9.3%) the market share of mortgages is lower at 8.3% at year-end 2005 than at year-end 2004 (9.1%) due to fierce price competition. The gross inflow of mortgages increased by 14.8% to € 8.6 billion.On the other hand, the market share of savings increased from 5.7% at year-end 2004 to 6.0% at

3 ComparablenetprofitSNSBank


Net profit 204 151 35.1%

Non-recurringitems: ‑‑ ‑‑


IFRSitems:-Fairvaluederivatives ‑‑ 15

Normaliseitems:-Penaltyinterestforearlyredemption (12) ‑‑


0

100

250

200

150

50

2001 2002 2003 2004 2005

€ millions

Net profit SNS Bank

7 NetprofitSNSBank



Result

Net interest income 595 571 4.2%Netcommissionandmanagementfees 114 109 4.6%Investmentincome 26 21 23.8%Incomefromderivativesandotherfinancialinstruments 33 (7) 571.4%Otheroperatingincome (4) 2 (300.0%)

Total Income 764 696 9.8%

Valueadjustmentsonfinancialinstrumentsandotherassets 50 59 (15.3%)Staffcosts 258 251 2.8%Depreciationontangibleandintangiblefixedassets 27 28 (3.6%)Otheroperatingexpenses 172 160 7.5%

Total Expenses 507 498 1.8%

Shareintheresultofassociatedsubsidiaries 1 (3) 133.3%

Operating profit before taxation 258 195 32.3%Taxes 54 44 22.7%

Net profit 204 151 35.1%


Balancesheet

Shareholders’equity 1,440 1,313 9.7%Capitalbase 2,590 2,480 4.4%Savings 12,333 10,973 12.4%Debtcertificatesandotherliabilitiestocustomersandcreditinstitutions 36,062 32,420 11.2%Mortgageloans 42,558 38,937 9.3%Otherassets 6,785 5,186 30.8%Totalassets 53,098 47,242 12.4%Riskweightedassets 20,175 20,037 0.7%

Inpercentage 3�-��-�005 3�-��-�004

Ratio’s

Returnonshareholders’equity 14.9% 12.0%Efficiencyratio 59.8% 63.1%Bisratio 11.9% 11.7%Tier�ratio 8.7% 8.7%Interest income to risk weighted assets 2.9% 2.8%Credit provision to risk weighted assets 0.80% 0.72%Value adjustments to risk weighted assets 0.25% 0.29%

In€millions Retail Commercial Total

�005 �004 �005 �004 �005 �004

Total assets 49,�5� 43,035 3,947 4,207 53,098 47,242 Totalincome 676 6�6 88 80 764 696 Netinterestincome 56� 534 34 37 595 571

SNSBank


0.60

0

0.80

0.90

1.00

0.70

0.50

0.40

0.30

0.20

0.10

%

2001 2002 2003 2004 2005

Credit provision to risk-weighted assets SNS Bank

9 Provisionforbaddebtstorisk-weightedassetsSNSBank

year-end 2005. The total savings portfolio amounted to € 12.3 billion at year-end 2005, representing an increase of € 1.4 billion (+12.4%) in comparison with year-end 2004. This growth was largely achieved with the SNS Spaarmix product.

ASN Bank was very successful in acquiring more than 60,000 new clients in 2005 thanks to the ASN Ideaalsparen product. BLG Hypotheken performed strongly with respect to the increase of the mortgage portfolio and efficiency improvement. CVB Bank further extended its network in 2005, with the milestone of 400 intermediaries being exceeded. The total funds under management of SNS Fundcoach experienced considerable growth in 2005 of over € 250 million to € 296 million. This also translates into higher securities commission receipts of € 2 million for 2005. The position of SNS Bank in the Randstad area has been further strengthened up to 16 branches.

CommercialsegmentFor the Commercial (‘Zakelijk’) segment, net interest income for 2005 is € 34 million, representing a drop of € 3 million (-8.1%) compared to 2004. Despite an improvement in the interest margin for 2005, net interest income fell in volume.Total income of the commercial segment increased by € 8 million in 2005 (+10.0%) to € 88 million at year-end 2005.

SNS Asset Management saw a strong improvement in the managed assets by € 2.6 billion to € 14.3 billion in 2005 (+ 22.2%) as a result of inflow into existing portfolios and positive price developments.

CommissionandmanagementfeesNet commission and management fees in 2005 increased by € 5 million to € 114 million (+4.6%). The increase in net commission is due to the rise in insurance and securities commission. At SNS Bank and BLG Hypotheken insurance commission increased through the sale of non-life insurance policies, while there was a strong increase in securities commission at SNS Fundcoach and SNS Securities. In addition, SNS Securities led two capital market transactions.

The increase in management fees is mainly due to the increase in the managed assets at SNS Asset Management and the funds under management at ASN Bank.

InvestmentsIncome on investments increased by € 5 million to € 26 million (+23.8%), mainly through the improved results on securities and debt papers. This includes gains and losses at ASN Bank and SNS Bank on bonds available for sale, as well as result on shares and dividend.

DerivativesThe results on derivatives and other financial instruments rose in 2005 by € 40 million to € 33 million. Due to the implementation of IFRS, the derivatives are carried at market value with effect from 2005. For the most part, SNS Bank applies hedge accounting to the derivatives book. The increase in the results from derivatives and other

2.00

1.50

3.00

3.50

4.00

2.50

%

2001 2002 2003 2004 2005

Interest income to risk-weighted assets SNS Bank

8 Interestincometorisk-weightedassetsSNSBank


financial instruments is the result of a positive development of the interest rate curve associated with an increase in the market value of the derivatives and ineffectiveness in the application of hedge accounting.

OperatingexpensesUnder the influence of strict cost control, total expenses only rose slightly by € 9 million from € 498 million in 2004 to € 507 million in 2005 (+1.8%). The increase in expenses was caused by an increase in the staff costs and other operating expenses. The increase in staff costs is related to the hiring of temporary staff in the sales organisation and the increase in regulations, including Basel II and IFRS. The number of permanent staff declined in 2005 by 170 FTEs to 3,158 FTEs (2004: 3,328 FTEs). The increase in operating expenses in 2005 is related to an increase in the marketing and communication costs as a result of a new marketing efforts and various media campaigns, among other things.

ValueadjustmentsValue adjustments costs fell by € 9 million in 2005 to € 50 million (-15.3%) due to a substantially lower addition to the provision for business loans.The addition for Value adjustments on mortgage items was € 18 million (2004: € 19 million) and for personal loans € 11 million (2004: € 10 million). The commercial portfolio showed a € 9 million decrease in these additions to € 24 million. The negative trend of increasing additions to the credit provision has thus been stopped. This is the outcome of measures taken to this effect in recent years, such as more active credit management in the branch office organisation, organisational changes and an acceleration in the foreclosure process at bad debt management. Value adjustments expressed as a percentage of risk-weighted assets decreased from 0.29% to 0.25% in 2005.

EfficiencyratioThe increase in 2005 in total income (€ 764 million) on the one hand and total operating expenses excluding value adjustments of financial instruments and other assets (€ 457 million) on the other resulted in an improvement of the efficiency ratio to 59.8% (year-end 2004: 63.1%). This efficiency ratio is among the lowest in the Netherlands. This demonstrates the operational efficiency of SNS Bank due to the high quality of the back office and its systems.

66

52

707274

68

646260585654

%

2001 2002 2003 2004 2005

Efficiency ratio SNS Bank

�0 EfficiencyratioSNSBank

TaxburdenThe tax burden for 2005 amounts to 20.9% and is lower than the tax burden for 2004 (22.6%). The lower tax burden is particularly caused by the decrease in the nominal corporation tax rate in 2005 (from 34.5% to 31.5%).


REAAL VerzekeringenFor 2005, REAAL Verzekeringen achieved a growth in net profit of € 12 million to € 140 million (+9.4%). Life operations showed a € 19 million increase in net profits to € 113 million (+20.2%). The net profit of the Non-life operations decreased by € 7 million to € 27 million (-20.6%). The net profit for 2005 includes the € 3.4 million profit of Nieuwe Hollandse Lloyd (NHL), which forms part of REAAL Verzekeringen with effect from 20 September 2005.

The figures have been influenced by IFRS effects, therefore underlying trends are not so easily visible. The net profit of REAAL Verzekeringen for 2005 and 2004 has been made more comparable in table 4 through the adjustment of the effects of an approxi-mation of the firsttime adoption of IFRS.

ResultThe net operating profit of REAAL Verzekeringen increased by 9.4% in 2005 to € 140 million. Taking into account the effect of capitalising internal acquisition costs and the supposed effect of the realisation policy, the approximation of the comparable net profit increased by 25.0% in 2005 from € 112 million to € 140 million.Total income increased by € 295 million (+12.1%) from € 2.4 billion for 2004 to € 2.7 billion for 2005. Total expenses increased by € 272 million to € 2.5 billion (+12.0%).

LifeinsuranceLife insurance operations again showed strong growth in 2005 in the life insurance products, also leading to stronger growth than seen in the market. The structure of the Unit-Linked products for both private clients and the pension variation for small enterprises in particular was the foundation for this success. In addition, the quick and innovative response to trends in the distribution field with new forms of distribution and partnerships has contributed to this.The market share for new production of regular-premium private life insurance policies increased to 15.2% (2004: 12.6%). Regular and single Life premiums rose by € 68 million to € 1.4 billion (+5.0%). The new annual premium Life equivalent (sum of 100% of the new premium income and 10% of the new single premiums excluding single premium profits) increased by € 28 million to € 200 million (2004: € 172 million). Regular premiums rose

by € 77 million to € 838 million (+10.1%).At year-end 2005, the market share of single premiums was 7.7% and showed an increasing trend during 2005 following a drop at the beginning of the year due to fierce price competition. Despite an improving market share, Life single premiums declined by € 9 million to € 584 million (-1.5%) in 2005.

Non-lifeinsuranceNon-life premiums increased by € 27 million to € 323 million (9.1%). New input in the non-life operations increased in 2005, particularly as a result of new impulses of the acquired NHL portfolio. The acquisition in September 2005 led to a better diversification of the turnover across the lines. This also led to a position being acquired in new lines, such as co-insurance and disability insurance. The Motor vehicle sector faced more cancellations due to increased price competition.

4 ComparablenetprofitREAALVerzekeringen


Net profit 140 128 9.4%

Non-recurringitems ‑‑ ‑‑


IFRSitems:-Capitalisationinternalacquisitioncosts ‑‑ 32

-Realisationpolicyoninvestments ‑‑ (48)


-100

-50

0

100

150

50

2001 2002 2003 2004 2005

€ millions

Net profit REAAL Verzekeringen

�� NetprofitREAALVerzekeringen



Result

Net regular life premium 838 761 10.1%Netsinglelifepremium 584 593 (1.5%)Netnon-lifepremium 323 296 9.1%

Net premium income 1,745 1,650 5.8%

Investmentincome 545 618 (11.8%)Investmentincomeonbehalfofpolicyholders 394 126 212.7%Incomefromderivativesandotherfinancialinstruments (2) ‑‑ ‑‑Netcommissionandmanagementfees 43 31 38.7%Otheroperatingincome 5 10 (50.0%)

Total income 2,730 2,435 12.1%

Technicalexpensesoninsurancecontracts 1,313 1,406 (6.6%)Technicalexpensesoninsurancecontractsonbehalfofpolicyholders 782 431 81.4%

Technical expenses 2,095 1,837 14.0%

Acquisitioncostsforinsurancecontracts 188 140 34.3%Valueadjustmentsonfinancialinstrumentsandotherassets 7 9 (22.2%)Staffcosts 127 151 (15.9%)Depreciationontangibleandintangiblefixedassets 11 14 (21.4%)Otheroperatingexpenses 69 60 15.0%Otherinterestcharges 41 55 (25.5%)

Total expenses 2,538 2,266 12.0%

Shareintheresultofassociatedcompanies 2 ‑‑ ‑‑

Operating profit before taxation 194 169 14.8%Taxes 54 41 31.7%Third-partyinterest ‑‑ ‑‑ ‑‑

Net profit 140 128 9.4%

Net profit Life 113 94 20.2%Net profit Non-life 27 34 (20.6%)


Balancesheet

Shareholders’equity 1,190 806 47.6%Capitalbase 1,320 941 40.3%Technicalprovisions,insuranceoperations 12,694 11,330 12.0%Investments 9,749 8,878 9.8%Investmentsforinsuranceproductsonbehalfofpolicyholders 3,426 2,798 22.4%Totalassets 15,456 13,264 16.5%

Inpercentage 3�-��-�005 3�-��-�004

Ratios

Returnonshareholders’equity 12.9% 16.8%Operatingcost-premiumratio,excludingcapitalisationofinternalacquisitioncosts 16.9% 17.2%Operatingcost-premiumratio,includingcapitalisationofinternalacquisitioncosts 13.5% 13.2%SolvencyLifeinsuranceoperations 233% 192%SolvencyNon-lifeinsuranceoperations 275% 261%NewannualpremiumequivalentLifeinsuranceoperations(millioneuro’s) 200 172 CombinedratioNon-lifeinsuranceoperations 98.1% 93.6%

REAALVerzekeringen


Direct-writer Proteq achieved growth in the portfolio in 2005. The collaboration with Route Mobiel has proven a success which is reflected in the sale of over 83,000 policies. The market-leader position of Dier & Zorg (pet care) has also been strengthened. In 2005, REAAL Non-life has further increased the number of underwriting agents.

InvestmentincomeIncome from investments for own risk fell by € 73 million to € 545 million in 2005 (-11.8%). This development is affected by the adoption of IFRS (IAS 32 and 39), which were not included in the comparative figures for 2004. Adoption the IFRS principles IAS 32 and 39 with effect from 2004 instead of 2005, and taking account of a supposed realisation policy in 2004, investment income would have stayed at practically the same level as in 2004 (€ 545 million).

The investment income on behalf of policyholders showed a strong increase in 2005 of € 268 million to € 394 million (+212.7%) because of an improved climate on the stock exchange. The investments of policyholders primarily consist of equities, which led to significant benefits from the positive stock market price development in 2005.

CommissionandmanagementfeesCommission and management fees received increased by € 12 million from € 31 million in 2004 to € 43 million in 2005 (+38.7%). This increase is the result of higher management fees from mortgage partners and other expense allowances.

Technicalexpenses,insuranceoperationsThe technical expenses of the insurance operations rose by € 258 million to € 2.1 billion (+14.0%). The expenses for own account dropped by € 93 million to € 1.3 billion (-6.6%), while those for account and risk of policyholders rose by € 351 million to € 782 million (+81.4%). This latter increase comes from the higher result on investments for insurance contracts on behalf of policyholders.

AcquisitioncostsThe increase in the acquisition costs of € 48 million to € 188 million (+34.3%) is the effect of increased production by intermediaries and authorised agents. As part of the implementation of IFRS 4, SNS REAAL has decided to bring the accounting of the internal acquisition costs more into line with the matching principle. With effect from 2005, the internal acquisition costs are amortised over the

average term of the periods for which the premiums are received. The impact on the 2005 result of the change in this accounting principle amounts to € 43 million before tax (€ 30 million after tax).

The capitalisation of the internal acquisition costs in 2005 had a cost-reducing effect of € 23 million on the Staff costs and € 20 million on the other operating expenses in 2005. If the acquisition costs had been capitalised in 2004, the cost-reducing effect in 2004 would have been € 25 million on the Staff costs and € 22 million on the other operating expenses.

OperatingexpensesNot taking account of the effects of capitalising internal acquisition costs, Staff costs decreased by € 1 million in 2005 to € 150 million (-0.7%). Other operating expenses increased by € 29 million to € 89 million in 2005 (+48.3%) which is the effect of the inclusion of the operating expenses of NHL and the corresponding integration costs. Furthermore, there are a number of major projects, including in the field of legislation and regulations and further computerising and improvement of administrative processes.

Legislators are rapidly introducing new regulations, which insurance companies have to comply with. The implementation of the new legislation and regulations in the administrative systems required a lot of attention and will continue to do so in the near future. Cost control on the implementation of the legislation and regulations is achieved by a timely and disciplined project-based approach. In addition, the increasing use of the modular structure of products and the scale expansion in the primary processes also contribute to the cost control.

Operatingcost-premiumratioNot taking account of the effects of capitalising the internal acquisition costs, the cost-premium ratio is 16.9% in 2005, which is 0.3 percentage points lower than in 2004. If the effects of capitalising the internal acquisition costs are taken into account, the cost-premium ratio is 13.5%, which is 0.3 percentage points higher than in 2004.The higher management fees and regular premiums had a positive effect on the cost-premium ratio in 2005. Higher operating expenses in 2005 had a negative effect. REAAL Verzekeringen is taking steps to further improve operational efficiency through modifications in the ICT environment and the organisation of the work processes.


This process is called ‘Straight Through Processing’ and chain integration.

TaxburdenThe tax burden for 2005 amounts to 27.8% and is thus higher than the tax burden for 2004 (24.3%). The higher tax burden in 2005 is related to the higher participation exemption in 2004.

LifeLife operations realised a net profit of € 113 million and thus had a very good year (2004: € 94 million). The premium income from the life insurance operations rose in 2005 by € 68 million to € 1.4 billion (+5.0%). This increase is the effect of higher new production through a combination of growth via intermediaries and special distribution channels. Single Life premiums dropped slightly.

The technical insurance expenses on insurance contracts for own risk decreased by € 102 million in 2005 compared to 2004. The technical expenses on insurance contracts on behalf of policyholders rose by € 351 million to € 782 million (+81.4%). This increase is the effect of the improved result on investments for insurance contracts on behalf of policyholders.

The operating expenses decreased as a result of strict cost control and capitalisation of internalacquisition costs with effect from the 2005 financial year.

Non-lifeThe net profit on Non-life operations declined by € 7 million to € 27 million because of the € 18 million increase in operating expenses, despite an improved claims result. Net premium income from the Non-life insurance operations rose by € 27 million in 2005 to € 323 million (+9.1%). Of this growth, € 19 million represents the acquisition of NHL and € 8 million the increased production. This led to an increase in the technical insurance expenses of € 9 million in the previous year to € 165 million, and of € 11 million to € 85 million in the acquisition costs. The claims ratio fell to 51.7% in 2005 (year-end 2004: 51.8%) due to a lower loss frequency and the absence of major claims. Combined with the strictly monitored operating expenses, the lower cost of claims resulted in a good combined ratio at 98.1%. The increase of € 18 million in operating expenses was mainly caused by the inclusion of the operating expenses of NHL , higher allocation of operational expenses to non-life and the integration costs of NHL.

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Operating cost/premium ratioEffect of capitalising the internal acquisition costs

�� Operatingcost/premiumratio


SNS REAAL regards risk management along with capital management, pricing and

portfolio management as the four pillars of an integrated policy aiming towards the

creation of long-term value.

Risk managementWhilst the risk profile has an impact on the capital requirements, the available capital places a limit on the group’s risk tolerance. Prices must be based on expected and unexpected losses and capital require-ments. Precise and risk-based pricing ensures that product portfolios always have wide enough margins to guarantee the creation of long-term value. As part of portfolio management, products and activities are analysed in terms of risk versus return.

The four chief outside stakeholders in respect of risk management and value creation are shareholders, clients, supervisory authorities and lenders. SNS REAAL strives towards long-term value creation for shareholders within the pre-conditions to its targeted moderate risk profile. Satisfaction of these pre-conditions should enable SNS REAAL to fulfil its obligations towards clients and debtors. SNS REAAL seeks to make its risk management and value creation transparent to its stakeholders so they can see how their interests are being promoted.

The risk policy focuses on keeping SNS REAAL’s risk profile at the targeted low level and to enable the value creation framework to function properly. To this end the Group Executive Board has installed a risk management organisation consisting of:�.� Riskprinciples�.� Riskcommittees�.3 Riskmanagementdepartments�.4 Riskclassification

These components, which are encased in the ‘shell’ in figure 13, support the four pillars of the core business which create value:�.� Capitalmanagement�.�Pricing�.3Portfoliomanagement�.4Riskmanagement

Risk management organisation

RiskprinciplesWith a view to an integrated and cohesive organi-sation, the Group Executive Board has defined a number of principles which apply to all risk categories. These principles are vital to SNS REAAL’s risk framework:§ The Group Executive Board is ultimately

responsible for risk management.§ The Chief Financial Officer of SNS REAAL is also

the Chief Risk Officer of SNS REAAL. § The Group Executive Board and SNS Bank’s and

REAAL Verzekeringen’s Boards of Directors have their own risk owners who are responsible for defining and implementing risk policy in the target areas assigned to them.

§ SNS REAAL has and will maintain at least a

Valuecreation

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principles Risk comm

ittees

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�3 Valuecreationbyriskmanagement


solid A rating from rating agencies. This goal determines the group’s risk tolerance per risk category.

§ With a view to uniform internal communication, group-wide use is made of the universal definitions of risk categories: risk classification.

§ Risk tolerance determines the control objectives, acceptance criteria and behavioural codes for each risk type.

§ SNS REAAL draws a distinction between three risk management levels:

- the line management organisation is responsible for the risk and its management.

- the risk management departments support the line management with advice and by monitoring the positions.

- the internal audit department (the Group Audit Department) checks the structure and performance of the risk organisation and operations.

§ Stress tests are performed for the chief risks of each business unit and measures are set down for emergency situations.

§ The Group Executive Board has installed a number of risk committees and risk management departments with clearly defined tasks, responsibilities and authorisations. Committees have been installed at group level and at the bank and insurer.

§ The models for risk management are regularly tested.

RiskcommitteesThe Supervisory Board has installed an Audit Committee from amongst its members. This committee oversees the quality and work of the organisation and the risk management operations. The Audit Committee evaluates the structure and performance of the risk management organisation and liaises with the external auditor, internal audit department and certifying actuary to this end. The Audit Committee prepares the decision-making in the Supervisory Board on these topics.

The SNS REAAL Risk Policy Committee consists of the Group Executive Board, the director of A/L & Risk Management and the director of Legal & Compliance. This committee sets the strategic risk policy, sets up the group-wide risk management organisation and converts the group’s risk tolerance (risk appetite) into standards and limits for the various risks within which the entities can operate. In addition, it sets the mandates for the other risk committees.

The SNS REAAL Asset & Liability Committee (ALCO Group) steers the bank’s and insurer’s balance sheet. The ALCO Group consists of the Group Executive Board, the CFOs of SNS Bank and REAAL Verzekeringen and the director of A/L & Risk Management, the head of Asset & Liability Management and the director of SNS Asset Management. The bank’s and insurer’s operational ALCOs take decisions within their mandates and carry out the decisions of the ALCO Group.

The SNS Bank’s Risk Policy Committee and the Insurer’s Risk Policy Committee, consisting of the Boards of Directors, are overall risk committees where risks are managed at the executive level.

SNS Bank’s credit decisions are taken by the Bank’s Credit Committee and those of REAAL Verzekeringen by the Insurer’s Credit Committee, which consist of the Boards of Directors. These committees advise on credit limits, counterparty limits and the acceptance of large items. The Bank’s Price Risk Committee and the Insurer’s Price Risk Committee, with representa-tives from product management, sales, service centres, Management Accounting and A/L & Risk Management, give advice on client rates. The bank’s price risk committee is also responsible for steering the mortgage portfolio.

RiskmanagementdepartmentsThe Group Executive Board has installed a number of group staff departments with the task of advising on risk management and reporting on the risk

Structure

Risk supervision: Supervisory Board

Risk policy: Group Executive Board

Risk management: Risk committees/Risk management

departments

SNS REAAL Risk Policy Committee

ALCO Group

Boards of Directors

Price Risk Committees

Credit Committees

Operational ALCOs


profile. This promotes efficiency and uniformity. The risk management departments operate as shared service centres for the banking and insurance operations. The directors of these group staff departments report hierarchically to the Group Executive Board and functionally to the responsible officers at the bank and insurer. Aside from defining definitions and policy, they are responsible for modelling, measuring, monitoring, reporting and advising with respect to risks.

Asset/Liability & Risk Management A/L & Risk Management supports the Group Executive Board and the Boards of Directors with the following: § Determining the desired risk profile§ Measuring the portfolio value for value creation§ Determining the prices of products and services

on the basis of risk-weighted return§ The choice of products and services fitting in

with the desired risk profile§ Asset and liability management for the banking

and insurance operations § Funding and capitalisation§ Portfolio management and credit risk modelling § Insurance technical portfolio management§ Operational risk§ Actuarial reporting

Legal and Compliance Legal & Compliance prepares policy and supports operations for risk management; its main tasks are§ Identifying and advising on present and future

legislation and regulations§ Advising on aspects of integrity and the duty to

exercise due care§ Preparing and implementing policy with respect

to the exercise of integrity and due care.

Local compliance officers have been installed in SNS REAAL’s main business units; they report to the Head of Compliance. The independent position of the compliance officers is guaranteed in a charter adopted by the Group Executive Board.

The Director of Legal & Compliance reports directly to the chairman of the Group Executive Board and is authorised to report to the chairman of the Supervisory Board if need be.

Group AuditGroup Audit provides the Group Executive Board and both Boards of Directors with optimum assurance concerning the effectiveness and the efficiency of

the internal risk management and control system, the effectiveness of the related processing systems and the reliability of the management information.

Group Audit evaluates the structure of the control procedures and reports to the Group Executive Board and both Boards of Directors to this extent. The Audit Committee and the Supervisory Board are also informed about the chief findings on the quality of the risk management organisation.

Group Audit reports directly to the chairman of the Group Executive Board. In this way, the department

Mostimportantchangesintheriskmanagementorganisation

§ The structure of the risk management committees has been greatly simplified. The ORM Committee, the Compliance Comittee and the Duty of Care Committee (WfD+) have been combined into the Group Risk Policy Committee. There is now a transparent and uniform committee structure for the Group, Bank and Insurer.

§ The risk reporting to the Group Executive Board and to the Supervisory Board has been broadened and, besides market risk, now also covers insurance technical risk, credit risk, operational risk, compliance and duty of care. The Group Executive Board and the Supervisory Board thus have a complete picture of the risk profile of SNS REAAL.

§ Within the scope of Basel II and IFRS, disclosure of the risk profile and the risk policy in the annual report has signifi-cantly increased.

§ An ‘In Control’ programme has been established to enable the organisation to issue a well-founded ‘In Control’ statement.

§ The Group’s risk appetite has been translated into policy, limits and control objectives for the various types of risk.

§ To improve accountability, a risk owner has been appointed at the level of Board of Directors or Group Executive Board for each type of risk.

§ Strategic risk analyses were performed in 2005 as a standard part of the risk framework. The Group Executive Board and the Boards of Directors evaluate the most important strategic risks and opportunities, decide upon actions in the operational plans and monitor these on a quarterly basis.

§ A business control framework has been established. § The SNS Bank Administrative Organisation department has

been incorporated in the Business Process Management department.

§ The Actuarial department has been amalgamated with the Asset/Liability & Risk Management department. As a result, it is easier to apply risk-based prices and to comply with the future risk-based supervision (Solvency II).


is able to perform its activities independently of the business units and the departments of SNS REAAL. In exceptional cases, the director of Group Audit is able to contact the chairman of the Audit Committee and the chairman of the Supervisory Board directly.

Group Audit reports on the result of its investiga-tions to the director responsible within the Board of Directors; the Group Executive Board receives a summary of the report. Summaries, by means of quarterly reports, are provided via the Boards of Directors to the Group Executive Board and subse-quently the Audit Committee.Besides the three corporate staff departments referred to, the Internal Control and Credit Risk Management departments are active within the organisation in the field of risk management: Internal Control The Internal Control departments of SNS REAAL, SNS Bank and REAAL Verzekeringen check the control measures in the procedures for the line management. By keeping to SNS REAAL’s general risk definitions and goals, this ensures that the findings are ‘weighed’ against the uniform standard and that proper management information is generated in relation to the organisational and process goals.

Credit Risk ManagementCredit Risk Management, a department of SNS Bank, focuses on policy preparation and operational support for credit risk management. The director of Credit Risk Management reports directly to the CFO of SNS Bank. Arrears Management (Business) and Arrears Management (Private) are also part of the Credit Risk Management department. Credit Risk Management’s chief tasks are as follows§ Analysing the business credit recommendations

and advising on them to the responsible officer or Credit Committee

§ Administering and managing the loan facilities and collateral

§ Managing and settling loans in arrears§ Preparing and setting down credit policy and the

related communications§ Preparing operational management reports on

credit management (Management Information System)

Riskclassification

Strategic riskThe risk of not achieving goals because no or a lacking response was made to changes in outside factors.

Market riskThe risk of market prices changing such that they have negative consequences for the results and/or the net assets. Market prices include interest rates, the price of equities and exchange rates.

Credit riskThe risk of a debtor defaulting in whole or in part or of its position deteriorating such that it has a negative impact on the results and/or the net asset value.

Insurance technical riskThe risk of the size and timing of cash outflows in connection with mortality, invalidity, non-life claims or insurance behaviour falling short of expectations.

Liquidity riskThe risk that funding and cash and cash equivalents are completely or partly unavailable such that the company cannot meet its financial obligations in the short term.

Operational riskThe risk of incurring losses on account of inadequate or failing internal processes or systems, through insufficient, negligent or criminal behaviour or due to external events.

Behaviour-related riskThe risk of insufficient compliance with legislation, regulations, company values or codes of conduct on integrity and the duty to exercise due care.


Activities for value creation

Introduction:SNSREAAL’sriskprofileSNS REAAL strives towards maintaining its modest risk profile with a healthy balance between risk and return. The risk profile depends on the following factors§ The focus on retail and retail-plus clients§ The focus on three core product groups§ The diversification within the portfolios § The focus on the Netherlands§ Prudential reinsurance policy§ The bancassurance model§ The diversification within the distribution

channels § The limited risk with respect to the pension

commitments

SNS REAAL believes that focusing on the retail and SME markets carries a lower risk than providing bancassurance services to large companies. Furthermore, SNS Bank’s assets consist primarily of private mortgages, which have traditionally been known for their low credit losses in the Netherlands. The focus on a limited number of core products – mortgages, savings and investments and insurance – combined with the focus on a limited number of client groups and product standardi-sation has made business less risky than if we were to offer a more extensive range of products. Plus, our chief operations are well diversified thanks to the large number of limited exposures.

On top of this, the Netherlands has a well-developed economy with reasonably predictable and stable growth. SNS REAAL’s management’s long-standing focus on the Netherlands is therefore a positive factor. REAAL Verzekeringen’s reinsurance policy restricts the losses from calamities to levels which fit in with SNS REAAL’s moderate risk profile. Furthermore, the impact of interest rate fluctua-tions on the trend in growth from the banking and insurance operations generally balances out. The bancassurance model therefore automatically provides a natural hedge against interest rate risks.

A lot is changing with respect to the distribution of financial services. New competitors are entering the retail market, both horizontal and vertical integration are taking placed in the distribution field and business models are being modified. SNS REAAL is, however, hardly affected by this because it has a wide range of distribution channels and strategies.

Furthermore, one of the strong points of the company is that it can react rapidly to changes in the world around it.

Finally, SNS REAAL believes that the company’s risk profile has benefited from making the SNS REAAL pension fund independent in 2005, as well as from the conversion to a defined contribution system.

CapitalmanagementSNS REAAL’s capitalisation policy focuses on capital structure optimisation with a view to achieving SNS REAAL’s strategic goals. This means that capital management must generate at least 10% growth in profits and at least 12.5% return on equity whilst satisfying the requirements of the§ Dutch central bank (De Nederlandsche Bank;

DNB)§ European Union (EU) legislation§ Rating agencies§ Internal requirements with respect to the funding

SNS Bank aims for at least an 11% BIS ratio, at least an 8% Tier 1 ratio and at least a 6% core capital ratio. REAAL Verzekeringen has its own standard of achieving 150% of the Dutch central bank’s standard for life insurance and 200% of their standard for non-life insurance.SNS REAAL applies a 115% ceiling for its double leverage. This standard limits the degree to which debt capital raised by the group can be passed on to subsidiaries as shareholders’ equity. This ratio has greatly improved during the past few years (see graph 14 on page 54).

5 Solvencystandards

Entity Standard Internalstandard

SNS REAAL Double leverage < 115%

REAAL Verzekeringen

Double leverage < 115%

CAR from S&P > 150%

Dutch central bank standard for life insurance > 150%

Dutch central bank standard for non-life insurance > 200%

SNS Bank BIS ratio > 11%

Tier 1 ratio > 8%

Core Capital > 6%


For assessing capital adequacy, increasingly more account is being taken of the economic risks of the underlying activities. These are assessed using economic capital and stress tests. We expect the supervisory authorities and rating agencies to gradually adopt this approach in the future, i.e. they will increasingly base their opinion on the company’s own estimates. That makes a proper underpinning for the stress tests and transparency on the assumptions vital.

The capitalisation mix – the relationship between shareholders’ equity, subordinated loans and hybrids – is determined by the goal of maintaining a solid single A rating.

To plan funding, commercial plans are prepared each year with a three-year horizon. Asset/Liability & Risk Management subsequently prepares a funding plan with the same term in which the capital requirements and their fulfilment are set such that SNS REAAL can satisfy the internal and external standards. Instruments to lower the risk and to increase the available capital are used for capital management. SNS Bank’s and REAAL Verzekerin-gen’s capital is a mixture of various kinds of capital, with the emphasis on shareholders’ equity. Different bandwidths are applied per entity for the other classes of capital. SNS REAAL is more than capable of funding its own organic growth in the coming years.

Each month, SNS Bank makes a twelve-month rolling forecast for its capital requirements. By extension of this monitoring, measures can be taken such as securitisation or raising subordinated loans. SNS Bank has excellent access to the financial markets.

Economic capitalEconomic capital is one of the chief parameters for SNS REAAL’s risk profile. SNS REAAL describes economic capital as the capital necessary to cover the economic risks of all activities within the period of one year. A 99.96% reliability level is applied. SNS REAAL is constantly improving and fine-tuning its own economic capital methodology.

Aggregation--across all risk classes – is used to determine whether the institution as a whole is sufficiently capitalised. A relationship is established between capital requirements and earnings to determine whether the right risk/return choices have been made. The economic capital model helps

to make risk attribution across the risk classes transparent and manageable and to clarify the company’s risk profile.

To determine whether a company is solvent in an economic sense, the economic capital (capital requirements on an economic basis) is compared with the fair market value of shareholders’ equity (available capital on an economic basis). The latter is defined as the difference between the fair market value of assets and liabilities. This means that the value of all balance sheet items is measured on an economic basis: market prices for current assets, present value of the cash flows for non-current assets and liabilities, including derivative measurement techniques for embedded options and guarantees in products.

In practice, SNS REAAL also faces the solvency requirements of the Dutch central bank. Graph 15 shows the necessary required supervisory capital along with the economic capital. Supervisory capital is defined for these purposes according to the internal guidance of a BIS ratio of 11% for SNS Bank, 150% for Life and 200% for Non-life at REAAL Verzekeringen. The reason for the large difference between the necessary supervisory capital and economic capital at SNS Bank is that for a well diversified retail portfolio the bank can suffice with holding much less capital according to real economic principles than according to the capital requirements of the supervisory authority. SNS REAAL also benefits from a natural hedge between the ALM positions in its banking and insurance operations. This reduces the amount of economic capital it needs to hold at group level in comparison

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�4 DoubleleverageSNSREAAL


with the supervisory capital, which takes no account of the diversification between banking and insurance operations. To further illustrate the group’s risk profile, graph 16 divides economic capital into the various risk classes.

In the calculation of economic capital, account is taken of diversification effects, both between risk types and product groups.The reason for these diversification effects is that not all risks are perfectly correlated. At SNS Bank and REAAL Verzekeringen no account is taken of diversification between banking and insurance operations.

PricingSNS REAAL believes that disciplined, underpinned and uniform market rates have played a key role in its success in recent years and that these form a chief pillar for long term value creation. Expected risk and capitalisation costs are important building blocks in this respect. Examples of risks which are used to set rates include credit risk for mortgages, mortality risk for life insurance contracts and uncertainties about policyholder or mortgage client behaviour.

Since the anticipated risks as well as capitalisation and organisational costs are shown separately in our rates, we can determine where the windfalls and setbacks have occurred when analysing our profits. This is then used for revising client rates to the latest data, which lowers the risk of carrying unprofitable products further down the road.

Actual client rates are set on the basis of advice from the bank’s and insurer’s Price Risk Committees. Aside from theoretical rates, account is also taken of

market conditions, volume targets, required return and room for special offers.

PortfoliomanagementPortfolio management is an important part of promoting long-term value creation and reducing risks. We continuously evaluate whether the return generated by our product lines and business units merits the related risks and capital tie-up. We also link our results to our economic capital and review the risk/return ratio of each business unit. From a portfolio management perspective, it was decided in recent years to discontinue the operations of SNS REAAL Invest.

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�5 Necessaryversusrequiredcapital(year-end�005)

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�6 Economiccapitaltothetypeofrisk(year-end�005)

SNSREAAL SNSBank REAALVerzekeringen


The ALM position in our banking and insurance operations is also evaluated in this context. As a result, REAAL Verzekeringen’s position in equities will be been slightly broadened and its interest rate position reduced. This will create a more favourable risk/return profile for the insurance operations and SNS REAAL.

RiskmanagementSTRATEGIC RISKThe strategic risk is the risk of not achieving goals because no or a lacking response was made to changes in outside factors. Possible causes are insufficient efforts to promote core products, a drop in demand for core products, tougher competition or new regulations.

Basel II and Solvency II are supervisory regimes under development for the banking and insurance industries. Based on risk-based supervision, these regimes fit in perfectly with the economic capital concept which is gaining increasing currency in the financial world. SNS REAAL is preparing for these developments.

Basel IIThe capital that banks are required to hold as a buffer against unexpected losses is based on the 1988 Basle capital accord. The final text of the new capital accord – known as Basel II – was presented in June 2004. Basel II is expected to take force by the end of 2006. In September 2005, the European Parliament approved the Capital Requirement Directive, which transforms the Basle capital accord into European regulations. This now forms the basis for the national legislation in the member states.

The new capital accord proposes to introduce more risk-sensitive capital requirements. These allow banks – under strict conditions – to use internal risk analysis systems for calculating their minimum capital requirement. SNS Bank is actively preparing for these new regulations. The bank’s Risk Policy Committee is responsible for implementing Basel II.

Credit riskIn respect of its credit risk, SNS Bank has decided to take the Internal Rating Based Approach towards its chief credit portfolios: mortgages, small business loans and consumer loans. To this end, SNS Bank has been developing internal scoring models which, aside from calculating its minimum capital requirement, can be used to accept, manage, monitor and steer loans and credit portfolios. The related systems and procedures have largely been modified for this purpose.

Operational riskFor its operational risk, SNS Bank will continue with the standardised approach. A loss database has been implemented for collecting data on operational incidents which have (almost) generated a loss. Risk self-assessment sessions are also conducted to check business processes for possible operational gaps or defects and to make any necessary improvements.

Other risksAside from the minimum capital requirements based on prescribed and modelled risk weights, SNS Bank is also required to ensure that its other risks and its internal management satisfy the requirements of Basel II. SNS Bank has set up a process to this end that it can regularly use to test the adequacy of its capital.

With a view to meeting the deadline for reporting according to the new rules, SNS bank has been implementing a new data and reporting system. Calculations recently made as part of Quantitative Impact Study 5 on the basis of Basel II models and the results from internal computations show that the new accord does justice to SNS Bank’s low risk profile. We therefore anticipate a clearly lower capital requirement in the medium term.

Solvency IIAlthough the ultimate shape of the Solvency II-framework is not clear yet, certain aspects of this European solvency framework have begun to emerge. The chief aspect is risk management based on the fair market value of investments and liabilities. SNS REAAL subscribes to this risk control approach and has already adopted the fair value approach for its ALM and value management. Given the present status of our internal economic capital models and our experience with Basel II at SNS Bank, we foresee no major problems implementing Solvency II.

BaselIIandSolvencyII


SNS REAAL sets its strategy down in a long-term plan. This strategy is revised each year in a process which includes identifying the strategic risks. Implementation of this strategy is closely followed in the quarterly business reviews. The yearly strategic risk analysis is a useful tool in this respect. The Group Executive Board and Board of Directors use it to identify and classify strategic risks in conjunction with SNS REAAL’s goals. The risks are assessed for their potential negative impact on the company’s strategy and the necessary steps are taken in the operational plans.

MARKET RISKMarket risk is the risk of market prices changing such that they have negative consequences for the company’s results and/or net assets. Market prices include interest rates, the price of equities and exchange rates.

Market risk profileFluctuations in the financial markets – interest rates, the price of equities and bonds, real estate prices, exchange rates – have an impact on SNS REAAL’s results and net assets. The degree of fluctuation is quantified in the market/ALM risk category.

Interest rate risk features prominently in SNS REAAL’s moderate risk profile. Interest rate risk is caused by differences in the interest rate sensitivity of the assets and liabilities on SNS REAAL’s balance sheet. As a rule, the assets on the bank’s balance sheet have a longer duration than the liabilities, whilst the opposite is true for the insurer’s balance sheet. Given its balance sheet structure, SNS Bank usually benefits from a decrease in interest rates and REAAL Verzekeringen from an increase. This is SNS REAAL’s natural hedge.

Market risk – SNS Bank’s bank bookThe interest rate risk in the bank’s portfolio is measured, monitored and managed using duration, Value at Risk, Earnings at Risk and gapping analyses (see insert on page 58). These are used to make a comparative assessment between the risk and expected return on the interest rate position.

The equity duration is the primary indicator for interest rate risk. The bandwidth of this measure is between 3 and 8. The ALCO Group sets a new bandwidth each year. Risk/return factors and the short term and medium term forecast on interest rate trends are used for steering purposes within the bandwidth. Given the anticipated and actual

drop in interest rates during the year, the equity duration in 2005 generally hovered round the top of the bandwidth. The end of 2005 shows a decreasing equity duration in connection with the upward trend in long-term interest rates. This resulted from our forecast on rising interest rates in 2006 and the flat interest rate curve at the end of 2005.

SNS Bank also regularly examines the sensitivity of the result and equity to changes in interest rates and shares prices. The results of this sensitivity test as at year-end 2005 are as follows (see table 6).

Value at Risk during 2005 did not exceed 12.5% of the fair market value of equity. Earnings at Risk during 2005 did not exceed 8.7% of the budgeted gross interest income on a yearly basis. No additional measures were necessary during 2005 to adjust the position on the basis of Value at Risk and Earnings at Risk.

Proposal risk is the risk of the bank having to offer a lower interest rate if the interest rate drops between when a proposal is submitted and the contract is executed. This risk is managed separately. Each month, the costs and the risk are used to decide whether or not to apply a hedge. In 2005, it was repeatedly decided not to hedge the proposal risk.

All of SNS Bank’s foreign exchange positions are measured monthly and directly hedged on a structural basis. Market risk – SNS Bank’s trading bookSNS Bank runs only a limited market risk with its trading book; this risk is calculatedon a daily basis and managed via a system of limits. The framework for Value at Risk and stress limits for extreme circumstances also functioned well in 2005 (see tables 7 and 8). The ‘utilisation rate’ for both

6 Sensitivitytest SNS Bank (year-end 2005)

In€millions

Change Fair

mar

ket

valu

eof

sh

areh

olde

rs’

equi

ty

Resu

lt

Shar

ehol

ders

’eq

uity

und

er

IFRS

DN

Bso

lven

cy

Interest +1% ‑141 ‑6 ‑43 ‑0.02%-point

Interest -1% +153 +6 +43 +0.02%-point

Shares +10% +2 0 +1 0.00%-point

Shares -10% ‑2 0 ‑1 0.00%-point


10

5

7

9

32

6

8

4

%

Jan Oct NovMar May Jul SepAugFeb Apr Jun Dec

Upper and lower limit equity duration Equity duration bank book

EquitydurationSNSBank(�005)

7

6

11

13

14

9

8

12

10

% of fair market value of shareholders’ equity


Value at risk

ValueatRiskSNSBank(�005)

7.5

8.5

9.0

6.5

6.0

8.0

7.0

% of gross interest margin

Jan NovMar May Jul Sep OctAugFeb Apr Jun Dec

Earnings at risk

EarningsatRiskSNSBank(�005)

-4,000

0

1,000

2,000

-2,000

-1,000

-3,000

€ millions

m1-3-426

y7-32

y10334

y11-15123

m7-9476

y2-340

y4631

y6-9

y8164

y9-278

y5626

m4-6-2.773

m10-121.230

y31.481

y15206

December 2005

InterestrategapsSNSBank(December�005)

Riskindicatorsforthemarketrisk

Equity duration (at fair market value)Equity duration is the difference between the fair mar-ket value of the assets and liabilities on the balance sheet. Equity duration illustrates (for small interest rate fluctuations) what effect a parallel shift in the interest rate curve would have on the fair market value of equity. With a duration of 2, for example, the fair market value of equity increases (decreases) by roughly 2% with a parallel decrease (increase) in the interest rate curve by 1%.

Value at Risk (VaR)VaR measures – with 99% reliability--the maximum losses that can be incurred in the fair market value of equity during a certain period of time owing to fluctuations in risk factors such as interest rate changes and fluctuations in the price of equities, real estate and foreign exchange. For SNS Bank, VaR is computed with a one-year horizon assuming that SNS Bank’s risk profile remains the same during that year. Although no VaR is computed for REAAL Verzekeringen, the risks are brought into focus via the economic capital and equity duration risk indicators.

Earnings at Risk (EaR)EaR measures – with 99% reliability – the maximum loss in SNS Bank’s gross interest income during the period of one year owing to fluctuations in inter-est rate levels. Although no EaR is yet calculated for REAAL Verzekeringen, the impact of fixed sce-narios on its results is measured (see also ‘Market risk – REAAL Verzekeringen’).

VaR and EaR are both determined using a scenario analysis. Changes in the fair market value of equity and changes in net interest income, for example, are determined for 10,000 scenarios for the underlying risk factors. With 99% reliability, VaR and EaR are equal to the 1% worst outcome of changes in the fair market value of equity in the net interest income, respectively.

Interest rate gapsAside from equity duration, Value at Risk and Earn-ings at Risk, use can also be made of the net (assets less liabilities) nominal amounts due per interest rate period in a gap profile (see graph).


limits was low throughout 2005. The Value at Risk method consists of scenario (Monte Carlo) analyses and stress tests. The underlying scenarios are benchmarked using historical data.

The economic capital for the trading book amounted in 2005 to less than 1% of SNS REAAL’s total economic capital consumption.

Market risk – REAAL VerzekeringenWhen changes occur in the financial markets, REAAL Verzekeringen is exposed to market risk if changes in the value of investments (equities, real estate, fixed-income) do not keep pace with the value of its liabilities. The ALM risk is reported quarterly to the Insurance ALCO, which is where the risks are also controlled and where risk/return-related decisions are taken. The chief quantification of the risk takes place by calculating the ALM/economic capital, scenario analyses and duration analyses.

Investment policyThe market risk occupies a large portion of the total economic capital at SNS REAAL, SNS Bank and REAAL Verzekeringen. REAAL Verzekeringen’s policy cornerstone on this risk is its investment plan, which sets out the strategic investment policy for the coming years on the basis of an ALM study. This ALM study aims to strike a balance between risk and return within the pre-conditions for solvency, the score in the Standard & Poor’s rating model (CAR ratio) and the investment income. The fixed-income part of the investment portfolio is kept within a pre-defined maturity bandwidth with the liabilities. Furthermore, the portfolio is well spread over regions, industries and companies.

An important consequence of the ALM study is the strategic increase of shares in the investment portfolio. This interest grew to 10% in November and December 2005.

REAAL Verzekeringen’s investment mix at year-end 2005 was as follows (see table 9 on page 60), not including investments for the account and risk of policyholders (unit-linked insurance).

In 2005, the low interest rate environment was a permanent agenda point for the Insurance ALCO. The main driver for REAAL Verzekeringen’s ALM position up to 1 January 2005 was the duration of the fixed-income portfolio; since then the duration of the fair market value of equity has been the chief management variable for the ALM position.

At the beginning of the year, a growth path for the duration of the shareholders’ equity was agreed (see the lower straight line in graph 17 on page 60). During 2005, the duration of the shareholders’ equity dropped below the growth pad on three occasions, but steps were taken to move the duration of the shareholders’ equity upwards. The reason for the drop below the growth pad is that the duration of the shareholders’ equity is very sensitive to changes in the interest when the interest rate level is low. This is caused by the fact that the market value and the duration of the guarantees in the obligations change rapidly with movements in the interest rate. The duration of the fixed interest investments changes to a much lesser extent with the same interest rate changes. At the beginning of 2006, ALCO Group decided to use the growth path for duration as evaluation trigger and also to introduce a limit system based on value-at-risk (VaR). The reason for choosing VaR as leading risk criterion is that interest rate and equity risk are then measured simultaneously. This has become important following the increase in the proportion of shares in the investment portfolio of REAAL Verzekeringen at the end of 2005.

7 ValueatRisk(99%ondaybasis)

Desk (€ 1.000) Limit

FX/Corporate desk 50

Money market desk 700

Capital market desk 150

Off balance desk 200

Equities desk 500

Derivatives desk 100

Bonds desk 300

Total 2,000

8 Stress test

Desk(€�.000) Limit

FX/Corporate desk 150

Money market desk 2,100

Capital market desk 450

Off balance desk 600

Equities desk 1,500

Derivatives desk 300

Bonds desk 900

Total 6,000


A sensitivity test is used to check on a regular basis the effect of changes in the interest rate and/or equity markets on the results, equity and solvency. See table 10 for the results of this sensitivity test as at year-end 2005.

CREDIT RISKCredit risk is the risk of a debtor defaulting in whole or in part, or of its position deteriorating such that it has a negative impact on the company’s results and/or net assets.

SNS REAAL’s credit risk profileSNS REAAL recognises various types of credit risk. Of these, mortgages (with an 78% share in terms of exposure) are by far the most important (see table 11). Given the good cover and low chance of default on these loans, the risk profile of the total credit portfolio is very low.

Tasks, authorisations and responsibilities are determined for officers and committees (with stepped decision-making powers) per credit risk class. These are set down in the policy documents for each credit risk class.

SNS Bank’s credit management for mortgages and other consumer loans§ Trend in house pricesThe main factor for credit losses on mortgages is the trend in house prices. The reason is that if house prices rise, the bank’s loss in the case of forced sales is very limited, whilst the losses can be very significant if prices drop. SNS Bank therefore keeps careful track of the actual and forecast increase in house prices. If necessary, the acceptance conditions are modified to keep pace with the trend in house prices.

The bank expects a stable or slightly upward trend in house prices for the coming years. One reason for the possible increase in prices is the limited and disappointing growth in the amount of available residential accommodation whilst growth in the number of single-person households coupled with higher incomes and personal net worth have been stimulating demand. Negative factors are the very gradual decrease in the deductibility of mortgage interest and the relatively high house prices. According to the price trend forecasts for the coming years, no changes to the acceptance conditions will be necessary.

§ Financing own homeIn the Netherlands, the cost of financing the purchase of one’s own home is tax-deductible. This makes it attractive to borrow a relatively large amount. From an international perspective, the Dutch market therefore has relatively high Loan to Foreclosure Value ratios. The credit risk, however, is largely mitigated given the general presence of collateral in the form of pledged life insurance policies or savings and investments. The actual and forecast credit risk losses are therefore extremely limited.

�0 SensitivitytestREAALVerzekeringen(year-end�005)

In€millions

Change Fair

mar

ket

valu

eof

sh

areh

olde

rs’

equi

ty

Resu

lt

Shar

ehol

ders

’eq

uity

und

er

IFRS

DN

Bso

lven

cy

Interest +1% +19 +2 ‑203 0%-point

Interest -1% ‑185 ‑2 +203 0%-point

Shares +10% +112 0 +77 +15%-point

Shares -10% ‑112 ‑49 ‑77 ‑15%-point

9 InvestmentmixREAALVerzekeringen

Year-end�005 �005

Fixed-income 76%

- Government 34%

- AAA/AA 16%

- A/BBB 13%

- High Yield 1%

- Mortgages 12%

Equities 10%

Real estate 4%

Otherassets 10%

-25

-30

-5

5

10

-15

-20

0

-10

%


Upper limit Actual equity duration Growth path

�7 EquitydurationREAALVerzekeringen


�� BreakdownofSNSREAAL’screditportfolio(year-end�005)

In€millions �005

Mortgage loans, SNS Bank 42,601

Business loans, SNS Bank 2,176

Consumer credit, SNS Bank 615

Mortgage loans, REAAL Verzekeringen (excluding savings) 988

Investment portfolio, fixed interest, REAAL Verzekeringen 2,884

Loans to intermediaries, REAAL Verzekeringen 50

Claims on reinsurers 371

Bankcounterparties(includingderivatives) 5,033

Total 54,718

In 2005, the bank examined the extent to which the portfolio is in line with the market. The conclusion was that the portfolio is comparable to the market for practically all risk indicators.

§ Credit managementConsumer loans consisting of mortgage loans or consumer credit are accepted by the relevant authorised officers on the basis of an extensive system of acceptance standards and policy rules. The acceptance score models developed in part within the Basel II framework play a supporting role.

Credit management for established clients takes place at client level by actively monitoring and following up on delays in payment. A Portfolio Management Process is used for the effective management of credit risks at portfolio level and to prevent concentration risks. There are three parts to this process: definition of a target portfolio, monthly portfolio monitoring (including reporting) and portfolio adjustment.

The instruments for adjusting the portfolio consist of pricing policy, acceptance and management policy, special offers (marketing) and product development.

§ Infection rate and advance financing Decisions on these adjustments are taken in the Bank’s Price Risk Committee. This committee manages the portfolio on the basis of a number of risk indicators, such as the ‘infection rate’ and the ‘Loan to Foreclosure Value’ (LtFV). The infection rate is the number of clients being dealt with by Arrears Management as a percentage of the total portfolio. At the end of 2003, the infection rate was 2.93%, which fell to 1.87% at year-end 2004 and 1.46% at year-end 2005.

The LtFV illustrates the ‘advance financing’ by taking the total exposure as a percentage of the foreclosure value of the collateral. The ‘Loan to Market Value’ is related to the market value of the collateral.

Where the mortgage portfolio of SNS Bank is concerned, the weighted average LtFV is 92% (on the basis of indexed LtFV: 81%). The weighted average ‘Loan to Market Value’ is 80% (indexed: 71%). The relatively high percentage is caused by the tax regime in the Netherlands. Less than 100% advance financing applies to 60% of the mortgages.

§ Losses on mortgagesIn the 1990s, the losses realised on the mortgage portfolio were well below 0.01% (see graph 18). This can be explained by economic growth, relatively low unemployment and continually rising house prices in that decade. SNS REAAL sees the cause of the increase in losses since 2003 as the negative economic trend with a deterioration in household incomes and the slower rise in house prices.SNS REAAL considers it unlikely that the current level of losses – 0.062% – will significantly increase in the coming period. The reasons for this include the further increase in house prices in 2005 and the improved procedures with respect to arrears management (see box on page 62). Furthermore, SNS Bank is accommodating the acceptance process with a centralised mid office for the entire distribution network.

§ Stress testsSNS Bank subjects its mortgage portfolio to a stress test twice a year. By using scenarios with extreme market conditions, a picture emerges of the conse-quences of this for the bank’s income and equity.

5,000

0

25,000

35,000

40,000

15,000

10,000

30,000

20,000

0

0.100

0.025

0.075

0.050

€ millions %

2002 20031995 1997 1999 200120001994 1996 1998 20052004

Mortgage portfolio Losses in a percentage of the portfolio

�8 LossesontheresidentialmortgageportfolioSNSBank


One of these scenarios is based on the phasing out of the tax deductibility of mortgage interest. The expectation is that such a measure will on its own lead to falling house prices and loss of purchasing power. Applied to SNS Bank’s internal credit risk models, this scenario produces an increase in both the risk of non-payment and the loss through non-payment. However, based on the current LtFV profile of the bank’s mortgage portfolio, it is not expected that the bank’s equity will be significantly affected by such a legal amendment.

Credit management for commercial credit portfoliosFor commercial lending, SNS Bank’s Board of Directors has delegated the lending process by means of an authorisation system. The Credit Committee is authorised to approve loans above €2 million. Loans up to that amount are approved by officers who have been appointed for this purpose on the basis of the double-check principle and in accordance with the approval matrix. Credit approval authorities are assigned to the relevant officers depending on the amount of the loan and the loan class. Applications for loans above €750,000 are analysed by the Credit Analysis department and submitted – along with its recommendation – to the relevant loan officer or Credit Committee. Commercial loans above €750,000 are reviewed each year in a process where the client’s creditworthiness is re-assessed using their latest annual figures. Loans under €750,000 are reviewed once a year depending on their risk class.

Credit control at client level is implemented using the Credit Risk Management Information System, which uses a number of risk indicators each day to detect potential problems at an early stage. Risks are tracked at portfolio level on a quarterly basis using extensive reports on movements in the commercial credit portfolio. Aside from the infection rate, the division over the various industries is followed in this report and adjusted where necessary. The infection rate showed an upward trend in the past year. This reflects the economic situation in the SME segments where SNS Bank operates.

Table 12 shows the spread across the various lines of business of the commercial portfolio. ‘Property lease and trade’ forms the largest part of the category Service sector companies, and largely concerns the mortgage-backed financing of commercial real estate.

The top-10 commercial clients have a 13% share in the portfolio (see table 13). The top-10 non-performing loans represent 2.25% of the portfolio (see table 14).

Arrears ManagementThe timely engagement of the Arrears Management department is a vital part of the risk policy for retail and SME clients. Should it emerge that a borrower is not able to fulfil their obligations to the bank, or if a borrower’s financial position has deteriorated to the extent that they will be unable to fulfil their obligations in the near future, the borrower is passed to the Arrears Management department. Part of Credit Risk Management, this department takes measures depending on the gravity of the problem to minimise the bank’s risk. Each quarter, the department also determines the level for the necessary provision and makes a recommendation to SNS Bank’s Credit Committee to this extent.

Provisioning policyIn 2005, SNS Bank structured its risk provisioning policy according to IFRS. The provisions for the retail portfolios – mortgage loans and consumer

With a view to the further improvement of the risk management for its mortgage portfolios, SNS Bank has started a Mortgage Risk Management programme. Part of this programme involves optimising arrears management. SNS Bank achieved the following improvements in 2006 as a result:§ Centralisation and concentration of arrears management

so that expertise can be pooled and truly risky items can be identified more quickly.

§ More uniform and professional procedures for delayed payments and special management items (e.g. by using a prioritisation tool).

§ Earlier execution on property if clients are unable to make payment.

Optimal arrears management for SNS Bank’s mortgage portfolios

�� Commercialportfolio(year-end�005)

Businesssector Breakdown

Public sector 16.8%

Agriculture and horticulture, forestry and fishery 0.7%

Industry 2.9%

Servicesectorcompanies 40.3%

Financialinstitutions 16.9%

Other 22.4%

Total 100%


�3 Top-�0commercialclientsbasedonlimits

In€millions Limits Debitvolume

Line of business� Healthandwelfare 70.1 49.7� Otherrentalcompanies 66.7 59.43 Otherrentalcompanies 57.7 30.64 Financialinstitutions 55.1 55.15 Propertyleaseandtrade 51.8 47.06 Financialinstitutions 48.9 32.67 Propertyleaseandtrade 47.0 45.68 Financialinstitutions 39.5 23.79 Healthandwelfare 38.7 38.7�0Tradeandrepairofconsumerarticles 37.5 32.1

Total 513.0 414.5

credits – comprise a joint provision for loans and advances with payment arrears (an ‘impairment provision’) and for those portions of the credit portfolio for which there are objective indications that they probably contain losses. The level of the group impairment provision depends on the loan arrears term. Account is taken of the present value of the future execution value of the collateral when determining the level of the provision.

The provisions for commercial loans also consist of an impairment provision and for those portions of the credit portfolio for which there are objective indications that they probably contain losses. When setting the impairment provision, a distinction is drawn between loans of more than €1 million and loans for less than this amount. For the former category, the provision is itemised. For loans of less than €1 million, an amount is determined for the provision as a whole depending on the risk class. The present value of the execution value of the collateral plays a role in setting the level of the provisions for commercial loans (see table 15 on page 64).

Credit management for bank counterpartiesSNS Financial Markets conducts money and capital market transactions with various bank counterparties as part of its treasury and funding policy. This largely concerns short-term loans and derivative transactions to hedge against interest rate and exchange rate risks. Managing these counter-party risks is based on a number of policy points: § SNS Financial Markets may only conduct

transactions ensuing in credit risk with financial counterparties whose limit has been approved by the Credit Committee.

§ Only bank counterparties with at least a single A rating qualify for a limit. The counterparty’s head office must be located in an OECD country.

§ The amount of the limit is capped at the lower of a fixed percentage of SNS Bank’s shareholders’ equity and that of the counterparty.

§ SNS Financial Markets makes use of various risk mitigating contracts such as cash netting agreements, ISDA contracts and Credit Support Annex (CSA) contracts. The credit exposures on the latter contracts are limited by the mutual placement of cash and cash equivalents as collateral.

Credit exposure on REAAL Verzekeringen’s mortgagesREAAL Verzekeringen’s mortgage portfolio consists largely of mortgages with guaranteed redemption

via the National Mortgage Guarantee. Moreover, most of these home mortgage loans were taken out years ago. The rise in the prices of houses in recent years has significantly increased their execution value. In the case of default, the insurer will usually be able to collect its entire debt by foreclosing. REAAL Verzekeringen therefore runs only a very limited credit risk on its mortgage portfolio.

Credit exposure on REAAL Verzekeringen’s intermediaries REAAL Verzekeringen controls the process of extending loans to intermediaries via a special Credit Committee, with the insurer’s CEO as chairman. The test criteria were tightened in 2004 and 2005 and the exposure decreased.

INSuRANCE TECHNICAL RISKThe insurance technical risk is the risk of the size and timing of cash outflows in connection with

�4 Top-�0non-performingloansbasedonexposure

In€millions Exposure

Line of business � Property 17.3

� Civilandutilityconstruction 16.3

3 Property 10.3

4 Property 6.9

5 Removaltransport 3.9

6 Cementindustry 3.7

7 Transport 3.3

8 Hotelandcatering 3.2

9 Leasedproperty 3.2

�0Leasedproperty 3.1

Total 71.1


material risks such as mortality, invalidity, non-life claims or insurance behaviour falling short of expectations.

REAAL Verzekeringen’s portfolio has a low risk profile. The portfolio is well spread for life insurance and non-life insurance alike with the focus on the retail and business markets in the Netherlands.

Risk managementREAAL Verzekeringen limits its insurance technical risk with a system of strict procedures and criteria for product development, acceptance and reservation. If accepted, unsuitable risks or risks which exceed preset limits are reinsured.

Representatives from the Board of Directors and the Financial Reporting & Information Management, Management Accounting and Actuarial departments monitor the portfolio’s development each month. This includes analysing the development of premiums and loss ratios per sector.

Insurance technical risk – LifeComposition of life insurance portfolioREAAL Verzekeringen’s life insurance portfolio contains individual and group insurance policies, both of which are sold as policies with cash benefits (traditional) and with payment in units (investment or unit-linked insurance policies).

With traditional policies, policyholders know exactly how much the contract will pay out. In the case of benefits, REAAL Verzekeringen pays the policyholder

a predetermined amount in euros. With unit-linked contracts, policyholders run a risk on the amount paid out. After all, the insured amount is unit-linked and depends on the value of the funds in which the units have been invested. The policyholder pays a regular or single premium for both kinds of policies.

REAAL Verzekeringen’s focus within its individual life insurance portfolio is on mortgage-related unit-linked policies and pension insurance policies with a regular endowment (the immediate annuity).

Insurance technical risks for life insurance portfolioLife insurance entitles the policyholder to death benefits and/or an endowment.

Longevity and short-life riskThe most significant risk of life insurance policies is the mortality risk. The mortality risk indicates the death benefit risk of the policyholder passing away earlier. In the case of an endowment, the mortality risk for REAAL Verzekeringen is that the policyholder might pass away later than expected.A policyholder’s risk of decease is quantified by his or her rate of mortality. The mortality rates of the Dutch population are researched and published by Statistics Netherlands. REAAL Verzekeringen also researches the mortality rates of its own policyholders. Recent years have shown a decrease in the mortality rates of the Dutch population (and of the population of policyholders insured by REAAL Verzekeringen) and this trend is expected to continue. In other words, people are living longer and longer. Also known as longevity risk, this is primarily a risk

�5 TrendinprovisionforanticipatedloanlossesSNSBank(consolidated)

In€thousands Openingbalance

Write-off Addition Release Closingbalance

Provisionin%ofrisk-weighted

assets

Year�004Mortgages 43,219 16,623 26,580 7,279 45,897

Commercial loans 57,117 26,050 45,430 12,869 63,627

Consumer loans 29,708 4,812 23,263 13,484 34,675

Total 130,044 47,485 95,273 33,632 144,199 0.72%

Year�005Mortgages 50,504 24,613 18,856 1,254 43,493

Commercial loans 76,597 14,578 42,866 18,791 86,094

Consumer loans 34,675 8,427 17,662 6,606 37,304

Total 161,776 47,618 79,384 26,651 166,891 0.80%


factor for endowment insurance. The opposite of longevity risk is short-life risk, which plays a role in death benefits. REAAL has a substan-tially higher volume of products with a short-life risk. Adequacy check DNB at low interest ratesThe chief risk for a life insurance company given today’s low interest rates is the risk of inadequate reserves. Dutch insurers are required by the Dutch central bank (DNB) to perform an adequacy check once a year. This is used to check whether the insurer can fulfil the obligations of its present portfolio taking into account future premiums and benefits paid out on in-force contracts. Future new business is not included in this calculation. The main assumption in this check is the return on the funds to be invested in the future. Unrealised capital gains on the present portfolio are included in forecasting future investment income. REAAL Verzekeringen uses historical data from its own portfolios to estimate the relevant mortality and maturity. Costs are allocated to the products according to internal allocation methods on a going concern basis.

REAAL Verzekeringen performed an adequacy check for the entire life insurance portfolio at the end of September 2005. Three scenarios were extrapolated for the return on investment: 3%, 2.5% and 2%. These scenarios are stricter than those required by the Dutch central bank in the official check. According to the check, only the reserves in the 2% scenario were not fully adequate. Please note, however, that this scenario is very extreme: the entire interest rate curve drops immediately to 2% and remains there until the last benefit has

been paid. The shortfall can easily be funded from shareholders’ equity without jeopardising REAAL Verzekeringen’s strong solvency position.

Policyholder behaviourOther insurance technical risks for the life insurance portfolio are risks associated with the insurance behaviour of policyholders, such as lapse and early surrender (termination of the policy before the maturity date), conversion into a paid-up policy and invalidation or revalidation (the policyholder becomes incapacitated for work).

Catastrophe riskExtremes in the insurance technical risks form a separate risk: catastrophe risk. One example of a catastrophe risk for the mortality risk would be a worldwide flu epidemic. For the risk in connection with the policyholder’s insurance behaviour, one possible example would be the risk of a large intermediary transferring its entire portfolio to a different insurer.

Controlling the risks for the life insurance portfolioThe trends in the insurance technical risks are regularly reviewed. The results of these reviews are used for setting rates and acceptance conditions and measuring the value of the life insurance policies.

Insurance technical risk – Non-lifeThe emphasis of REAAL Verzekeringen’s non-life insurance portfolio is on four main segments: Accident and Health, Fire, Motor Vehicles and Other (see graph 19). The acquisition of the portfolio from Nieuwe Hollandse Lloyd in September 2005 has also

�9 DistributionpremiumincomeandNon-lifeprovision

Transport

Motor vehiclesAccident and Health

Fire

28%

17%

2%

47%

6%

22%

10%

36%

7%

25%

OtherTransport


Fire

28%

17%

2%

47%

6%

22%

10%

36%

7%

25%

Other

Grosspremiumincome(�005) GrossNon-lifeprovision(year-end�005)


increased the number of policies in the Transport segment, even though its share in the total portfolio remains slight.

Controlling non-life insurance riskThe focus on the retail and SME business markets has led to a portfolio characterised by diversification across various segments and sub-segments, on the one hand, and the similarity in the type of insured risks, on the other. The portfolio has a relatively low variability in the technical results.

Controlling claim run-off REAAL Verzekeringen has a special department for handling claims, including claims in respect of bodily injury. This department handles claims on an ‘item-by-item’ basis, makes estimates on the size of the claim and monitors progress on claims-handling. It usually takes a long time to settle claims in these areas. Most of these claims have a run-off of between five and eight years.

CatastropheREAAL reinsures its catastrophe claims resulting from storms and terrorism (see below). Catastrophes arising from acts of violence, nuclear incidents or flooding are excluded under the policy conditions.

Fraudulent claims From a risk perspective, fraudulent claims are defined as claims submitted by policyholders for non-events or claims in which the extent of damage is exaggerated. Fraud supervision has been localised at the various departments, such as Acceptance, Claims and Claims Handling. Fraud prevention and detection efforts were intensified in 2006 such as by setting up a separate Fraud department.

Insurance risk – ReinsuranceReinsurance policyThe reinsurance for REAAL Life and REAAL Non-life is realigned with SNS REAAL’s risk appetite each year. Reinsurance cover takes shape on the basis of the outcomes of the risk analyses on the various portfolios. This includes looking at the effect of reinsurance on solvency, desired return and profitability.

Aside from its regular portfolio protection, REAAL Non-life also has a catastrophe contract for covered natural forces (storm, hail) and accumulation within the fire insurance portfolio (e.g. on account of the fireworks explosion in Enschede). The risk of terrorism is reinsured via NHT, the Dutch reinsurance company for terrorism claims.

Reinsurance, REAAL LifeREAAL Verzekeringen’s life insurance portfolio has seen strong growth in premium income, insured capital and profitability. Research was done into the risk profile of the insurance portfolio in 2005, on the basis of which it has been decided to increase own retention. This should be put into effect with the installation of a completely new reinsurance programme in 2006.

Reinsurance, REAAL Non-lifeThe non-life insurance operations in recent years have increased REAAL’s own retention under the reinsurance contracts to a level that does justice to the size of the various portfolios, the nature of the insurance technical risks, the results and its solvency base (see table 16).

REAAL Verzekeringen has an active policy on where to reinsure its contracts. A distinction is drawn between the palette of reinsures for the property programme (fire and catastrophe) and the casualty programme (car, liability and accidents). Given the long-term nature of the latter programme (claim settlement), continuation of the pallet is the driving factor when deciding where to reinsure the contract.

During recent years, policies on car and personal/business liability were reinsured at Münchener Rück (Germany), Swiss Re (Switzerland), Partner Re (Bermuda), Hannover Re (Germany), GE Solutions (USA) and Secura (Belgium). The minimum rating for this palette is A+. REAAL Verzekeringen has had a lasting relationship with these companies since the end of the 1980s.

A minimum rating of A- applies to fire and catastrophe. Here, the price aspect plays a more important role.

LIquIDITy RISKLiquidity risk is the risk that funding and cash and cash equivalents are completely or partly unavailable such that the company cannot meet its financial obligations in the short term.

SNS REAAL pays ample attention to the management of liquidity risk so that the group has sufficient reserves at its disposal and always remains able to meet its financial obligations.

The liquidity risk is the most important for SNS Bank, the largest borrower within SNS REAAL (see ‘Funding’, page 72). The bank has a broad


investor base, an extensive range of financing instruments and wide access to the international money and capital markets. In 2005, SNS Bank again combined good access to the financial markets with a stable and low credit spread. Maturity of the financing was extended in 2005, as a result of which the maturity of the assets and liabilities are better geared to each other. In this context, the organi-sation benefited from the historically low credit spreads. SNS Bank has the lowest funding costs within all European single A banks. This reflects SNS Bank’s successful market relationships and low risk profile image.

The liquidity risk policy of SNS Bank has four elements:§ Liquidity management assuming a going

concern basis§ Diversification in the funding portfolio§ Liquidity of assets§ Planning for unforeseen events

In the first place, SNS Bank’s liquidity risk management is founded on the composition of its funding portfolio as a going concern. The daily cash management activities of the central treasury are in line with the operational requirements of SNS Bank and take place in accordance with the supervisory guidelines in this field. As part of the ALM report, the A/L & Risk Management department makes a monthly liquidity forecast with a twelve-month horizon and advises the ALCO on how to steer towards the targeted liquidity.

In the second place, SNS Bank strives towards diversification of the funding portfolio with respect to maturity, instrument, currency and type of investor. The maturity of the financing was extended

in 2005 with a view to an improvement of the bank’s liquidity profile.

In the third place, SNS Bank has a broad portfolio of quickly convertible assets, such as government bonds. Furthermore, SNS Bank is able to securitise or sell a major part of the mortgage portfolio within a year.

In the fourth place, SNS Bank performs a stress test in which the contingency planning or the planning for unforeseen events plays an important role. The tests cover various risks with the emphasis on liquidity risk. The plan based on the results contains scenarios with alternatives for refinancing should sudden changes take place in the business activities or on the international financial markets.

OPERATIONAL RISKThe operational risk is the risk of incurring losses on account of inadequate or failing internal processes or systems, through insufficient, negligent or criminal behaviour or due to external events.

SNS REAAL sees operational risk as an integrated part of the line responsibility of each manager, who is supported to this end by specialised group departments.

SNS REAAL has opted for the group-wide implementation of methods and techniques for operational risk management (ORM). This means that SNS Bank and REAAL Verzekeringen take a uniform ORM approach supported by the operational risk management department at group level. The definitions and the framework for operational risk management are based on Basel II for organisations with a standardised approach to the calculation of economic capital.

�6 RetentionREAALVerzekeringen

Ineuro’s �003 �004 �005 �006

Non-lifeCatastrophe 15,000,000 15,000,000 20,000,000 25,000,000

Fire 500,000 700,000 700,000 700,000

Motor Liability 1,200,000 1,200,000 1,200,000 1,200,000

GeneralThirdPartyLiability 500,000 500,000 500,000 500,000

PersonalAccident 150,000 300,000 300,000 300,000

LifeMortality(sumatrisk) 400,000 400,000 400,000 1,000,000

Disability(Life)(yearlyinterest) 20,000 20,000 20,000 35,000

Disability(Non-life)(yearlyinterest) 7,800 7,800 7,800 35,000


The SNS REAAL Risk Policy Committee is responsible for setting risk policy and determining frameworks and instruments. These operations are overseen by the bank’s and insurer’s Risk Policy Committees. Policy is prepared by the A/L & Risk Management department in collaboration with ORM-related expertise functions such as Compliance, Information Security, Business Continuity Management, Human Resources Development, Security and Business Process Management. In the sphere of risk control, the Administrative Organisation and Internal Control departments also play an important role. Administrative Organisation is responsible for clearly documenting these processes and advises the management on how to structure these processes whilst Internal Control evaluates control procedure performance.

The following instruments and measures have been developed and, for the most part, implemented to support risk management:§ Risk self-assessments which the business can

use to identify, assess, prioritise risks and – if desired – suggests ways to improve their control

§ Documentation and analysis of incidents with an actual or potential loss of more than €5,000

§ Indicators for key risks at group and business level for the timely detection of possible incidents

With a view to the continuity of business processes, the most important systems and data files are implemented in parallel, while the data is continually copied to two physically separate locations. This increases the possibility that SNS REAAL is able to continue providing services in the case of a calamity.

BEHAVIOuR-RELATED RISKBehaviour risk is the risk of insufficient compliance with legislation, regulations, company values or codes of conduct on integrity and the duty to exercise due care, etc.

Financial institutions have an important position and responsibility in society. The importance of this position is reflected, for instance, in how society expects financial institutions and their staff to behave and in the growing amount of legislation and regulations on integrity and the duty to exercise due care. Moreover, the Authority for the Financial Markets, a new supervisory authority in the Netherlands, has been created to enforce the legislation and regulations in this area.

SNS REAAL has taken measures to take its responsi-bility and to maintain society’s trust. In this context, SNS REAAL has taken special measures to control the risks of falling short of its own standards and values. The principle underlying these measures is that behaviour risks cannot be controlled by operational measures alone or by laying down regulations and codes of conduct for the staff. Behaviour risk control is also a matter of having the management set a proper example whilst upholding and safeguarding a culture where integrity is part and parcel. Aside from more general measures, SNS REAAL has also taken more specific measures to address three main areas: duty of care, integrity and legislation and regulations.

Duty of careThe measures taken to promote the duty of care aim to ensure that SNS REAAL upholds the statute governing the services rendered by financial institutions. Current themes include the ‘know your client’ principle, the prohibition on over-lending and transparency of product features and costs.

SNS REAAL has taken a number of relevant measures to fulfil its duty of care. During the product development stage, for instance, the key duties of care associated with the product are identified and the fulfilment of these duties is anchored in the business processes used for developing, distributing and selling the product. As a result, fulfilment of the duty of care depends less on the specific circumstances and individual capacities or qualities of the staff.

Furthermore, SNS REAAL has implemented a procedure for checking finished products and advertisements in process and product conditions, e.g. by the Legal department, before they are offered to the public.

IntegritySNS REAAL’s integrity policy is focused on its own integrity as well as that of its clients and business partners.

The integrity of management and staff is ensured by a system of procedures. This system consists of requirements placed on staff conduct, organi-sational and administrative procedures and an enforcement policy. Staff are screened for reliability before being taken on. SNS REAAL’s management is screened by the supervisory authorities (the Dutch


central bank and the Authority for the Financial Markets) for reliability and expertise.

The entire staff is required to observe specific codes of conduct and regulations established to e.g. prevent the unauthorised disclosure of confidential and/or price-sensitive information, conflicts of personal and commercial interests and other inappropriate behaviour. All staff who might have access to price-sensitive information on account of their job are required to make all personal investments via a central staff desk where these transactions are checked. Furthermore, the Compliance department keeps a register of all sideline activities undertaken by senior management. Prior permission is required for certain categories of sideline activities. SNS REAAL is also required to register all serious incidents within its own company and report them to the supervisory authorities.

SNS REAAL’s policy also focuses on the integrity of clients and business partners. The aim of this policy is to ensure the integrity of the financial system. This relational integrity consists of e.g. screening clients (due diligence), monitoring clients’ transactions (partly with a view to combating money-laundering) and refusing to do business (including breaking off relations) with companies which lack the required business permits.

Legislation and regulationsThe financial industry has been faced in recent years with a sharp rise in the amount of new legislation and regulations – with no end in sight. This increase includes regulations for the implementation of European regulations, the reform of the supervisory legislation in the Netherlands and changes in social-economic regulations. With a view to the timely and effective implementation of these new laws and regulations in operations, a procedure has been initiated to bring all new legislation and regulations to the attention of the Legal department in a timely manner and to charge a member of senior management with implementation. The Group Executive Board or the relevant Board of Directors of SNS Bank and/or REAAL Verzekeringen is regularly informed about the progress on implementation so they can take the necessary policy decisions.

Before REAAL Verzekeringen and SNS Bank enter into a cooperation agreement with an intermediary, he should show that he is included in the AFM

register. An additional requirement from REAAL Verzekeringen is that the intermediaries are affiliated to the Klachteninstituut Verzekeringen (Insurance complaints institute).

SNS Bank has its Security department perform an integrity analysis based on the different registers. REAAL Verzekeringen performs a comparability study with a negative outcome resulting in the intermediary not being appointed. Regular checks are made to establish whether the intermediary is still registered with the AFM.

Finally, it is important for SNS REAAL to take sustained efforts to notify the various aspects of integrity and the duty of care to the staff with a view to ensuring a business culture where observing these values is part and parcel. The task of senior management is to promote these values.


Compliance

SNS REAAL sets great store by its integrity, professionalism and good reputation. Its promotion of these values has been set down in the Compliance Statement as follows: ‘SNS REAAL strives to provide high quality services. This is only possible if SNS REAAL and its staff act with complete integrity. This means not only obeying the law but also treating clients with respect and upholding SNS REAAL’s reputation as a trusted partner.’

Business principlesIn a changing and increasingly complex society with ever stricter legislation and regulations, compliance plays an important role. To press its mission home, SNS REAAL has formulated business principles that are the starting point for its policy and day-to-day ‘thinking and doing’. These concern the client focus, professionalism, integrity and social commitment of SNS REAAL’s staff.

Integrity policySNS REAAL’s integrity policy contains rules and procedures that are based on our own principles, legislation and regulations, and codes of conduct in the banking and insurance industry. The underlying premise is that directors, management and staff should act not only in accordance with these rules and procedures but also in the spirit of them. The Compliance department boosts awareness of the integrity rules, advises staff and management to this extent, monitors compliance with them and detects potential shortcomings.

Compliance Manual for Senior ManagementMore specifically, the Compliance Manual for Senior Management provides a summary of the main integrity rules that apply to SNS REAAL’s staff. The manual also includes general rules of conduct such as: § The management of each business unit must set an example and is to ensure the integrity of their staff. § The integrity of all staff of SNS REAAL must be evident beyond the shadow of any doubt. § Staff must refrain from abusing their position or job at SNS REAAL to promote personal (financial) interests.

General Integrity Code of ConductFurthermore, a General Integrity Code of Conduct has been adopted for the staff. This contains rules of conduct concerning the responsible treatment of information, serving clients properly, acting in compliance with the legislation, regulations and internal instructions, avoiding money from criminal sources, avoiding impermissible account construc-tions, and preventing conflicts of business and private interests (e.g. when accepting business gifts or engaging in sideline activities).

Compliance awarenessTo bolster compliance awareness within SNS REAAL, a new approach was taken to implementing the legislation and regulations in which the management and the business units received various tools (including manuals) and in which personal communication with the relevant business units and staff takes place. New regulations are thus first discussed with the directors of all relevant business units within SNS REAAL. Stock is taken of the points for attention and problem areas during these meetings with a view to resolving them to everyone’s satisfaction. Furthermore, the introduction and communication in the business units include regular presentations and workshops for the staff and management. Compliance’s intranet site provides relevant and up-to-date documentation. Regulations on price-sensitive informationCompletion of the price-sensitive information project was a chief milestone in 2005. This project concerned the group-wide introduction of and communication on all legislation and regulations on price-sensitive information. As part of this new approach, a manual on price-sensitive information was created which provides a clear and handy summary of the requirements under all internal regulations; this manual was sent to everyone who deals with this information and to the senior management of SNS REAAL. The internal regulations and manual have been updated to reflect the Market Abuse Act, which took force on 1 October 2005.

Incident managementTo promote proper incident management, a group-wide procedure has been adopted for dealing with incidents. Incidents are taken to mean material events within SNS REAAL which pose a serious risk to the integrity of operations,


such as fraud or serious violation of the integrity regulations with potentially negative publicity. The core of the procedure is that incidents must be dealt with properly and as quickly as possible. All incidents must also be reported to Compliance; certain incidents must also be reported to the supervisory authorities.

Whistleblower protection schemeOn the basis of the best practices in the Dutch Corporate Governance code, SNS REAAL is required to ensure that all staff have the opportunity to report suspected irregularities without fear for their legal position under a whistleblower protection scheme. This is provided for in the ‘Regulation on reporting a suspected abuse’, which has been approved by the Supervisory Board and the Group Executive Board. This regulation has been circulated inside SNS REAAL and published on its intranet and internet site. The regulation provides for a staff counsellor in the person of the director of Human Resources Development. An Abuses Committee has also been installed which is comprised of the secretary of the Group Executive Board and the head of the Compliance department.

‘Customer Due Diligence’In 2005, the REAAL Verzekeringen Customer Due Diligence project group was engaged in the further introduction of and communication on the policy that had been adopted for the Customer Due Diligence (know-your-client principles) for insurers. This policy concerns such areas as client acceptance and identification as well as the categorisation of clients and products into risk classes.

Measures have been taken at SNS Bank on the basis of a scan to bolster awareness of the Customer Due Diligence policy. With a view to improved risk control for the Customer Due Diligence, it was also decided to improve the (digital) archiving system for proofs of ID and national social/fiscal numbers for established as well as new clients. The first steps will be taken in 2006 with a special action plan.


SNS Bank is an active player in international capital markets. The main goal of

the capital market funding activities is to finance and capitalise the bank with

minimal economic costs under limitation of risks. For some years the strategy

of the bank is based on diversification of funding instrument, investor type,

geography and maturity. This strategy has provided SNS Bank with strong access to

international capital markets, which enables the organisation to finance its growth

at competitive levels.

FundingDiversifiedfundingprogramsSNS Bank uses several funding programs (see graph 20 and 21). It has at its disposal a € 20 billion Euro Medium Term Note program (EMTN), under which public and privately placed bonds are issued. SNS has developed into a flexible issuer of privately placed notes, both for plain vanilla and structured medium term notes. During the year under review it has issued € 2.6 billion private placements in 180 transactions. At year-end 2005 the outstanding amount under the EMTN program equals € 15.9 billion. Furthermore, SNS Bank makes use of its Australian A$ 3 billion MTN program. In 2005 this program has been used to issue A$ 600 million.

The € 4 billion Euro Commercial Paper program and €4 billion French CP program are used for cash management under current market circumstances. On average €1 billion has been outstanding during 2005 in commercial paper.

SecuritisationofmortgageloansThe bank continues to securitise part of its mortgage portfolio. In February, the bank launched its ninth Hermes transaction for a portfolio of € 1.5 billion of mortgages. The senior notes of this transaction were at the time issued at the tightest level ever for Dutch RMBS. In September, a second portfolio of € 1.5 billion of mortgages was securitised in 2005 under the Hermes program. The Hermes program ranks among the top three most active securitisation programs for residential mortgage loans in the Netherlands and has a well established name in the market.

Securitisation forms an integrated part of the funding activities of the bank. The securitised mortgages are presented on-balance under IFRS, whereas these were presented off-balance under Dutch Gaap (See page 156).

BenchmarkbondsSNS Bank has for some years now applied the policy of having a number of public benchmark loans outstanding, of € 500 million or more, in different maturities. These bonds are actively traded, which enables investors to switch between maturities within the credit curve of SNS Bank.

SecuritisationMedium term notes

Commercial paper

Fiduciary DepositsSubordinated loans

46.8%

3.9%

39.1%

1.6%

8.6%

�0 Instrumentdistribution�005


Outstanding benchmark bonds SNS Bank€ 500 million FRN Feb 2005€ 1,000 million FRN Sep 2006€ 1,000 million 6.00% Oct 2007$ 1,000 million FRN Jun 2008€ 1,000 million 6.125% Apr 2010€ 800 million FRN Oct 2011€ 500 million 5.625% Jun 2012€ 900 million 4.625% Feb 2014

Within the bank’s own rating category, the benchmark bonds of SNS Bank have consistently outperformed the iBoxx A financial index and are trading around the iBoxx index for AA financials (see graph 22). Clearly the market acknowledges the strong credit profile of the bank, resulting in a strong demand for SNS Banks’ debt securities.

ManagingliquidityriskAs a result of its well diversified funding sources SNS Bank maintains a low liquidity risk profile. In its rating report of September 2005 Moody’s states: ‘The bank’s vulnerability to a liquidity shock is low in our opinion, the bank has taken care to issue its debt with a good spread of maturities. It also has a demonstrated ability to securitise its own mortgages. It is therefore unlikely that a temporary interruption in the bank’s ability to refinance maturing debt would compromise its ability to maintain its mortgage lending business.’

RatingsDuring the year under review, ratings and outlook by the three rating agencies have remained unchanged. By the end of the year the outlook for the bank by Moody’s is on ‘positive’ for more than two years. In its rating report of September 2005 Moody’s reiterates that: ‘The positive outlook on the A2/C+ ratings takes account of the trend towards increased efficiency and a more focused strategy.’ The long term rating by Fitch Ratings has been one notch higher than the long term rating by S&P and Moody’s since its inception in 1999 with a stable outlook. Capital market activities SNS REAALThe activities of SNS REAAL in capital markets are limited. It has at its disposal a € 1 billion MTN Program, under which € 374 million is outstanding at year-end 2005. Furthermore, it makes use of privately placed loans and deposits.

SNS Bank S&P Moody’s FitchShort term A-1 P1 F1Long term A A2 A+Outlook Stable Positive Stable

SNS REAAL S&P Moody’sShort term A-2 Long term A- A3Outlook Stable Stable

5 years6 years7 years

8 years9 years10 years

15 years20 years> 20 years

35.7%

6.3%

3.7%

5.6%

5.1%

2.8%

12.0%

14.8%

14.0%

�� Maturityissuedseniorfunding�005

1510

50

35

4550

2520

40

30

bp

Jan2005

Oct NovMar May Jul SepAugFeb Apr Jun Dec Jan2006

6.125% Apr ’10

iBoxx Fin A4.625% Feb ’145.625% Jun ’12 iBoxx Fin AA

�� SNSBankcreditspreads


SNS REAAL has always placed great emphasis on corporate responsibility and we

are keen to strengthen our position in this area. Helping to resolve social issues

features prominently in our policy at SNS REAAL.

Being part of society starts at home.

Ethical business practiceCorporate responsibility strengthens the bond with our stakeholders: shareholders, clients and staff. It is a chief condition to justifying our existence as a company and to post the best possible results of operations. Corporate responsibility plays an increasingly important role in our planning processes. The business units must focus explicitly on corporate responsibility in their operational plans and define their goals to anchor it in their business. To put this approach into practice, we have chosen ‘accessibility’, ‘transparency’, and ‘integrity’ as the themes for 2005 and the coming years.

Publicationofthefirstannualcorporateresponsibilityreport2005 saw the publication of SNS REAAL’s first corporate responsibility report covering a broad and varied spectrum of corporate responsibility issues. The report ranked fifteenth in a VBDO survey of 50, largely listed, companies. The 2005 corporate responsibility report, which will go into further depth on the key issues touched upon in this section, will be published in mid-2006.

Accessibility,transparencyandintegrityWe strive to help our clients achieve their financial goals. Our products and services need to satisfy their requirements and all of our distribution channels must be accessible for them. Figuratively speaking, we are keen to be an open company as well, which means being open about who we are and what we want whilst keeping an open mind to our clients’ ideas.

SNS Bank has made accessibility one of the priorities of its corporate responsibility policy by paying extra attention to older people and those with a physical or mental impairment. For instance, the website has been modified with the help of interest groups to include more colours and an improved navigation

and search function. Internet banking at SNS Bank has also been made accessible for the blind. ATMs have been fitted with a PIN delay so that they adjust themselves to the speed of the user. Branches and ATMs have been made more accessible for people in wheelchairs, where necessary.

REAAL Verzekeringen wants the price, conditions and risks of all its products and services to be clear: clients need to know what they are getting. This has been put into practice by marketing only those products with true value added for clients and by ensuring that the financial information leaflets are consumer-friendly with clear wording and equally clear conditions. The price structure of complex products – such as unit-linked insurance – is clear so that clients only pay for what they use. The pension statements have been made easier to understand.

Clients entrust a large part of their assets to their bank and insurer. We must not betray their trust, which means that everyone related to our company acts with integrity. As SNS REAAL, not only have we set up a large number of rules of proper conduct as part of our ‘integrity’ drive, but we also ensure that our staff incorporate these into their work through education and training. It is not just by chance that ‘working with integrity’ has become one of SNS REAAL’s principles (see also Compliance).

SNSREAALWaterFund:investinginsustainablewaterprojectsIn 2005, SNS REAAL gave the initial impulse for a fund for investment projects that encourage sustainable development, business and innovation in water management. Specifically, the SNS REAAL Water Fund will invest $50 million in the coming five years in water purification, irrigation, drinking water and sanitary facilities in Africa, Asia and Eastern Europe. Investments will also be made in


Dutch SMEs with the focus on sustainable water development. All such investments must satisfy SNS REAAL’s criteria and therefore be in keeping with its 3P approach: People, Planet, Profit. Establishment of the Water Fund fits perfectly within SNS REAAL’s aim to help resolve societal problems and is in keeping with one of the eight Millennium Development Goals of the United Nations: to promote access to safe drinking water and sanitary facilities.

The aim is to develop the SNS REAAL Water Fund into an accessible centre of expertise for the sustainable investment in water. Special 3P expertise will be shared amongst the government-related agencies (such as the United Nations) and private ventures involved in the water projects. A platform will also be set up to unite stakeholders for technical advice, the identification of investment targets, the development of profitable projects, project monitoring and networking.

SNSREAAL:promotingvolunteerworkBeing part of society starts at home. Sustainability and corporate responsibility are therefore prioritised from the very beginning via introductory training for new staff. And the same naturally goes for the entire education and training programme at SNS REAAL: corporate responsibility is still an important part of the programme.

In 2005, an alliance was forged between ‘NetWerk’, the platform of more than 250 young, higher qualified professionals at SNS REAAL, and the LaLuz Foundation, which brings volunteers and non-profit-making organisations together. This alliance has made it easier for our ‘networkers’ to put their often long-expressed interest in volunteer work into practice by taking on board positions, advising on how to raise funding or writing business plans. In other words, they go to work in their own field of specialisation, gain experience, broaden their horizons, expand their network and develop competences which can only benefit their further development within their own organisation. At the same time, these non-profit-making organisations benefit from qualified and motivated volunteers.

As part of its corporate responsibility, SNS REAAL started to collaborate in 2005 with WorkMate, a website that connects staff from companies with social organisations in search of volunteers. These are mostly one-off or short-term tasks that essentially anyone can perform. Volunteers indicate

via the website in which area – people, wildlife, nature & environment – they wish to work, after which they are contacted by one of the affiliated non-profit-making organisations.

Another way to encourage staff to work for the good of society is to grant them special leave. This applies e.g. to staff who are keen to help older people, people with a handicap or youth groups who go on proper holiday. Each day of holiday taken for this purpose counts only as half; they also receive their normal pay during their absence.

SNSREAALFund:supportingsocialandnot-for-profitprojectsThe SNS REAAL Fund supports projects and activities with a broad public interest that have an idealistic or social purpose. The areas of particular interest are ‘culture & education’, ‘emancipation’ and ‘nature & the environment’. SNS REAAL strives to put its commitment to society into practice by supporting hundreds of projects, large and small, national, regional and local. One such project supported by the SNS REAAL Funds is known throughout the country: Prix de Rome. This is the highest award in the Netherlands for young and talented artists.

In-housefocusonsustainabilitySNS REAAL’s in-house environmental policy promotes the careful use of scarce raw materials and reducing the impact of our business on the environment. This focus on sustainability has three themes: responsible choices, reduced consumption and the environmental-friendly disposal of waste products.

‘Responsible choices’ imply that products and initiatives must be vetted for sustainability. This means making increasing use of environmental-friendly office supplies and promoting the use of organic products in the office canteens. All coffee and tea must come from brands with a good reputation for sustainable development and environmental protection. Chemicals have been replaced by micro-fibre cloths for office cleaning purposes. In 2006, SNS REAAL is asking its most important suppliers to sign a sustainability statement.

SNS REAAL has an environmental programme ‘Duurzame Daadkracht’ with goals for reducing the consumption of raw materials such as paper, energy and water. Given the space and energy saving, new working concepts – such as flexible working


areas – also fall into this category. SNS REAAL uses green energy only. Staff are also encouraged to use public transport and to cycle to work. These aspects are discussed more extensively in the annual sustainability report.

SNS REAAL strives to separate company waste where reasonably feasible. Detailed arrangements have been agreed with its caterers and contractors to this end. Office staff are encouraged to separate their waste. last but not least: staff are regularly informed about the company’s sustainability policy and how they can make it work.

ASNBank:sustainablebankingontherise

ASN Bank, with its mission to promote sustainability in society, has grown in its 45 years of existence into the leading sustainable bank in the country. Clients’ savings and assets are invested solely in businesses, institutions and governmental ventures which actively promote the interests of people, wildlife and the environment.To be admitted to ASN Bank’s ‘investment universe’, businesses must fulfil strict criteria in respect of their environmental and social policy and human rights record. Certain industries are completely off limits, such as nuclear energy and the weapons trade.

These criteria are discussed in depth at the AGM of ASN Beleggingsfondsen, which has traditionally enjoyed high client attendance. As a result, the checklist has continued to grow in length and depth, thus giving ASN Bank the most transparent and easy-to-understand criteria in the financial world. The related sustainability analyses are conducted by SNS Asset Management. And economic criteria, such as return, are naturally also part of the selection procedure.

ASN Bank’s People, Planet, Profit approach appeals to a rapidly growing part of the population. The number of clients at ASN Bank increased in 2005 to more than a quarter of a million, and managed assets grew to €3 billion. Savings grew by €374 million (+23%); investment funds increased by €304 million (+45%).

ASN Bank has a number of savings and investment funds such as ASN Milieusparen, ASN Milieu & Waterfonds, ASN Groenprojectenfonds and

ASN-Novib Fonds that focus on ‘good causes’ in particular sectors. The latter two provide tax benefits on top of their return. SNS Bank and CVB Bank also actively sells funds of ASN Bank. It is also possible to invest in ASN Bank funds via REAAL Verzekeringen insurance products.

ASN Bank has also teamed up with Novib en NOTS, a development aid organisation, to create Triple Jump. This is a social venture which strives to make capital from the West more readily available for combating poverty in developing countries. To this end, Triple Jump uses its expertise, own funds and donations to help set up and grow local Micro Financing Organisations (MFIs). These MFIs help the poorer part of their people by extending small loans and giving them access to savings and insurance. Today more than a half billion poor people still do not have access to these small-scale financial services. Triple Jump strives to involve a broad spectrum of Dutch society in micro-financing.

In 2005, ASN Bank strengthened its bonds with Greenpeace and the World Nature Fund. The North Sea Project saw the beginnings of an official partnership between Greenpeace and ASN Bank. Today, people can open an account with ASN Bank via sparenvoordenoordzee.nl. An amount of €10 per new account goes to Greenpeace, whilst the savings are used in the struggle to create natural sea reserves in the North Sea. These are sites where sea life can recover from over-fishing and pollution. ASN Bank also works with the World Nature Fund to save the forests in Borneo. The aim of the Heart for Borneo campaign is to protect the virgin rainforest from logging, forest fires and palm oil plantations.

ASN Bank also held its seventh Ethical Investment Day, which was dedicated to many international problems and their possible solutions this year. Guest speakers were Jean-François Rischard, the World Bank’s former director for Europe, and Jane Goodall, who is known for her research on chimpanzee behaviour. An ASN Bank survey, which was presented on Ethical Investment Day, showed that most people in the Netherlands do not know how their banks invest their money even though they are against the investment of that money in businesses and industries which pose a threat to people, wildlife and the environment.


SNSAssetManagement:marketleaderinsustainableinstitutionalinvestment

SNS Asset Management is an internationally recognised specialist in sustainable asset management. Pension funds, social institutions and other institutional investors entrust their portfolios to SNS Asset Management. SNS Asset Management is naturally also the asset manager for SNS REAAL and its pension fund as well as for SNS Bank’s and ASN Bank’s investment funds. SNS Asset Management manages a total of more than €14 billion in assets.

Sustainable investment continues to grow in popularity amongst institutional investors. SNS Asset Management makes it possible for them to express their social commitment by investing in businesses (and government) with the best track record for a range of sustainability criteria. In its sustainability analyses, SNS Asset Management gives each business a total score for the three dimensions of People, Planet, Profit (‘3Ps’). It keeps constant track of the various economic sectors with a view towards up-to-the-minute information on each line of business. SNS Asset Management has developed into THE centre of expertise in the sphere of corporate responsibility for European listed companies. And alliances have been forged with specialist research agencies in the American and Asian markets.

In April 2005, a group of institutional investors, including SNS Asset Management, established the Governance Platform, combining forces as discussion partner for listed companies. SNS Asset Management thus actively putting into practice the Dutch Corporate Governance Code, which states that institutional investors should be prepared to enter into a dialogue with the companies in which they hold shares. By participating in this Governance Platform, SNS Asset Management demonstrates its involvement with the companies in which it invests in all areas. The aim is to demonstrate commitment in all dimensions within the 3P approach and not only in the social and environmental field where this commitment has already been shown for years.Active voting at shareholders’ meetings is an important first step for SNS Asset Management to give meaning to corporate governance. During the past two years, either Déminor’s advice on how to

vote was adhered to, or the voting policy that was formulated together with the client was followed.

SNS REAAL also joined – with SNS Asset Management as its representative – the Enhanced Analytics Initiative (EAI), an international group of large institutional investors and asset managers, at the end of 2004. In 2005 they allocated part of their commissions to brokers who include non-financial and intangible investment criteria in their analyses. In 2005, EAI was awarded on the Triple Bottom Line Investment Congress. SNS Asset Management joined the European Social Investment Forum (EUROSIF) in 2005. This is a pan-European stakeholder-network whose mission is to stimulate and develop sustainable and responsible investment.

With its participation in the above-mentioned initiatives, SNS Asset Management wants to put high-quality sustainable policy into practice in a structured and continuous manner. According to current insights, a company that promotes the interests of all stakeholders in such a way that they are able and want to contribute to its existence is the better managed company. SNS Asset Management itself wants to be the frontrunner in this aspect.


With a view to achieving our strategic goals, special efforts were taken in 2005 to

put the Human Resources Development policy into further practice.

After all, SNS REAAL’s success is largely down to our staff. We therefore find it

imperative to have the right people at hand at the right time who are willing to

make a long-term commitment to SNS REAAL.

Human Resources Development

TopemployerIn 2005, SNS REAAL again succeeded in climbing up various league tables on ‘top employers’. Corporate Research Foundation, with its publication on the top 49 employers, gave us – along with four other companies – the highest marks.

SNS REAAL has a stronger presence in the jobs market. Scores of initiatives were launched in 2005 in our endeavour to become one of the best employers in the Netherlands. One of these was the attempt to fill university-level vacancies at SNS REAAL as a whole rather than per business unit. This has succeeded in boosting awareness of SNS REAAL amongst job-seekers.

Furthermore, SNS REAAL was also present at the Nobiles career days, a jobs fair attended by more than 11,000 potential employees. The use of career days to strengthen our presence on the employment market will be continued in 2006 as well. The past year also saw the introduction of new systems to maintain contact with universities and university-level institu-tions, which remain a key source of new employees.

InvestingintrainingSNS REAAL looks for staff who fit in with our organisation and offers them a wealth of growth opportunities within the group. Staff development is one of our top priorities. The underlying principle is that development is the shared responsibility and in the common interest of employee and employer. SNS REAAL invests around 3% of the total wage and salary bill in staff training and education.

Management developmentIn 2005, the Group Executive Board decided to focus its Management Development (MD) policy. As a result, MD concentrates on human resources planning, succession and development for the third echelon and higher. This concerns all SNS REAAL officers at the director level or higher as well as talented staff who are in an accelerated stream to grow into such positions.

Talent developmentBesides this MD target group, SNS REAAL has been coordinating its efforts for the development and horizontal mobility of talented staff, who comprise the Talent Development (TD) target group. We are keen to foster a further exchange between SNS REAAL’s various business units with this target group, which consists of managers as well as non-executive specialists.

Leadership developmentStaff with management capacities or growth potential as a specialist, or both, are given the opportunity to develop themselves. These programmes are tailored to their personal learning objectives and the needs of the organisation. They foster the development of the targeted culture within our company (see insert on page 79).

Job developmentIt is important for established and new staff alike to provide clients with proper information about our products. ‘Training streams’ have been developed and introduced for jobs and job groups so staff can acquire the necessary qualifications.


Performance and competence appraisal2003 saw the introduction of a new appraisal system: performance and competence appraisal. Based on the evaluations of managers and staff, a decision was taken at the end of 2005 to start using two generic competences, professionalism and ambition, for the entire company. Job-specific competences will be added for each individual job type. A Personal Development Plan can be created to focus on the development of competences.

TermsofemploymentandlabourrelationsNew collective labour agreement Once again, a new collective labour agreement has been signed with the trade unions. Running from 1 January 2006 to 31 May 2007 inclusive, this collective labour agreement provides for a 2% (structural) increase in wages effective 1 January 2006 and a 0.5% increase effective 1 January 2007.

The present pension scheme has also been updated to reflect the Early Retirement, Pre-pension and lifetime benefits plan. It is no longer possible to grant a transitional old age pension that is coupled with tax advantages (General Old Age Pensions Act compensation between 62 and 65 years). Furthermore, effective 1 January 2006 the pensionable age for accruing pension entitlements is 62. The present pension scheme remains in force for staff born before 1 January 1949. The Pension Fund has become independent on 1 January 2005.

Furthermore, it has been agreed with the trade unions to limit the period of leave taken under the lifetime benefits plan to three months, unless such leave is taken immediately before going on pension.

In respect of the Basic Healthcare Insurance Scheme, a gross monthly contribution of €15 for all staff has been agreed for the supplementary insurance for the duration of the collective labour agreement. This contribution is in addition to the 8% discount on the basic insurance policy and the supplementary insurance policies that SNS REAAL has agreed with the administrator of the group insurance.

And finally in respect of the Work and Income (Ability to Work) Act, it has been agreed to create categories based on the rate of incapacity. For the various categories, SNS REAAL provides further supplements on top of the statutory regulations.

New ‘job house’Efforts have been taken with the line management to develop a new transparent ‘job house’ for the staff governed by the collective labour agreement. This job evaluation system was implemented at the start of 2006.

Profit-sharingEarnings performance for 2005 was, just as in 2004, high enough to pay out the maximum 3.5% of the staff ’s gross yearly salary.

WorkingconditionsAbsence due to sickness stabilised in 2005 compared with the previous year and now reflects the industry average of about 4.5%. Prevention has been targeted to reduce this rate further. In future, all staff will be given a health check-up once every three years. No less than 32% of qualifying staff have availed themselves of this facility.

Special anti-RSI software has also been installed which forces staff to take short breaks from working at the computer. Furthermore, additional support facilities have been implemented in-house to deal with psycho-social stress.

Ourculture

So what makes working for SNS REAAL so rewarding? SNS REAAL is a Dutch employer in the banking and insurance industry that has the advantage of being a large financial institution amongst the small, and a small financial institution amongst the large. We therefore enjoy all the benefits of the retail trade: attractive products, flexibility, innovation, stimulating jobs and clear communication.

SNS REAAL is an employer that gives its staff opportunities to grow. The difference with larger financial institutions is that our staff find themselves ‘climbing up’ the ladder more rapidly: they are spotted and thus moved into company-wide projects earlier on in their career. This enables them to network throughout the full breadth of SNS REAAL.

Besides that, SNS REAAL has an informal culture: the highest echelons keep in personal touch with the staff and find this very important indeed. Furthermore, at some 6,000 staff strong, we are also large enough for attractive (horizontal, vertical or diagonal) staff transfers, personal development programmes, etc.

SNS REAAL is an employer that places a premium on staff satisfaction, innovation and investing in human capital and where staff have an actual say in policy: ‘our staff have real added value’.

80

Given the good financial and commercial results we have achieved in recent years,

we are convinced that we have chosen the right strategy towards a promising future.

Outlook Our efficient and innovative organisation has laid a solid foundation for further growth, be it organic or non-organic. The added value which we seek to achieve will benefit all stakeholders: shareholders, clients, staff and society. The economy seems to be recovering, but it is still fragile. Perhaps the announced improve-ments in purchasing power will have a positive impact on domestic spending, which will also benefit SNS REAAL. Much will depend on the trend in the financial markets, especially in interest rates.

In 2005 we started preparing our financial reports in accordance with International Financial Reporting Standards. One of the results of these new standards is the increased volatility of our results.

Although we are convinced that SNS REAAL’s earnings will develop positively in the longer term, we are not prepared to issue a profit forecast for 2006 at this time.


S. van KeulenC.H. van den BosM.W.J. HinssenR.R. Latenstein van Voorst

Financial Statements 2005

SNS REAAL Financial Statements 2005 94 SNS REAAL Financial Statements 2005

Contents96 ConsolidatedFinancialStatements96 Consolidated balance sheet

97 Consolidated income statement

98 Consolidated statement of changes in shareholders’ equity

99 Consolidated cash flow statement

�00 NotestotheConsolidatedFinancialStatements�00 Accounting principles

��6 Information by segment

�� Risk management SNS REAAL

�43 Acquisitions

�44 Notes to the consolidated balance sheet

�44 � Goodwill and other intangible assets

�44 � Tangible fixed assets

�45 3 Associated companies

�47 4 Investment property

�47 5 Investments

�49 6 Investments for insurance products on behalf of policyholders

�50 7 Derivatives

�5� 8 Deferred tax receivables and liabilities

�5� 9 Mortgage loans to customers

�53 �0 Other loans and advances to customers

�54 �� Loans and advances to credit institutions

�54 �� Other tax receivables

�54 �3 Other assets

�54 �4 Cash and cash equivalents

�55 �5 Shareholders’ equity

�55 �6 Participation certificates and subordinated debts

�56 �7 Debt certificates

�57 �8 Technical provisions, insurance operations and reinsurance contracts

�59 �9 Provision for employee benefits

�60 �0 Other provisions

�6� �� Savings

�6� �� Other amounts due to customers

�6� �3 Amounts due to credit institutions

�6� �4 Other tax liabilities

�6� �5 Other liabilities

�6� Off-balance sheet commitments

�63 Notes to the consolidated income statement

�63 �6 Interest income, banking operations

�64 �7 Net premium income

�64 �8 Net commission and management fees

�64 �9 Investment income

�65 30 Investment income on behalf of policyholders

�65 3� Result on derivatives and other financial instruments

�66 3� Other operating income

�67 33 Technical expenses on insurance contracts

�67 34 Technical expenses on insurance contracts on behalf of policyholders

�67 35 Acquisition costs for insurance operations

�68 36 Value adjustments on financial instruments and other assets

�68 37 Staff costs

�70 38 Other operating expenses

SNS REAAL Financial Statements 2005 95SNS REAAL Financial Statements 2005

�70 39 Other interest charges

�70 40 Share in the result of associated companies

�70 4� Taxes

�7� 4� Net earnings per ordinary share

�7� Implementing IFRS

�76 CompanyFinancialStatementsSNSREAALGroepN.V.�76 Company balance sheet

�77 Company income statement

�78 Notes to the company balance sheet

�78 � Participating interests in subsidiaries

�78 � Receivables from subsidiaries

�79 3 Investments

�79 4 Derivatives

�79 5 Cash and cash equivalents

�80 6 Shareholders’ equity

�8� 7 Subordinated debts

�8� 8 Debt certificates

�8� 9 Other amounts due to customers

�8� �0 Amounts due to credit institutions

�8� Notes to the company income statement

�8� �� Net earnings per ordinary share

�83 Mostimportantsubsidiariesandotherequityparticipations�83 Most important subsidiaries

�83 List of the most important other equity participations

�84 Otherinformation�84 Profit appropriation under the articles of association

�85 Auditor’s report

�86 Curricula vitae of the members of the Supervisory Board

�87 Additional positions of the members of the Group Executive Board

SNS REAAL Financial Statements 2005 consolidated financial statements96 SNS REAAL Financial Statements 2005 consolidated financial statements

Consolidated balance sheetBeforeprofitappropriationandin€millions 3�-��-�005 3�-��-�004

AssetsGoodwill and other intangible assets � 559 369

Tangible fixed assets � 302 300

Associated companies 3 126 51

Investment property 4 129 125

Investments 5 9,211 8,233

Investments for insurance products on behalf of policyholders 6 3,426 2,798

Derivatives 7 1,174 103

Deferred tax receivables 8 132 167

Reinsurance contracts �8 365 269

Mortgage loans to customers 9 43,544 39,924

Other loans and advances to customers �0 2,599 2,627

Loans and advances to credit institutions �� 4,949 3,421

Other tax receivables �� 192 38

Other assets �3 304 473

Cash and cash equivalents �4 1,076 1,074

Total assets 68,088 59,972

Liabilities and equityShare capital 340 340

Other reserves 1,865 1,252

Retained profit 323 288

Shareholders’ equity �5 2,528 1,880

Participation certificates and subordinated debts �6 1,616 1,443

Debt certificates �7 25,654 23,464

Technical provisions, insurance operations �8 12,658 11,330

Provision for employee benefits �9 76 187

Other provisions �0 44 50

Derivatives7 976 42

Deferred tax liabilities 8 324 82

Savings �� 12,333 10,973

Other amounts due to customers �� 7,078 6,346

Amounts due to credit institutions �3 3,419 2,442

Other tax liabilities �4 23 19

Other liabilities �5 1,359 1,714

Total liabilities and equity 68,088 59,972

The numbers mentioned with the balance sheet items refer to the notes starting on page 144.

SNS REAAL Financial Statements 2005 consolidated financial statements 97SNS REAAL Financial Statements 2005 consolidated financial statements

Consolidated income statementIn€millions �005 �004

IncomeInterest income, banking operations �6 622 593

Regular premium Life 838 761

Single premium life 584 593

Non-life premiums 323 296

Net premium income �7 1,745 1,650

Net commission and management fees �8 129 115

Investment income �9 549 640

Investment income on behalf of policyholders 30 394 126

Result on derivatives and other financial instruments 3� 31 (7)

Other operating income 3� 1 13

Total income 3,471 3,130

ExpensesTechnical expenses on insurance contracts 33 1,313 1,406

Technical expenses on insurance contracts on behalf of policyholders 34 782 431

Acquisition costs for insurance operations35 167 122

Value adjustments on financial instruments and other assets 36 60 71

Staff costs 37 443 451

Depreciation on tangible fixed assets and amortisation of intangible assets� 38 42

Other operating expenses38 201 218

Other interest charges39 60 75

Total expenses 3,064 2,816

Share in the result of associated companies 40 9 44

Operating profit before taxation 416 358

Taxes 4� 93 70

Net profit 323 288

Earnings per share 4� 1.55 1.38

The numbers mentioned with the income statement items refer to the notes starting on page 163.

SNS REAAL Financial Statements 2005 consolidated financial statements98 SNS REAAL Financial Statements 2005 consolidated financial statements

Consolidated statement of changes in shareholders’ equity In€millions

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Balance on 1 January 2004 340 15 36 ‑‑ ‑‑ ‑‑ 1,198 ‑‑ 1,589

Other unrealised revaluations ‑‑ ‑‑ 1 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 1

Revaluation transfer in connection with realisation of revaluations ‑‑ ‑‑ (3) ‑‑ ‑‑ ‑‑ 3 ‑‑ ‑‑

Net profit 2004 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 288 288

Other changes ‑‑ ‑‑ 5 ‑‑ ‑‑ ‑‑ (3) ‑‑ 2

Balance on 31 December 2004 340 15 39 ‑‑ ‑‑ ‑‑ 1,198 288 1,880

Change in accounting principles to IAS 32 and 39 and IFRS 4 ‑‑ ‑‑ ‑‑ 52 113 49 (55) ‑‑ 159

Transfer of 2004 net profit ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 288 (288) ‑‑

Unrealised revaluations from cash flow hedges ‑‑ ‑‑ ‑‑ 71 ‑‑ ‑‑ ‑‑ ‑‑ 71

Deferred interest income from cash flow hedges ‑‑ ‑‑ ‑‑ 12 ‑‑ ‑‑ ‑‑ ‑‑ 12

Other unrealised revaluations ‑‑ ‑‑ 3 ‑‑ 123 ‑‑ ‑‑ ‑‑ 126

Revaluation transfer in connection with realisation of revaluations ‑‑ ‑‑ (1) ‑‑ ‑‑ ‑‑ 1 ‑‑ ‑‑

Realisation of revaluations via the income statement ‑‑ ‑‑ ‑‑ ‑‑ (43) ‑‑ ‑‑ ‑‑ (43)

Change in Profit sharing reserve ‑‑ ‑‑ ‑‑ ‑‑ 9 (11) 2 ‑‑ ‑‑

Net profit 2005 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 323 323

Other changes ‑‑ ‑‑ (3) ‑‑ 1 ‑‑ 2 ‑‑ ‑‑

Balance on 31 December 2005 340 15 38 135 203 38 1,436 323 2,528

For further information, please refer to the separate statement of changes in shareholders’ equity in the notes to the Company balance sheet of SNS REAAL (page 180).

The revaluation reserve concerns tangible fixed assets.

The cash flow hedging reserve comprises the effective portion of the accumulated net change in the fair value of cash flow hedging instruments for hedged transactions that have not yet taken place. The fair value reserve comprises the accumulated net change in the fair value of investments available for sale.

The profit-sharing reserve is maintained for insurance contracts with profit-sharing rights and is not at the free disposal of the shareholders. Holders of these insurance contracts receive a payment that is partly dependent upon the realised result of the insurer. The management of the insurance company determines the amount and the time at which the profit-sharing payment is made to the holders of the insurance contracts. The profit-sharing reserve only relates to realised and unrealised revaluations of fixed-income securities.

SNS REAAL Financial Statements 2005 consolidated financial statements 99SNS REAAL Financial Statements 2005 consolidated financial statements

Consolidated cash flow statement In€millions �005 �004

Cash flow from operating activitiesProfit for the financial year 323 288

Adjustments for:Depreciation and amortisation 38 43

Amortisation of Value of Business Acquired 3 (1)

Amortisation of acquisition costs 48 35

Changes in provisions and deferred taxes 271 (81)

Value adjustments 60 71

Share in retained profit from associated subsidiaries (9) (44)

Operating cash flow before changes in working capital and provisions 734 311

Change in mortgage loans to customers (3,620) (3,029)

Change in other loans and advances to customers 760 198

Changes in loans and advances to credit institutions (551) (1,217)

Change in savings 1,360 569

Increase in technical provisions and employee benefits 1,121 68

Change in other operating activities (1,101) 287

Net cash flow from operating activities (1,297) (2,813)

Cash flow from investment activitiesIncome on the sale of intangible assets ‑‑ 2

Income on the sale of tangible fixed assets 23 20

Income on the sale of subsidiaries 8 148

Income on the sale of investment property 2 6

Income from the sale and redemption of investments and derivatives 5,504 7,115

Purchase of intangible fixed assets (203) (112)

Purchase of tangible fixed assets (44) (36)

Purchase of associates and subsidiaries (29) (3)

Purchase of investment property ‑‑ (1)

Purchase of other investments (5,939) (6,313)

Net cash flow from investment activities (678) 826

Cash flow from financing activitiesIncome from subordinated loans 304 ‑‑

Income from debt certificates 9,614 12,041

Redemption of subordinated loans (121) (11)

Redemption of debt certificates (7,820) (9,769)

Net cash flow from financing activities 1,977 2,261

Cash and cash equivalents as at 1 January 1,074 800

Net increase in cash and cash equivalents 2 274

Cash and cash equivalents as at 31 December 1,076 1,074

SNS REAAL Financial Statements 2005 notes to the consolidated financial statements�00 SNS REAAL Financial Statements 2005 notes to the consolidated financial statements

Accounting principles

� General information

�.� Groupstructure SNS REAAL comprises SNS Bank N.V., REAAL Verzekeringen N.V. and SNS REAAL Invest. N.V. and their subsidiaries. The Group’s

consolidated financial statements include the financial statements of all the companies in which SNS REAAL has a controlling influence and the interest of the SNS REAAL in associated subsidiaries and entities.

A number of corporate staff departments are shared. The costs of the corporate staff are charged on the basis of the service provided or proportionally allocated to the group’s subsidiaries. The costs of the Group Executive Board and certain holding company costs are not allocated to group subsidiaries.

The main accounting principles used in the preparation of the consolidated and the company financial summaries are described in this section. Pursuant to the option offered under Part 9, Book 2 of the Netherlands Civil Code, SNS REAAL prepares its Company financial statements using the same accounting principles as those used for the consolidated financial statements.

�.� StatementofIFRScompliance SNS REAAL adapted the International Financial Reporting Standards (IFRS) as adopted for use in the EU on 1 January 2005. The comparative

figures for the preceding financial year have been adjusted. IFRS 1 First-time adoption of International Financial Reporting Standards were applied to the preparation of these financial statements.

In accordance with the exemption offered under European legislation, SNS REAAL applies International Accounting Standard 32 Financial instruments: disclosure and presentation (IAS 32), 39 Financial Instruments: recognition and measurement (IAS 39) and IFRS 4 Insurance contracts (IFRS 4) with effect from 1 January 2005.

The statement concerning the effect of the conversion to IFRS on the reported financial position, financial results and cash flows of the Group starts on page 172.

�.3 Accountingprinciplesusedinthepreparationofthefinancialsummaries The accounting principles set out below have been consistently applied to all the periods presented in these consolidated financial

statements, as well as to the preparation of the IFRS opening balance on 1 January 2004 in the context of the implementation of IFRS. However, in accordance with the exemption offered under European legislation, SNS REAAL applied IAS 32, IAS 39 and IFRS 4 with effect from 1 January 2005 without restating the comparative figures.

The entities that belong to the Group have consistently applied the accounting principles.

The consolidated financial summaries have been prepared on the basis of historic cost, with real estate, investments in securities held for sale, financial assets and financial liabilities held for trading, and all the derivatives contracts being restated at fair value. With the exception of the cash flow information, the financial summaries are prepared on the accrual basis of accounting.

The consolidated financial summaries are stated in millions of euros (€). The euro is the presentation currency of SNS REAAL.

�.4 Theuseofestimatesandassumptionsinthepreparationofthefinancialsummaries The preparation of the consolidated financial summaries requires that SNS REAAL use estimates and assumptions that could affect the

reported assets and liabilities and the contingent assets and liabilities as at the date of the consolidated financial statements, and the reported income and expenses for the period under review. It concerns particularly the rules for determining the provisions and capitalised acquisition costs for insurance operations, determining the provision for bad debts, determining the fair value of assets and liabilities and determining impairment. This involves assessing the situations on the basis of financial data and information that are subject to change over the time. Although these estimates with respect to current events and actions are made to best of the management’s knowledge, the actual results can ultimately differ from the estimates.

The estimates and the underlying assumptions are constantly assessed. Revisions of estimates are recognised in the period in which the estimate is revised if the revision only has consequences for the period in question, or in the period of revision and future periods if the revision has consequences for both the reporting and future periods.

For details about these accounting principles, please refer to the corresponding notes to the consolidated financial statements and to the information below.

SNS REAAL Financial Statements 2005 notes to the consolidated financial statements �0�SNS REAAL Financial Statements 2005 notes to the consolidated financial statements

�.5 Principlesofconsolidation

�.5.� Subsidiaries Subsidiaries, in other words, the companies and other entities (including the so-called ‘special purpose entities’) of which SNS REAAL can

directly or indirectly control the financial and operational policy, are included in the consolidation. This is usually the case if more than half the voting rights can be exercised or if SNS REAAL can otherwise exercise controlling influence.

Subsidiaries are fully consolidated from the moment that SNS REAAL gains control until the moment that this ends. The financial statements of these group companies are fully consolidated, with uniform accounting principles being applied. Third-party interests are stated separately in the consolidated balance sheet and profit and loss account.

�.5.� Associatedcompanies Associated companies are entities in which SNS REAAL has 20–50% of the voting rights, or in which SNS REAAL otherwise has significant

influence but no control. Investments in associated subsidiaries are measured at ‘net asset value’, and recognised at cost (including goodwill) when first included.

With this method, the participating interest is recognised as an asset, and SNS REAAL share in the net profit of the associated company is stated in the profit and loss account from the moment of acquisition. The share of SNS REAAL in the movements in shareholders’ equity of the participating interest after acquisition is stated in shareholders’ equity. The cost of the participating interest is restated for the accumulated changes after acquisition.

Where necessary, the accounting principles applied by the associated subsidiaries have been adjusted to ensure consistency with the principles applied by SNS REAAL.

�.5.3 Securitisations SNS REAAL Groep N.V. has securitised mortgage receivables in special purpose entities (SPEs). With these transactions, the economic

ownership of these mortgage receivables are transferred to separate entities. SNS REAAL includes these SPEs in full in its consolidated financial statements if, on the basis of the economic reality of the relationship

between SNS REAAL and the SPE, SNS REAAL controls the SPE, and if SNS REAAL retains the majority of the risks and rewards.

�.5.4 Eliminationoftransactionsonconsolidation Intra-group transactions, intra-group relationships and realised and unrealised gains on transactions between group companies are

eliminated. Unrealised gains on transactions between SNS REAAL and its subsidiaries are eliminated for the share of SNS REAAL in the subsidiaries. Unrealised losses are eliminated in the same way as unrealised gains, but only insofar as there is no indication of impairment.

�.6 Administrativeprocessingonthebasisofthetransactiondateandthesettlementdate.

All the purchases and sales of financial assets and liabilities settled according to standard market conventions are processed on the transaction date, in other words, the date on which SNS REAAL commits itself to buy or sell the asset or liability. All the other purchases or sales are carried as forward transactions (derivatives) until they are settled.

�.7 Nettingoffinancialinstruments

Financial assets and liabilities are netted and stated as a net amount on the balance sheet if there is a legally enforceable right to settle the amounts net, and there is an intention to settle the items in this manner, or to settle the asset and liability simultaneously.

�.8 Insurancecontracts

Insurance contracts are those contracts that transfer significant insurance risks. These contracts can also transfer financial risks. As a general rule, SNS REAAL considers an insurance risk to be significant if there is a possibility that, following an insured event, it has to make a payout of at least 10% in excess of the payout due if the insured event had not occurred.

SNSREAALdistinguishesbetweenthefollowingcontractcategories:

�.8.� Lifeinsurance These contracts provide long-term insurance of events that lead to a payment in cash or investments units in connection with the survival

or death of policyholders. The life insurance contracts of REAAL can be categorised in the product groups endowment mortgages, annuities, risk insurance policies, savings insurance policies, funeral insurance and insurance policies in investment units.

SNS REAAL Financial Statements 2005 notes to the consolidated financial statements�0� SNS REAAL Financial Statements 2005 notes to the consolidated financial statements

�.8.� Non-lifeinsurance Non-life insurance contracts comprise those insurance contracts that do not offer cover connected to the life or death of policyholders.

These contracts mainly concern a shorter period during which events are insured. The non-life insurance contracts of REAAL can be categorised in the product groups illness / accidents, motor vehicles, fire, transport and other.

With liability insurance policies, clients of SNS REAAL insure themselves against the risk that they may cause damage to third parties as a result of lawful actions. With building insurance, the clients of SNS REAAL insure themselves primarily against damage to their real estate or for the value of lost real estate. Non-life insurance also includes insurance contracts with which clients of SNS REAAL insure themselves against the consequences of occupational disability that could affect the possibility of the client or policyholders to sustain their current income level. Guaranteed payouts made after the occurrence of the specified insured event are either fixed or linked to the scale of the economic loss suffered by the policyholder. No payouts take place when the insurance policy expires or is surrendered.

�.8.3 Unit-linkedinsurance The distinctive feature of unit-linked insurance is the link of the life insurance policy to investment units. The policyholder determines how

REAAL should invest the paid premiums after deduction of costs and risk premium. To this end, REAAL has created mainly separate investment funds. The policyholders bear the economic risk on the investments. REAAL determines the investment policy. Policyholders have the option, in addition to the type of investment, also adapt the policy to his/her personal and/or financial situation.

The benefits from these insurance contracts are linked to the investments. Given this link, the insurance commitments for these contracts are adjusted for all the adjustments in the value of these investments.

�.8.4 Insurancecontractswithdiscretionaryprofit-sharingrights The insurance portfolio also contains insurance contracts with discretionary profit sharing. Discretionary profit sharing schemes are

connected to the contractual right of individual policyholders to an additional benefit over and above the insured or guaranteed capital. The amount and timing of these additional benefits are at the discretion of SNS REAAL. Because of the discretionary element of these profit-sharing commitments, an amount is included in an earmarked portion of shareholders’ equity.

�.9 Translationofforeigncurrencies

Upon initial recognition, transactions in foreign currencies are translated into euros at the exchange rate on the transaction date. Balance sheet items in foreign currencies are translated into euros at the spot rate applicable on the balance sheet date. Exchange rate gains and losses from these transactions and from translating monetary balance sheet items in foreign currency are taken to the income statement under Result on investments or Result on derivatives and other financial instruments, except in the case of cash-flow hedge accounting, in which case exchange rate gains and losses are taken to shareholders’ equity.

The exchange rate gains and losses of non-monetary items stated at fair value, with changes in the value being taken to the result, are accounted for as part of these changes in the value of the asset in question. Exchange rate differences in the revaluation reserve of non-monetary balance sheet items, with changes in the value being taken to shareholders’ equity, are incorporated in shareholders’ equity. Non-monetary items stated at historical cost are translated at the exchange rate applicable on the transaction date.

�.�0 Informationbysegment

A segment is a clearly distinguishable division of SNS REAAL that provides services with a different risk or return profile (business segment) from other segments, or that delivers the services to a particular economic market (market segment) with a different risk and return profile from other segments.

The most significant business segments of SNS REAAL are the banking operations, life insurance operations, non-life insurance operations and group activities. Together these form the primary segmentation basis. Banking operations are further segmented into retail operations and commercial banking operations.

� Cash flow statement

The cash flow statement is drawn up in accordance with the indirect method, making a distinction between cash flows from operating, investing and financing activities.

Cash flows in foreign currency are translated at the average exchange rates during the financial year. With regard to cash flow from operations, the net profit is adjusted for gains and losses that did not result in income and payments in the

same financial year and for changes in provisions and accrued and deferred items. With investments in consolidated participating interests, the liquid assets available in these participating interests are deducted from the

purchase price. In the context of the cash flow statement, cash and cash equivalents comprise cash balances and balances that can be converted into

ready cash within three months, including: demand deposits kept at banks, funds and balances at central banks, government papers, other short-term, highly marketable investments with an original maturity of a maximum of three months, current account advances and loans and advances to other banks.

SNS REAAL Financial Statements 2005 notes to the consolidated financial statements �03SNS REAAL Financial Statements 2005 notes to the consolidated financial statements

3 Balance sheet

3.� Goodwillandotherintangibleassets

3.�.� Goodwill Acquisitions by SNS REAAL are recognised according to the ‘purchase’method, with the cost of the acquisitions being attributed to the fair

value of the acquired assets, commitments and off-balance sheet commitments. Goodwill, being the difference between the cost of the acquisition and the share of SNS REAAL in the fair value of the acquired assets, commitments and off-balance sheet commitments on the acquisition date, is capitalised as an intangible asset.

Goodwill is not amortised. Instead, an impairment test is performed once a year or more often whenever there are indications of impairment. For this impairment test, goodwill is attributed to cash-generating units. The book value of the cash-generating unit (including goodwill) is compared to the recoverable amount. The recoverable amount is the higher of the net realisable value and the going-concern value.

Any negative goodwill is taken directly to the result.

3.�.� Software Acquired software licences are capitalised on the basis of the acquisition cost and the costs to render the software in question operational.

These costs are amortised on the basis of the expected useful life, with a maximum of three years applying. Costs that are directly related to the manufacture of identifiable and unique software products to which SNS REAAL has right of disposal, and which are likely to generate economic benefits that exceed the costs for more than one year, are capitalised as intangible assets. The direct costs comprise the staff costs directly attributable to software development

All the other costs associated with the development or maintenance of computer software are included as a charge in the period during which they are incurred.

The capitalised development costs for computer software are amortised on a straight-line basis over the useful life, with a maximum of three years applying.

3.�.3 Capitalisedacquisitioncostsinconnectionwithinsuranceoperations These acquisition costs are the direct or indirect costs in connection with concluding life insurance policies. The capitalised acquisition

costs item comprises capitalised commission and other direct and indirect acquisition costs that depend on and relate to the acquisition of new contracts and the extension of existing contracts. The costs are capitalised to the extent that they can be recovered from future loading in the premiums or from the expected gross result, depending on the nature of the policy.

The capitalised acquisition costs are amortised on a straight-line basis over a maximum period of 12 years (in line with the period in which the premiums are realised or the expected period in which premium income is earned). This amortisation is decided by the management on the basis of the best possible estimates with respect to future expectations. These estimates include income from bonds and equities in the long term, assumptions with respect to mortality, invalidity and termination of policies, recurring costs and expected future inflation.

Movements in the equity market can have a significant effect on the fund value of variable products and their management fees. Consequently, the expected future results increase or decrease in line with these movements. Likewise, changes in the interest income from fixed annuities (added interest less the interest earned) affect the assumptions in respect of future contributions.

An impairment test is carried out annually on these capitalised acquisition costs to confirm that future contributions from the insurance products are sufficient to cover the periodic amortisation expenses. In the case of a negative recovery capacity, additional amortisation is recognised in the income statement in the relevant year.

3.�.4 ValueofBusinessAcquired SNS REAAL recognises acquisitions on the basis of the purchase method. As a result, the acquired insurance portfolios are included in the

balance sheet as intangible assets on the basis of ‘value of business acquired’ (VOBA). The VOBA is calculated on the net present value of the estimated future cash flows from the current insurance contracts at the acquisition date. Best estimates of actuarial assumptions for interest, mortality and costs are used for determining this net cash value.

SNS REAAL amortises the VOBA on a straight-line basis over the estimated maturity of the acquired contracts. The estimated maturity is re-assessed on a regular basis. An impairment test is carried out as at each balance sheet date to confirm that the future contributions from the acquired insurance contracts are sufficient to cover the periodic amortisation expenses. In the case of a negative recovery capacity, additional amortisation is recognised in the income statement in the relevant year.

3.� Tangiblefixedassets

3.�.� Landandbuildingsincompany’sownuse Property in own use primarily concerns offices (buildings and land) and is stated at fair value based on assessments by independent

external surveyors, less depreciation of buildings and accumulated impairment. Positive revaluations on the basis of these assessments are added to the revaluation reserve in shareholders’ equity, less deferred taxes. Positive revaluations, insofar as these result in the reversal of earlier write-downs on the same asset, are credited to the income statement. Negative revaluations, insofar as these result in the reversal of prior positive revaluations of the same asset, are charged to the revaluation reserve. All other write-downs are charged directly to the income statement.


Buildings are depreciated in a straight line over the economic life, with a maximum of 50 years, with account being taken of the possible residual value. Land is not depreciated. Regular impairment tests are carried out on real estate.

Repair and maintenance expenses are recognised in the other operating expenses when the expense is incurred. Expenses incurred after the acquisition of an asset that increase or extend the future economic benefits in relation to the original use are capitalised and then amortised.

At the sale of a property the revaluation reserve related to the sold real estate is transferred to the other reserves.

3.�.� ITequipmentandotherassets All other tangible fixed assets are carried at historical cost net of accumulated depreciation and, if applicable, accumulated impairment. The historical cost comprises the expenses directly attributable to the acquisition of the asset. The cost of the other tangible fixed assets is depreciated on a straight-line basis over the useful life, with account being taken of a possible

residual value. The estimated useful life is three to five years. Regular impairment tests are carried out on the other tangible fixed assets. If the book value of an investment permanently exceeds the net

realisable value, it is immediately written down to the realisable value. Repair and maintenance expenses are recognised in the other operating expenses when the expense is incurred. Expenses incurred after

the acquisition of an asset that increase or extend the future economic benefits of the other investments in relation to the original use are capitalised and then amortised.

Results on the sale of equipment are defined as the balance of the realisable value less transaction costs and the book value. These results are recognised as part of the result from operating activities.

3.3 Associatedcompanies

Associated companies are entities in which SNS REAAL generally exercises between 20% and 50% of the voting rights, or in which the Group can exercise significant influence, but does not have overall control.

Participating interests are recognised in accordance with the net equity method. The item also includes goodwill paid at acquisition less accumulated impairment where applicable. Under the net equity method, the share of SNS REAAL in the result of the participating interest is recognised in the income statement of SNS REAAL as share in the result of associated companies. The share of SNS REAAL in changes in the reserves of the participating interest is stated in the reserves of SNS REAAL. The value of the participating interest is adjusted for these results and changes in reserves. If the valuation of the participating interest has become zero, no further losses are accounted for anymore, unless the Group has entered into commitments on behalf of the participating interest or has made payments for the participating interest.

Where necessary, the accounting principles applied by the associated companies have been adjusted to ensure consistency with the accounting principles applied by SNS REAAL.

Associated companies held for sale are classified as held for sale. These investments are stated at the lower of the book value and the sale price less selling costs. The result on the sale of an investment in an associated company is presented as a total amount in the income statement consisting of the sale price less the transaction costs and the book value of the participating interest.

3.4 Investmentproperty

Investment property, comprising shop and office buildings and land, are held to generate long-term rental income. If property is kept partly as investment property and partly for own use, the property is included under tangible fixed assets, unless the part in own use is less than 20% of the total number of square metres.

Investment property is treated as long-term investments and stated at fair value, which is the same as the open market value that is determined every three years by independent external surveyors with sufficient expertise and experience in the locations and categories of real estate. In the time between the three-yearly external valuation, SNS REAAL uses alternative valuation methods based on the total net annual rental of that property and, where applicable, the associated costs.

Changes in the fair value are stated in the income statement under result from investments. Investment property is carried at cost including transaction costs upon initial recognition. The summary below shows the bandwidth of return factors used for every category of property.

Building Location Return factor Shops A-location 6.50 – 7.50 Shops B-location 7.00 – 8.00 Offices A-location 7.00 – 9.00 Offices B-location 7.20 – 9.00


3.5 Investments

3.5.� Classification SNS REAAL divides its investments into the following categories: (1) held to maturity, (2) loans and receivables, (3) available for sale and (4)

at fair value through profit and loss. The category depends on the purpose for which the investments were acquired. Upon acquisition of its investments, the management decides which category the investment will be allocated to, and reviews the

appropriateness of this allocation every year as at reporting date. Upon first-time inclusion, investments are stated at cost including transaction costs.

3.5.� Heldtomaturity Fixed-term investments, which management intends, and is able, to hold to maturity, are classified as held to maturity. Investments held to maturity are stated at amortised cost based on the effective interest method, less a provision for impairment if

necessary. The effective interest method is based on the expected flow of cash receipts, with account being taken of the risk of early redemption of the underlying financial instruments and the direct costs, such as the transaction costs charged, agency commission and discount or premiums.

3.5.3 Loansandreceivables This item includes unlisted investments with a fixed term. These investments are stated at amortised cost based on the effective interest

method, less a provision for impairment if necessary.

3.5.4 Availableforsale Investments that do not satisfy the criteria defined by management for held to maturity investments or at fair value in the income

statement, are classified as available for sale. Upon first-time inclusion, investments available for sale are recognised at fair value in the balance sheet. Unrealised gains and losses

resulting from the fair value adjustments of investments available for sale are taken to shareholders’ equity, taking account of deferred taxes.

Investments in the form of shares of which the fair value cannot be estimated reliably are stated at cost less impairment if necessary. When the investments are sold or if they are impaired, the related accumulated fair value adjustments are recognised in the income statement as result from investments.

3.5.5 Atfairvaluethroughprofitandloss Investments at fair value through profit and loss were acquired with a view to benefiting from short-term fluctuations in the price or

trading margin. Upon first recognition, these investments are stated at cost, in other words, the fair value of the reimbursement paid, and are subsequently stated at fair value. All the related realised and unrealised gains and losses are taken to the result from investments. Interest income earned on securities is recognised as interest income under net interest income at SNS Bank and under result from investments at REAAL Verzekeringen. Dividend received is stated under result from investments.

3.5.6 Impairment The management performs an assessment at balance sheet date to ascertain whether there are objective indications of impairment of

investments held to maturity and available for sale. Impairment losses are taken directly to the income statement under Impairment of financial instruments and other assets. Remeasurement in shareholders’ equity, where applicable, is written down.

An investment is considered to be impaired if the cost exceeds the recoverable amount in the long term, in other words, a significant or prolonged decline in the fair value below its cost. The recoverable amount of the investments in the form of unlisted shares is determined using recognised valuation methods. The standard method used is based on the relationship in the market between the profit and the value of comparable companies. The recoverable amount of listed investments is determined on the basis of the market price. They are deemed to be impaired if there are objective indications that the decrease in the market price is such that it cannot reasonably be assumed that the value will recover to the level of the book value in the foreseeable future.

If, during a subsequent period, the impairment of an investment held to maturity or of investments available for sale decreases, and the decrease can objectively be attributed to an event following the write-down, the impairment is reversed in the income statement. This does not apply to investments in equity instruments where an increase in value following impairment is treated as a revaluation.

3.6 Investmentsforinsuranceproductsonbehalfofpolicyholders

These investments are held on behalf of life insurance policyholders and are stated at fair value. Amounts due by policyholders in this context are recognised in the income statement as insurance premiums. If the income from investments is not sufficient to cover the obligations due to minimum returns, a supplementary provision is formed at the expense of the income statement. Adjustments in the value of investments and book results on the sale of investments are taken to the income statement as result on investments on behalf of policyholders.


Obligations arising from investments on behalf of policyholders are recognised on the basis of the same principles as those used for the valuation of the corresponding investments. Adjustments in the value of obligations related to the investments on behalf of policyholders are recognised in the income statement under technical expenses with respect to insurance contracts on behalf of policyholders.

3.7 Derivatives

Derivative financial instruments, such as currency contracts, interest rate futures, forward contracts, currency and interest rate swaps, currency and interest rate options (both written and purchased) and other derivative financial instruments are stated at cost (including transaction costs) in the balance sheet upon first-time inclusion and are subsequently stated at fair value.

The fair value of publicly traded derivatives is based on listed bid prices for assets held or liabilities to be issued, and current offer prices for assets to be acquired or liabilities held.

The fair value of non-traded derivatives depends on the type of instrument and is based on a DCF model or an option valuation model. SNS REAAL recognises derivatives with a positive value as assets and derivatives with a negative value as liabilities.

Adjustments in the fair value of derivatives held for trading are taken to the valuation result on derivatives.

3.7.� Embeddedderivatives Certain derivatives are embedded in other financial instruments, such as conversion options in convertible bond loans. These are treated

as separate derivatives if there is no close relation between the risks and characteristics of the derivative and the host contract, and if the host contract is not stated at fair value, with unrealised gains and losses being taken to the result.

3.7.� Hedgeaccounting SNS REAAL uses derivatives as part of the management of the balance sheet and management of risk. These instruments are used for

hedging interest rate and foreign currency risks, including risks by virtue of future transactions. If a transaction meets the relevant conditions for hedge accounting, SNS REAAL applies fair value hedge accounting or cash flow hedge accounting.

SNS REAAL can designate particular derivatives as either (1) a hedge of the fair value of a recognised asset or liability (fair value hedge); or (2) a hedge of a future cash flow that can be attributed to a recognised asset or liability, an expected transaction or a definite obligation (cash flow hedge).

Hedge accounting is used for derivatives thus identified, provided certain conditions are met. The conditions applied by SNS REAAL for a derivative instrument to qualify for treatment as a hedging instrument comprise:

§ formal documentation of the hedging instrument, the hedged position, the aim, strategy and relationship of the hedge is completed before hedge accounting is applied;

§ the documentation shows that the hedge is expected to be effective in compensating the risk in the hedged position for the entire reporting period;

§ and the hedge continues to be effective during the term. A hedge is considered to be effective if SNS REAAL, from the start of and during the term, can expect that adjustments in the fair value or

cash flows of the hedged position are almost fully compensated by adjustments in the fair value or cash flows of the hedging instrument, and actual results point in this direction, and the actual effectiveness remains within a bandwidth of 80% to 125%.

SNS REAAL ends the hedge accounting as soon as it is established that a derivative is no longer an effective hedge, or when the derivative expires, is sold, terminated or exercised; when the hedged position expires, is sold or redeemed; or when an expected transaction is no longer deemed highly likely to occur.

3.7.�.� Fair value hedge accounting Derivatives designated as a hedge of the fair value of recognised assets or liabilities or of a definite obligation are stated as fair value hedge. Changes in the fair value of the derivatives that are designated as a hedge are taken directly to the income statement and reported in the

line that relates to the hedged item. The corresponding adjustments in the fair value of the hedged asset or the hedged liability that can be attributed to that specific hedged risk are also taken directly to the income statement under the same line in the income statement.

If the hedge no longer fulfills the conditions for hedge accounting, an adjustment in the book value of a hedged financial instrument is amortised and charged or credited to the income statement during the residual term of the instrument.

If the hedged instrument is no longer recognised, in other words, if it is sold or redeemed, the non-amortised fair value adjustment is taken directly to the income statement.

3.7.�.� Cash flow hedge accounting Derivatives can be designated as a hedge of the risk of future variability of the cash flows of a recognised asset or liability or expected

transaction. Adjustments in the fair value of the effective portion of derivatives that are designated as cash flow hedge and that fulfill the conditions for cash flow hedge accounting and that appear to be effective in relation to the hedged risk are stated in the cash flow hedging reserve as a separate component of shareholders’ equity. The underlying transaction, which is designated as part of a cash flow hedge, does not change as far as the administrative processing is concerned.

If the expected transaction leads to the actual inclusion of an asset or a liability, the gains and losses that were previously taken to shareholders’ equity are transferred to the income statement and classified as income or expense in the period during which the hedged transaction influences the result.


When determining the portion of the fair value adjustment that is included in the cash flow hedging reserve, the portion of the gain or loss on the hedging instrument that is considered as an effective hedge of the cash flow risk is taken to shareholders’ equity, while the ineffective portion is taken to the income statement.

If the hedging instrument itself expires or is sold, terminated or exercised, the accumulated gain or loss that was included in shareholders’ equity remains in shareholders’ equity until the expected transaction actually takes place. If the hedging instrument no longer satisfies the conditions for hedge accounting, the accumulated gain or loss that was included in shareholders’ equity remains in shareholders’ equity until the expected transaction takes place. If the transaction in question is no longer expected to take place, the accumulated result taken to shareholders’ equity is immediately transferred to the income statement.

3.8 Deferredtaxreceivables

Deferred tax receivables and liabilities are recorded for temporary differences between the book value of assets and liabilities for tax and for accounting purposes. This is based on the tax rates applicable as at balance sheet date and that are expected to apply in the period in which the deferred tax receivables are realised or the deferred tax liabilities are settled. The deferred taxes are stated at nominal value.

Deferred tax receivables are only included if it is expected that tax profits will be realised in the near future as compensation for these temporary differences. A provision for deferred taxes is formed for temporary differences between the book value and the value for tax purposes of investments in group companies and participating interests, except if the Group can determine the time at which these temporary differences are realised or settled and if it is likely that these differences will not be realised or settled in the near future.

The most significant temporary differences arise from the revaluation of tangible fixed assets, certain financial assets and liabilities, including derivatives contracts, provisions for pensions and other post-retirement employee schemes, technical provisions, deductible losses carried forward; and, as far as acquisitions are concerned, from the difference between (a) the fair value balance of the acquired assets and obligations entered into and (b) the book value.

Tax due on profits is recognised in the period during which the profits were generated, based on the applicable local tax laws. Deferred taxes with respect to the revaluation of investments available for sales and cash flow hedges, of which value adjustments are taken directly to shareholders’ equity, are also charged or credited to shareholders’ equity and consequently taken to the income statement together with the deferred value adjustments.

3.9 Reinsurancecontracts

Contracts concluded by SNS REAAL with reinsurance companies by virtue of which SNS REAAL receives compensation for losses on one or more contracts issued by SNS REAAL, which satisfy the criteria for insurance contracts, are designated as held reinsurance contracts.

Insurance contracts concluded by SNS REAAL where the contract holder is a different insurance company are designated as received reinsurance contracts and recognised as insurance contracts.

Reinsurance premiums, commission, payments and claims and technical provisions for reinsurance contracts are accounted for in the same way as the direct insurance policies that are reinsured. The share of the reinsurance companies in the technical provisions for reinsurance contracts and the benefits to which SNS REAAL is entitled to by virtue of its insurance contracts are recognised as assets from reinsurance. These assets comprise current receivables from reinsurance companies (presented under other assets), and non-current receivables (presented under reinsurance contracts). These receivables depend on the expected claims and benefits arising from the relevant reinsured insurance contracts. The amounts due to reinsurance companies are valued in accordance with the terms and conditions of each reinsurance contract. Reinsurance obligations primarily concern premiums payable for reinsurance contracts. These premiums are recognised as expense in the period during which these premiums are due.

The receivables in respect of reinsurance contracts are tested for possible impairment on the balance sheet date.

3.�0 Mortgageloanstoclients

3.�0.� Mortgagereceivables This is defined as loans and advances to clients with mortgage collateral. These loans and advances are stated at amortised cost on the

basis of the effective interest method. Loans and advances adjusted after negotiations or otherwise adjusted due to financial restructuring of the borrower are valued on the basis of the original effective interest rate before the terms and conditions were revised.

As far as the loans and advances are concerned, a provision for impairment is formed if there are objective indications that SNS REAAL will not be able to collect all the amounts due by virtue of the original contracted loan terms and conditions. For loans and advances that are individually significant, the provision formed equals the difference between the book value of the total position and the recoverable amount. The recoverable amount equals the present value of the expected cash flows, including the amounts realised by virtue of guarantees and collateral, discounted at the effective interest rate of the loans and advances.

Small homogenous loans and advances are tested collectively for impairment. The provision with respect to this collective approach is calculated using a range of model-based instruments, including ‘risk-rating’ models for homogenous pools of consumer and business loans. The loss factors developed using similar models are based on historic loss data of SNS REAAL, and are adjusted according to clear current information that, in the opinion of the management, can affect the collectability of the portfolio on the assessment date.


The provision for impairment also covers losses where there are objective indications of losses likely to be incurred in the loan portfolio. These are estimated on the basis of historic loss patterns in every division and the creditworthiness of the borrower, and are a reflection of the current economic climate in which the borrowers operate.

If a loan cannot be collected, it is written off against the relevant provision for impairment. Amounts that are subsequently collected are deducted from the addition to the provision for loan losses in the profit and loss account.

If the amount of the impairment subsequently decreases due to an event following the write-down, the release from the provision is credited to the income statement.

3.�0.� Creditguarantees SNS REAAL has concluded a credit guarantee for the credit risk in a portion of the mortgage portfolio to recover impairment losses on the

relevant mortgage portfolio from the guarantor. Impairment of mortgages is included under impairment of financial instruments and other assets. The amount receivable by virtue of the guarantee is also recognised on this line in the result.

3.�� Otherloansandadvancestocustomers

This comprises loans and advances to business and private clients without mortgage collateral. Loans and advances adjusted after negotiations or otherwise adjusted due to financial restructuring of the borrower are valued on the basis of the original effective interest rate before the terms and conditions were revised.

As far as the loans are concerned, a provision for impairment is formed if there are objective indications that SNS REAAL will not be able to collect all the amounts due by virtue of the original contracted loan terms and conditions.

The criteria for impairment are applied to the entire loans portfolio, except to smaller, homogenous loans, such as consumer credit and credit card loans, which are tested collectively for impairment. Smaller business loans managed in a portfolio are also tested collectively for impairment.

For loans and advances that are individually significant, the provision formed equals the difference between the book value of the total position and the recoverable amount.

The provision with respect to the collective approach is calculated using a range of model-based instruments, including ‘risk-rating’ models for homogenous pools of consumer and business loans. The loss factors developed using similar models are based on historic loss data of SNS REAAL, and are adjusted according to clear current information that, in the opinion of the management, can affect the collectability of the portfolio on the assessment date.

The provision for impairment also covers losses where there are objective indications of losses likely to be incurred on the loan portfolio. These are estimated on the basis of historic loss patterns in every division and the creditworthiness of the borrowers, and are a reflection of the current economic climate in which the borrowers operate.

If a loan cannot be collected, it is written off against the relevant provision for impairment. Amounts that are subsequently collected are deducted from the addition to the provision for loan losses in the profit and loss account.

If the amount of the impairment subsequently decreases due to an event following the write-down, the release from the provision is credited to the income statement.

3.�� Loansandadvancestocreditinstitutions

The loans and advances to credit institutions concern loans to banks, insofar as not in the form of interest-bearing securities. These loans and advances are carried at amortised cost on the basis of the effective interest method.

3.�3 Othertaxreceivables

The other tax receivables concern tax due on the taxable profits. This item also includes receivables concerning wage tax, dividend tax and value added tax.

Current tax receivables are stated at nominal value.

3.�4 Otherassets

Other assets consist of receivables from direct insurance policies, other receivables and accrued assets. Accrued assets include the accumulated interest on financial instruments stated at amortised cost, as well as the accrued assets.

3.�5 Cashandcashequivalents

Cash and cash equivalents include the demand deposits at the Dutch central bank and deposits at other banks. Loans and advances of SNS Bank to banks are included under Loans and advances to credit institutions.


3.�6 Shareholders’equity

3.�6.� Issuedsharecapital The share capital comprises the issued and paid-up share capital. Costs directly attributable to the issue of equity instruments are

deducted net of tax from the share issue income in shareholders’ equity.

3.�6.� Ordinarysharedividend Dividend for a financial year, which is payable after the balance sheet date, is disclosed in the notes on the events after the balance sheet

date.

3.�6.3 Revaluationreserve These reserves concern the revaluation of real estate for own use (see 3.2.1).

3.�6.4 Cash-flowhedgereserve Adjustments in the fair value of the effective portion of derivatives that are designated as cash-flow hedge and that comply with the

conditions for cash flow hedge accounting and that appear to be highly effective in relation to the hedged risk are stated in the cash-flow hedge reserve (see 3.7).

3.�6.5 Fairvaluereserve This reserve relates to the revaluations of the instruments available for sale (see 3.5.3). In addition, exchange rate differences on non-

monetary financial assets that are classified as available for sale are stated in this reserve (see 1.10).

3.�6.6 Otherreserves Other reserves comprise the retained earnings of SNS REAAL.

3.�7 Participationcertificatesandsubordinateddebts

SNS Bank issues participation certificates to third parties. The certificates have an open-ended term, with SNS Bank maintaining the right to early redemption in full after 10 years, provided permission is given by the regulator. The amount of the dividend, in the form of a coupon rate, is fixed over a period of 10 years and equal to the CBS (Statistics Netherlands) return on 9-10 year Government bonds plus a mark-up. Benefit payments on participation certificates are stated under interest expenses for banking operations. These certificates are classified as debt in the financial statements. For the solvency reports to the Dutch central bank, this item forms part of the Tier 1 capital. Participation certificates are valued at amortised cost.

Subordinated loans include the subordinated bond loans that are considered in the solvency test by DNB, and are stated at amortised cost based on the effective interest rate.

At REAAL Verzekeringen, the final bonus account concerns final bonus commitments in relation to certain life insurance policies. Entitlement to a final bonus applies only to specific individual policies that become payable upon expiry of the agreed term or upon the death of the insured party. Entitlement to a final bonus is cancelled when the policy is surrendered. Entitlements to final bonuses not yet paid out are subordinated to all other debts. It is also stipulated that entitlement to a final bonus is cancelled if and insofar as the results erode the capital base to the extent that the statutory solvency requirements can or may no longer be complied with. The final bonus account is calculated on an actuarial basis using the same principles as applied to calculate the profit additions, which form part of the technical provisions for insurance operations, additionally taking account of the estimated probability of early termination of insurance policies.

Part of the final bonus account is converted annually, according to a fixed method, into an unconditional right of the policyholder and added to the Technical provisions for insurance operations. These obligations arising from the final bonus scheme are classified as debt in the financial statements. For the solvency reports by REAAL Verzekeringen to the Dutch central bank, this item forms part of the available equity.

3.�8 Debtcertificates

Upon first-time recognition, outstanding debt certificates are stated at cost, in other words, the issue income (the fair value of the received payment) net of the transaction costs incurred. Thereafter, they are stated at amortised cost. The hedge accounting rules are applied to outstanding debt certificates and other borrowed funds that are hedged by derivatives as referred to in 3.7.

When SNS REAAL purchases its own debt securities in the context of market maintenance, these debt certificates are removed from the balance sheet.

SNS REAAL Financial Statements 2005 notes to the consolidated financial statements��0 SNS REAAL Financial Statements 2005 notes to the consolidated financial statements

3.�9 Technicalprovisions,insuranceoperations

3.�9.� Insurancecontracts–commitments3.�9.�.� Life insurance A commitment is recognised for contractual payouts expected in the future as soon as the premiums become due. The life insurance

commitments consist of the cash value of the expected future benefits to policyholders or other beneficiaries, including future premiums. The provision is calculated according to the actuarial methods with assumptions, such as estimates of premiums, mortality, investment

results, termination of policies, surrender and costs being taken into account. These assumptions were originally based on the best possible estimates of actual future outcomes when the contracts is concluded with, in some cases, account being taken of a margin for negative developments. The assumptions used are regularly tested against the actual developments and, depending on the type of product, adjusted if necessary. The average discount rate is 3% or 4% and is fixed. The average actuarial interest rate is 4.2% (2004: 4.0%).

Mortality rates are determined on the basis of the same principles used to calculate the premiums. Where necessary, adjustments are made in accordance with the latest mortality tables. The assumptions take account of a margin for unfavourable deviations. The commitments are calculated every year as at balance sheet date, with the assumptions made at the outset of the contract being used.

The premiums are loaded to cover the costs. When the premiums are received or become due, the surcharge is released and becomes available for covering the actual costs, including recurrent costs, non-capitalised acquisition costs and amortisation of the capitalised acquisition costs.

REAAL also sells products that contain minimum guarantees. The technical provision for life insurance includes provisions for guaranteed benefits. This technical provision also includes guarantees with respect to policies of which policyholders bear the investment risk.

The provisions are stated net of the capitalised interest rate rebates. Depending on the type of insurance contract, the capitalised interest rate rebate is amortised either on an actuarial basis or over a period of eight years.

Profit sharing already awarded but not yet paid out and the single premium profit policies for the next year are included under the provision for profit sharing, bonuses and discounts, calculated using actuarial principles.

The commitments arising from funeral insurance policies consist of the cash value of the expected future benefits to policyholders or other beneficiaries, including profit sharing already awarded and future administrative expenses that are directly related to the contract, less the expected value of the future premium income.

The premium provision for the right to premium exemption during occupational disability and the occupational disability payments is twice the annual premium received, with the exception of the premiums withheld in investment insurance policies, for a which premium provision equal to one time the annual premium is kept.

3.�9.�.� Non-life insurance The provision for unearned premiums is computed in proportion to the unexpired risk periods. The provision is equal to the unearned gross

premiums net of prepaid reinsurance premiums. Gross premiums are stated net of the commission paid. The provision for unexpired risks is calculated on the basis of claims and claim-handling expenses that may arise after balance sheet date

and which are covered by contracts concluded before that date, insofar as the amount estimated in this connection exceeds the provision for unearned premiums and the premiums claimable in relation to these contracts.

REAAL Verzekeringen keeps co-insurance contracts, which mainly concern the transport sector. In the calculation of the technical provision, account is taken with risks entered that have not yet occurred, and events that have occurred but have not yet been reported. The expected balances for the risks entered into and loss incurred are determined on an underwriting year basis.

Claims and specialist costs are charged to the result when they are incurred. Provisions for unpaid claims and specialist costs concern the accumulated estimates of the final claims and comprise a provision for events

that have already occurred but have not yet been reported. The provisions represent the estimate of the future payouts for reported and unreported damage claims and the associated costs with respect to insured events that have occurred. Expected subrogation is deducted from the provision.

The provision for payable claims is earmarked for claims for the financial and preceding years that have yet not been settled as at balance sheet date. The provision is determined systematically for each item or on the basis of statistical data, taking account of claims not yet reported. In determining the provision, account was also taken of claim-handling costs still to be incurred. Transport and aviation insurance contracts use a different method. The calculation is performed on an underwriting year basis, with the provision for premiums and claims being taken to a fund separately.

The calculation of provisions involves uncertainties that require substantiated estimates and assessments. The non-life provisions, with the exception of claims related to occupational disability, are not discounted by SNS REAAL, in accordance with standard practice in the sector. Adjustments in estimates are stated in the result in the period during which the estimates are adjusted

In the event of individual cases reported to SNS REAAL, commitments in respect of unpaid claims are estimated on the basis of the claim assessment. In the case of events that have already occurred, but have not yet been reported, the commitments are estimated on the basis of statistical analyses. Statistical analyses are also used to estimate the expected final costs of more complex claims that can be influenced by both internal and external factors (such as claim handling procedures, inflation, changes in legislation and regulations, court rulings, history and trends). Payments are recognised as a charge when they are made.

3.�9.�.3 unit-linked contracts These contracts primarily concern life insurance policies, with the investment risk being borne by the policyholders. The technical provisions for insurance policies, in which policyholders bear the investment risk, are stated at the balance sheet value of the

SNS REAAL Financial Statements 2005 notes to the consolidated financial statements ��SNS REAAL Financial Statements 2005 notes to the consolidated financial statements

related investments. These technical provisions are thus stated at fair value in the income statement. Transaction costs and commission are not included in the first valuation but recognised as charge at the moment they are incurred.

Guarantees have been furnished for insurance policies in investment units with the premiums being invested in a fixed-income fund. The guarantee entails a 3% or 4% annual return on the invested savings premium, and only applies at the maturity date of the insurance policy.

Payments are recognised as a charge when they are made.

3.�9.�.4Reinsurance Reinsurance contracts and other damage retrieving options are recognised separately under assets and are assessed and accounted for in

the same way as the corresponding technical provisions.

3.�9.�.5 Discretionary profit-sharing commitments The insurance portfolio contains contracts with discretionary profit sharing. This profit sharing is awarded each year, mainly on the basis of

the surplus interest realised in accounting terms on fixed-income securities in the existing portfolio, less related costs and a limited share in the insurance result upon death. When awarding the profit, account is also taken of expected returns in the future and other factors that could have an influence on the investment returns. The realisation of surplus interest in accounting terms is not the same as the investment results under the accounting principles used in these financial statements.

As far as the differences between the calculation of the profit and the accounting principles used in these financial statements are concerned, realised and unrealised gains and losses from fixed-income securities, which serve to hedge these contracts proportionally and are recognised in shareholders’ equity in accordance with accounting principles used in these financial statements, are considered to be available for future profit sharing to policyholders. Insofar as applicable, this is disclosed in shareholders’ equity.

3.�9.� Adequacytestforinsurancecommitments Although the insurance commitments present a true and fair view on the basis of the information available as at balance sheet date, the

eventual commitments can vary as a result of events after balance sheet date, which can result in a significant change in the current valuation. Changes in the valuations of prior years are recognised in the year in which these changes are implemented, and are disclosed separately if material.

The methods and assumptions used are regularly assessed during the reporting period. Every year at balance sheet date, an adequacy test is performed for life insurance commitments to ensure that the contractual obligations,

net of the related capitalised acquisition costs, and VOBA, are adequately stated. The tests are performed using the estimates of future contractual cash flows and claim handling and management costs, and income from investments that serve to hedge these obligations. Any shortfall is taken directly to the profit and loss account by first writing down the capitalised acquisition costs or the VOBA and then, insofar as necessary, forming a provision for insurance commitments (the provision for current risks) on the basis of the adequacy test.

As explained in the notes, life insurance contracts are valued on the basis of assumptions made at the outset of the contract. When the adequacy test for insurance commitments indicates that new best assumptions need to be made, these assumptions (without a margin for unfavourable deviations) are subsequently used for determining these commitments. The adequacy test for the discount rate is based on the interest rate laid down by DNB.

Write-downs on capitalised acquisition costs or the VOBA as a result of this test cannot be subsequently reversed.

The following principles were used in the adequacy test: § Discount rate 3% § Profit allocation With surplus interest exceeding 4.5%, surplus interest tranches increase § Inflation 2% § Efficiency improvement 2% § Expected mortality Historical tables on the basis of internal research § Lapse and early surrender Historical tables on the basis of internal research § Salary trend, group policies 2.5% § Increase in participants, group policies 5% § Tax percentage 0% § Cost of capital required 0

3.�9.3 Derivativesembeddedinhostcontracts SNS REAAL does not separately recognise derivatives embedded in insurance contracts, or options to surrender insurance contracts at a

fixed amount, or fixed amount and an interest rate, and thus closely linked to the basic insurance contract, but recognises them in accordance with the main contract. The embedded derivatives are measured as soon as they have become final; the time value of the derivative is not included in full in the measurement of the contract.

SNS REAAL Financial Statements 2005 notes to the consolidated financial statements�� SNS REAAL Financial Statements 2005 notes to the consolidated financial statements

3.�0 Provisionforemployeebenefits

3.�0.� Pensioncommitments SNS REAAL has different pension schemes, the major part of which being defined contribution schemes. A defined contribution scheme is

a pension scheme in which SNS REAAL pays fixed contributions to a separate entity (a fund). SNS REAAL has no legally enforceable or constructive obligation in these schemes to pay extra contributions if the fund has insufficient assets to make all the benefit payments in connection with staff performance during the reporting and prior periods.

For the defined contribution schemes, SNS REAAL pays contributions to Stichting Pensioenfonds SNS REAAL. After payment of the contributions, SNS REAAL has not further payment obligations. The regular contributions are considered to be net period costs for the year in which they are due, and are recognised as such in the staff costs.

Employee contributions are deducted from the net period costs. SNS REAAL additionally has a number of defined benefit pension schemes. The Group’s net commitments arising from defined benefit

pension schemes are calculated separately for each scheme by making an assessment of the pension entitlements that staff have accrued in exchange for their service during the period under review and prior periods. These pension entitlements are discounted in order to determine the present value, and the fair value of the fund investments is deducted from this. The discount rate represents the return as at balance sheet date of bonds with an AAA credit rating whose maturity approach the term of the commitments.

All the actuarial gains and losses as at 1 January 2004, the date of transition to IFRS, are charged to the shareholders’ equity. With respect to the actuarial gains and losses incurred after 1 January 2004 during the calculation of the Group’s commitments arising from defined benefit pension schemes, insofar as non-recognised accumulated actuarial gains and losses exceed 10% of the cash value of the gross commitment arising from the defined benefit pension scheme, or the fair value of the fund investments if higher, that portion is taken to the income statement for the expected remainder of the service of the employees participating in the scheme. Other than that, the actuarial gains or losses are not included.

When the calculation results in a positive outcome for the Group, the asset is stated at a maximum equal to the balance of any non-recognised actuarial losses and past service pension charges and the cash value of any future repayments by the fund or lower future premiums.

3.�0.� Liabilitiesbyvirtueofotherbenefitsafterretirement A number of subsidiaries of SNS REAAL provide limited reimbursements for medical expenses and long-service awards, as well as a

discount on certain financial services of SNS REAAL and its subsidiaries to its retired employees. To qualify for these benefits, the employment contract of the staff should normally have continued until the retirement age, and it should have lasted for a minimum period. A liability is formed for the estimated costs of these benefits during the term of employment using a method that corresponds with that used for defined benefit schemes. This liability is determined annually on the basis of actuarial principles.

3.�� Otherprovisions

SNS REAAL forms provisions if there is a legally enforceable or constructive obligation arising from events in the past, the settlement of which is likely to require an outflow of assets, and a reliable estimate of the size of the obligation can be made. Provisions are stated at the present value of the expected future cash flows. Additions and any subsequent releases are taken to the profit and loss account.

3.��.� Reorganisationprovision The reorganisation provision comprises estimated termination benefits and other direct costs related to restructuring programmes.

These costs are recognised in the period in which SNS REAAL is presented with a legally enforceable or constructive obligation to pay. No provision is formed for costs in advance related to the continuing operations of SNS REAAL.

SNS REAAL recognises termination benefits if the Group has demonstrably committed itself to: § termination of the employment contract of current employees in accordance with a detailed formal plan without the option of the plan

being withdrawn; or § payment of termination benefits as a result of an offer to encourage voluntary redundancy.

Benefits that are due after more than twelve months after the balance sheet date are discounted. No provisions are formed for future operating losses.

3.��.� Legalcosts A provision for legal proceedings is formed for the estimated liability with respect to pending legal proceedings as at balance sheet date.

The claims against SNS REAAL in the legal proceedings are disputed. Although the outcome of these disputes cannot be predicted with certainty, it is assumed on the basis of legal advice obtained and information received that they will not have a substantial unfavourable effect on the financial position of SNS REAAL. The provision comprises an estimate of the legal costs and payments due during the course of the legal proceedings.

SNS REAAL Financial Statements 2005 notes to the consolidated financial statements ��3SNS REAAL Financial Statements 2005 notes to the consolidated financial statements

3.�� Derivatives

See part 3.7. of these Notes.

3.�3 Deferredtaxliabilities

Deferred tax liabilities concern tax payable in future periods in connection with taxable temporary differences. See 3.8 for detailed information.

3.�4 Savings

This item consists of balances on savings accounts, savings deposits and term deposits of private clients. Upon first-time inclusion, other funds entrusted are stated at cost, including transaction costs. Thereafter, these are stated at amortised cost. A difference between the income and the redemption value based on the effective interest method is recognised under Net interest income, banking operations in the income statement as during the term of the funds entrusted.

3.�5 Otheramountsduetocustomers

Amounts owed to clients concern unsubordinated debts to non-banks, other than in the form of debt certificates. Upon first-time inclusion, these debts are stated at cost, including transaction costs. Thereafter, they are stated at amortised cost. A difference between the income and the redemption value based on the effective interest method is recognised under Net interest income, banking operations in the income statement during the term of these amounts owed to clients.

3.�6 Amountsduetocreditinstitutions

Amounts owed to credit institutions concern debts to banks, insofar as not in the form of interest-bearing securities. Upon first-time inclusion, these debts are stated at cost, including transaction costs. Thereafter, they are stated at amortised cost. A difference between the income and the redemption value based on the effective interest method is recognised under interest charges in the income statement during the term of these debts to credit institutions.

3.�7 Othertaxliabilities

Taxes due concern tax on the taxable profit for the period under review, based on the applicable tax rates or the tax rates that had materially been agreed as at balance sheet date. This item also includes payroll tax and value added tax payable.

3.�8 Otherliabilities

Other liabilities primarily consist of interest accrued on financial instruments that are stated at amortised cost. This item also includes payables and accrued liabilities.

4 Income statement

4.� Income

Income represents the fair value of the services, less value added tax, after elimination of intra-group transactions within SNS REAAL. Income is recognised as follows:

4.�.� Interestincome,bankingoperations The interest income from banking activities is the difference between interest income from banking activities and interest expenses from

banking activities. The interest income from banking activities comprises interest on monetary financial assets attributable to the period. Interest on financial assets not classified as being stated at fair value in the income statement is recognised using the effective interest method based on the actual acquisition price.

The effective interest return method is based on the expected flow of cash receipts, with account being taken of the risk of early redemption of the underlying financial instruments and the direct costs, such as the transaction costs charged, agency commission and discount or premiums. If the risk of early redemption cannot be reliably determined, SNS REAAL assumes the cash flows over the full term of the financial instruments.

Commitment fees, together with related direct costs, are deferred and recognised as an adjustment of the effective interest on a loan if it is likely that SNS REAAL will conclude a particular loan agreement. If the commitment expires without SNS REAAL extending the loan, the fee is recognised at the moment the commitment term expires. If it is unlikely that a particular loan agreement will be concluded, the commitment fee is recognised pro rata during the commitment term.


Interest income on monetary financial assets that have been subject to impairment and written down to the estimated recoverable amount or fair value is subsequently recognised on the basis of the interest rate used to determine the recoverable amount by discounting the future cash flows.

Interest expenses from banking activities comprise the interest expenses arising from financial liabilities of the banking operations. Financial liabilities not classified as stated at fair value in the profit and loss account are recognised on the basis of the effective interest method.

4.�.� Netpremiumincome Net premium income is divided into Regular Life, Single-premium Life and Non-life premiums. Gross premium income, excluding tax and other charges, from life insurance contracts is recognised as revenue when payment by the

policyholder falls due. The premiums for single-premium contracts and limited-premium life insurance policies are recognised as income when payment falls due, with possible surplus profit being deferred and included in the result in a constant ratio to the current policy or, in the case of annuities, proportional to the amount of the benefits.

The premiums for non-life policies, usually insurance contracts with a maximum term of twelve months, are recognised as revenue during the term of the contract proportional to the amount of insurance coverage provided. The provision for unearned premiums represents a proportion of the unexpired risk periods. This provision for unearned premiums is determined separately for each insurance contract on the basis of a daily pro-rata method adjusted, where applicable, for differences in risk and the frequency of claims during the term of the insurance contract. Changes in the provision for unearned premiums are taken to the income statement such that the revenue is recognised during the risk period.

Reinsurance premium outflows are deducted from the premium income and recognised as an expense in accordance with the type of reinsurance cover received. A proportion of the reinsurance premium outflow is stated as a prepayment.

4.�.3 Netcommissionandmanagementfees Commission includes income from securities transactions for clients, asset management, commission from the insurance operations and

other related services offered by SNS REAAL. These are recognised in the reporting period in which the services are delivered. Commission related to transactions with financial instruments for own account are incorporated in the amortised cost of this instrument, unless the instrument is stated at fair value in the income statement, in which case the commission is taken to the valuation result.

4.�.4 Investmentincome The result on investments comprises: § Interest § Dividend § Rent § Increases and decreases in value

4.�.4.� Interest The Interest item comprises the Group’s net interest income and interest income on investment on the basis of the effective interest

method . The Group’s net interest income is the difference between the interest income realised by the Group and the Group’s interest expenses.

4.�.4.� Dividend Dividend income is recognised in the income statement as soon as the entity’s right to payment is established. In the case of listed

securities, this is the date on which the dividend is paid out.

4.�.4.3 Rent Rent comprises the rental income from investment property. This rental income is recognised as income on a straight-line basis for the

duration of the lease agreement.

4.�.4.5 Increases and decreases in value Increases and decreases in the value of investments in the category Fair value in the income statement and realised increases and

decreases in the value of the investments in the other categories are accounted for under this item. Realised value increases concern the difference between the sale price and book value; unrealised value increases concern the difference between the fair value and the book value.

4.�.5 Investmentincomeonbehalfofpolicyholders These investments are held on behalf of life insurance policyholders and are stated at fair value. Increases and decreases in the value of

investments and book results on the sale of investments are taken to the income statement as result on investments on behalf of policyholders.


4.�.6 Resultonderivativesandotherfinancialinstruments Derivatives are stated at fair value. Gains and losses from remeasurement to fair value are taken directly to the income statement as Result

on derivatives and other financial instruments. However, if derivatives are eligible for hedge accounting, the recognition of a resulting gain or a resulting loss depends on the nature of the hedged item. The non-effective portion of any gains or losses is taken to Result on derivatives and other financial instruments.

4.�.7 Otheroperatingincome Other operating income comprises all the income that cannot be accounted for under other headings.

4.� Expenses

Expenses include the losses and charges arising from the ordinary business activities of SNS REAAL. Expense is recognised in the profit and loss account on the basis of a direct relationship between the costs incurred and the corresponding

income. If future economic benefits are expected to be spread across different reporting periods, expenses are recognised in the income statement using a systematic method of allocation. Cost items are immediately taken to the income statement if they do not generate any future economic benefits.

4.�.� Technicalexpensesoninsurancecontracts This item comprises the net movements in the technical provision. See notes under Technical insurance provisions in section 3. In addition,

benefit payments to policyholders, reinsurance premiums, claims and claim handling costs are recognised under this item.

4.�.� Technicalexpensesoninsurancecontractsonbehalfofpolicyholders This item includes movements in the unit-linked provisions. See subsection on unit-linked contracts in the notes to Technical insurance

provision in section 3. In addition, payments to policyholders are recognised under this item.

4.�.3 Acquisitioncostsforinsuranceactivities These costs comprise the direct and indirect costs involved in acquiring an insurance contract, including acquisition commission, the costs

of a medical check-up and administrative costs for including the items in the portfolio. The direct acquisition costs and part of the indirect acquisition costs are capitalised and amortised actuarially as and when the allowances due are actually earned.

4.�.4 Valueadjustmentsonfinancialinstrumentsandotherassets Value adjustments concern the permanent loss of value on assets to below their book value. Goodwill and other intangible assets, tangible

fixed assets, investments in associated subsidiaries, investments, receivables and other assets may be subject to impairment. As soon as impairment is identified, it is recognised in the income statement. The specific principles for impairment are explained in more detail in section 3 under the applicable items.

4.�.5 Staffcosts These costs concern all the costs related to staffing, including salaries, social security charges, pension charges and discounts extended to

members of staff.

4.�.6 Depreciationoftangiblefixedassetsandamortisationofintangibleassets This item comprises all depreciation and amortisation of tangible and intangible fixed assets. The specific principles for depreciation and

amortisation are explained in more detail in section 3 under the applicable items.

4.�.7 Otheroperatingexpenses This includes office, accommodation and other operating costs.

4.�.8 Otherinterestexpenses Other interest expenses comprise the interest expenses of the insurance operations arising from financial obligations. The interest

expenses are incorporated in the income statement in accordance with the effect interest method.

5 Off-balance sheet commitments

Contingent liabilities are liabilities not stated on the balance sheet because the existence is contingent on one or more uncertain events that may or may not occur in the future without SNS REAAL having decisive influence on it. It is not possible to make a reliable estimate of the liability.

The maximum potential credit risk arising from these contingent liabilities of SNS REAAL is stated in the notes. In determining the maximum potential credit risk, it is assumed that all the counterparties would default their contractual obligations and that all the existing sureties would be worthless.


Information by segment

SNS REAAL is a retail banking and insurance provider offering banking, investment and insurance products to the private and small and medium-sized business market in the Netherlands. It serves its private and business clients primarily through its main brands of SNS Bank and REAAL Verzekeringen and through various distribution channels. The activities of SNS REAAL are organised in four primary business segments: � SNS Bank

This business segment offers banking products in the field of mortgages and wealth creation and protection for both the private and the business market. In addition to SNS Bank, this segment also comprises ASN Bank, BLG Hypotheken, CVB Bank, SNS Securities and SNS Asset Management. At secondary level, the SNS Bank business segment is organisationally split between Retail and Commercial; � REAAL Verzekeringen Life This business segment offers life and pension insurance policies to the private and business market. The REAAL Verzekeringen Leven segment invludes the REAAL Leven, Proteq Leven and Nieuwe Hollandse Lloyd Leven divisions; 3 REAAL Verzekeringen Non-life

This business segment offers non-life insurance policies with respect to property, mobility, injury, invalidity and occupational disability. The REAAL Verzekeringen Schade segment invludes the REAAL Schade, Proteq Schade and Nieuwe Hollandse Lloyd Schade divisions; 4 Group activities

The group activities include the business units that are managed directly from within the Group and whose income and expenses are not attributed to the other business segments. The Group activities segment also includes SNS REAAL Invest. Allocation of group costs A number of corporate staff departments are shared. The costs of the corporate staff are charged on the basis of the service provided or proportionally allocated to the group’s subsidiaries. The costs of the Group Executive Board and certain holding company costs are not allocated to group subsidiaries. Technical account REAAL Insurance All investment results in the technical account of REAAL Verzekeringen are allocated to own account, insofar as not on behalf of policyholders. Investment charges concerning the interest charges on granted intercompany loans.


Balance sheet

In€millions SNSBank REAALVerzekeringen Groupactivities

Consolidationadjustments

Total

Life Non-life

�005 �004 �005 �004 �005 �004 �005 �004 �005 �004 �005 �004

AssetsGoodwill and other intangible assets 12 12 547 357 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 559 369

Tangible fixed assets 153 164 73 67 3 ‑‑ ‑‑ ‑‑ 73 69 302 300

Associated companies 2 5 77 ‑‑ ‑‑ ‑‑ 50 49 (3) (3) 126 51

Subsidiaries ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 2,662 2,148 (2,662) (2,148) ‑‑ ‑‑

Investment property 1 2 201 192 ‑‑ ‑‑ ‑‑ ‑‑ (73) (69) 129 125

Investments 1,641 1,703 7,113 6,428 743 451 117 ‑‑ (403) (349) 9,211 8,233

Investments for insurance pro-ducts on behalf of policyholders ‑‑ ‑‑ 3,426 2,798 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 3,426 2,798

Derivatives 915 70 237 41 ‑‑ ‑‑ 22 (8) ‑‑ ‑‑ 1,174 103

Deferred tax receivables 85 32 26 70 4 ‑‑ 17 65 ‑‑ ‑‑ 132 167

Reinsurance contracts ‑‑ ‑‑ 196 197 169 72 ‑‑ ‑‑ ‑‑ ‑‑ 365 269

Mortgage loans to customers 42,558 38,937 986 987 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 43,544 39,924

Other loans and advances to customers 2,667 2,708 ‑‑ ‑‑ ‑‑ ‑‑ 628 635 (696) (716) 2,599 2,627

Loans and advances to credit institutions 4,118 2,478 995 1,091 ‑‑ ‑‑ ‑‑ 9 (164) (157) 4,949 3,421

Other tax receivables 52 8 39 29 ‑‑ ‑‑ 101 1 ‑‑ ‑‑ 192 38

Other assets 297 294 8 75 29 98 13 58 (43) (52) 304 473

Cash and cash equivalents 597 829 564 295 20 16 301 251 (406) (317) 1,076 1,074

Total assets 53,098 47,242 14,488 12,627 968 637 3,911 3,208 (4,377) (3,742) 68,088 59,972

LiabilitiesandequityShareholders’ equity 1,440 1,313 1,010 690 180 116 2,560 1,909 (2,662) (2,148) 2,528 1,880

Third-party interests ‑‑ ‑‑ 3 3 ‑‑ ‑‑ ‑‑ ‑‑ (3) (3) ‑‑ ‑‑

Group equity 1,440 1,313 1,013 693 180 116 2,560 1,909 (2,665) (2,151) 2,528 1,880

Participation certificates and subordinated debts 1,150 1,167 123 128 4 4 419 227 (80) (83) 1,616 1,443

Debt certificates 25,465 23,198 ‑‑ ‑‑ ‑‑ ‑‑ 189 266 ‑‑ ‑‑ 25,654 23,464

Technical provisions, insurance operations ‑‑ ‑‑ 11,953 10,840 741 490 ‑‑ ‑‑ (36) ‑‑ 12,658 11,330

Provision for employee benefits ‑‑ ‑‑ 4 3 8 ‑‑ 28 184 36 ‑‑ 76 187

Other provisions 23 29 6 16 ‑‑ ‑‑ 15 5 ‑‑ ‑‑ 44 50

Derivatives 939 28 33 14 ‑‑ ‑‑ 4 ‑‑ ‑‑ ‑‑ 976 42

Deferred tax liabilities 119 3 192 79 7 ‑‑ 6 ‑‑ ‑‑ ‑‑ 324 82

Savings 12,333 10,973 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 12,333 10,973

Other amounts due to customers 7,494 6,927 353 327 16 3 527 480 (1,312) (1,391) 7,078 6,346

Amounts due to credit institutions 3,103 2,295 417 129 8 ‑‑ 108 77 (217) (59) 3,419 2,442

Other tax liabilities ‑‑ ‑‑ 8 22 4 ‑‑ 12 (3) (1) ‑‑ 23 19

Other liabilities 1,032 1,309 386 376 ‑‑ 24 43 63 (102) (58) 1,359 1,714

Total liabilities and equity 53,098 47,242 14,488 12,627 968 637 3,911 3,208 (4,377) (3,742) 68,088 59,972


Income statement



Total

Life Non-life

�005 �004 �005 �004 �005 �004 �005 �004 �005 �004 �005 �004

IncomeInterest income, banking operations 595 571 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 27 22 622 593

Net premium income ‑‑ ‑‑ 1,422 1,354 323 296 ‑‑ ‑‑ ‑‑ ‑‑ 1,745 1,650

Net commission and management fees 114 109 35 26 8 5 ‑‑ ‑‑ (28) (25) 129 115

Result on investments 26 21 516 589 29 29 34 71 (56) (70) 549 640

Result on investments for insurance products on behalf of policyholders ‑‑ ‑‑ 394 126 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 394 126

Result on derivatives and other financial instruments 33 (7) (2) ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 31 (7)

Other operating income (4) 2 2 8 3 2 ‑‑ 2 ‑‑ (1) 1 13

Total income 764 696 2,367 2,103 363 332 34 73 (57) (74) 3,471 3,130

ExpensesTechnical expenses on insurance contracts ‑‑ ‑‑ 1,148 1,250 165 156 ‑‑ ‑‑ ‑‑ ‑‑ 1,313 1,406

Expenses concerning insurance contracts on behalf of policyholders ‑‑ ‑‑ 782 431 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 782 431

Acquisition costs for insurance operations ‑‑ ‑‑ 103 66 85 74 ‑‑ ‑‑ (21) (18) 167 122

Value adjustments on financial instruments and other assets 50 59 7 9 ‑‑ ‑‑ 3 3 ‑‑ ‑‑ 60 71

Staff costs 258 251 83 114 44 37 58 49 ‑‑ ‑‑ 443 451

Depreciation of tangible fixed assets and amortisation of intangible assets 27 28 11 14 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 38 42

Other operating expenses 172 160 42 44 27 16 (40) (2) ‑‑ ‑‑ 201 218

Other interest charges ‑‑ ‑‑ 40 55 1 ‑‑ 49 76 (30) (56) 60 75

Total expenses 507 498 2,216 1,983 322 283 70 126 (51) (74) 3,064 2,816

Share in the result of associates and subsidiaries 1 (3) 2 ‑‑ ‑‑ ‑‑ 346 326 (340) (279) 9 44

Operating profit before taxation 258 195 153 120 41 49 310 273 (346) (279) 416 358

Taxes 54 44 40 26 14 15 (13) (15) (2) ‑‑ 93 70

Net profit 204 151 113 94 27 34 323 288 (344) (279) 323 288

Additional information per segment



Total

Life Non-life

�005 �004 �005 �004 �005 �004 �005 �004 �005 �004 �005 �004

Cash flow from operating activities (2,252) (2,925) 938 22 261 29 (47) 393 (197) (335) (1,297) (2,816)

Cash flow from investment activities 207 458 (666) 194 (248) 17 4 297 25 (137) (678) 829

Cash flow from financing activities 1,813 2,842 (3) (50) (8) (47) 93 (639) 82 155 1,977 2,261


Secundary segmentation of SNS Bank

In€millions Retail Commercial Total

�005 �004 �005 �004 �005 �004

Assets 49,151 43,035 3,947 4,207 53,098 47,242

Income 676 616 88 80 764 696

Interest income 561 534 34 37 595 571

Income statement for REAAL Verzekeringen

In€millions Life Non-life

�005 �004 �005 �004

TechnicalaccountPremiums, net of reinsurance:- Gross premium income 1,443 1,372 346 317

- Outward reinsurance premiums 21 18 23 21

1,422 1,354 323 296

Change in technical provision for unearned premiums and current risks:- Gross (10) 2

- Reinsurers’ share (4) ‑‑

6 (2)

Investment income:- Investments for own account 516 589 29 29

- Investments on behalf of policyholders 394 126 ‑‑

910 715 29 29

Payments / claims: - Gross 1,152 1,658 207 187

- Reinsurers’ share 18 15 26 14

(1,134) (1,643) (181) (173)

Changes in provision:- Gross 719 (27) 19 22

- Reinsurers’ share 2 2 9 (1)

(717) 25 10 21

Profit-sharing and rebates (79) (63) ‑‑ (2)

Operating expenses (210) (213) (147) (120)

Investment costs (40) (55) (1) ‑‑

Result technical account 152 120 39 49


In€millions Non-life

�005 �004

Non-technicalaccountTechnical result, Life 152 120

Technical result, Non-life 39 49

Total technical result 191 169

Other income 5 11

Other expenses (2) (2)

Value adjustments to loans and advances ‑‑ (9)

Operating profit before taxation 194 169

Taxes 54 41

Net profit 140 128

Analysis of life insurance premiums

In€millions �005 �004

RegularpremiumpoliciesIndividual 796 713

Collective 63 66

859 779

SinglepremiumpoliciesIndividual 542 544

Collective 42 49

584 593

Total premium income, life insurance 1,443 1,372

SNS REAAL Financial Statements 2005 notes to the consolidated financial statements ��SNS REAAL Financial Statements 2005 notes to the consolidated financial statements

Analysis of non-life insurance technical result

In€millions Total Fire Accidentandhealth Motorvehicles Othersectors

�005 �004 �005 �004 �005 �004 �005 �004 �005 �004

Earned gross premiums 356 315 101 90 22 16 166 162 67 47

Gross claims 187 165 47 35 2 5 98 101 40 24

169 150 54 55 20 11 68 61 27 23

Reinsurance balance (11) (8) (4) (4) (8) (3) 1 ‑‑ ‑‑ (1)

158 142 50 51 12 8 69 61 27 22

Operating expenses and profit-sharing (148) (122) (45) (39) (5) (5) (68) (62) (30) (16)

Operating result 10 20 5 12 7 3 1 (1) (3) 6

Investment income 29 29 3 3 6 4 12 14 8 8

Technical result 39 49 8 15 13 7 13 13 5 14

SNS REAAL Financial Statements 2005 notes to the consolidated financial statements�� SNS REAAL Financial Statements 2005 notes to the consolidated financial statements

Risk management SNS REAAL � Risk profile

SNS REAAL strives towards maintaining its moderate risk profile with a healthy balance between risk and return. The risk profile depends on the following factors: §The focus on retail and retail-plus clients§The focus on three core product groups§The diversification within the portfolios§The focus on the Netherlands§The prudential reinsurance policy§The bancassurance model§The diversification within the distribution channels§The limited risk with respect to the pension commitments

SNS REAAL believes that focusing on the consumer and small business market carries a lower risk than providing bancassurance services to large companies. Furthermore, SNS Bank’s assets consist primarily of private mortgages, which have traditionally been known for their low credit losses in the Netherlands. The focus on a limited number of core product groups – mortgages, wealth creation and insurance – combined with the focus on a limited number of client groups and product standardisation has made business less risky than if we were to offer a more extensive range of products. Plus, our chief operations are relatively diversified thanks to the large number of limited exposures. On top of this, the Netherlands has a well-developed economy with reasonably predictable and stable growth. SNS REAAL’s management’s long-standing focus on the Netherlands is therefore a positive factor. REAAL Verzekeringen’s reinsurance policy restricts the losses from calamities to levels which fit in with SNS REAAL’s moderate risk profile. Furthermore, interest rate fluctuations often have an opposite effect on the value development of the banking and insurance operations. The bancassurance model therefore provides a natural hedge against interest rate risks to a certain extent. A lot is changing with respect to the distribution of financial services. New competitors are entering the retail market, both horizontal and vertical integration are taking place in the distribution field and business models are being modified. SNS REAAL is, however, hardly affected by this because it has a wide range of distribution channels and strategies. Furthermore, one of the strong points of the company is that it can capitalise rapidly on changes in the world around it. Finally, SNS REAAL believes that the company’s risk profile has benefited from making the SNS REAAL Pensioenfonds independent in 2005.

� Risk management Bank �.� Creditrisk Credit risk is the risk of a debtor defaulting in whole or in part, or of its position deteriorating such that it has a negative impact on the company’s results or net assets. Credit risk profile of SNS Bank SNS Bank recognises various types of credit risk. Of these, private mortgages (with an 85% share in terms of exposure) are by far the most important. In view of the good cover and low risks of default on these loans, the risk profile of the total credit portfolio of SNS Bank can be seen as very low.

Breakdown of SNS Bank’s loan portfolio (gross amounts)

In€millions 3�December�005 3�December�004

Mortgage loans, SNS Bank 42,601 38,983

Commercial loans portfolio 2,176 2,188

Consumer credit 615 618

Bank counterparties (including derivatives) 5,033 2,548

Other assets (no lending operations) 2,673 2,906

Total 53,098 47,243


Credit management, SNS Bank retail credit portfolio Consumer loans consisting of mortgage loans or consumer credit are accepted by the relevant authorised officers on the basis of an extensive system of acceptance standards and policy rules. The acceptance score models, partly developed within the Basel II framework, play a supporting role. Credit management for established clients takes place at client level by actively monitoring and following up on delays in payment. A Portfolio Management Process is used for the effective management of credit risks at portfolio level and to prevent concentration risks. There are three parts to this process: definition of a target portfolio (for mortgages), monthly portfolio monitoring (including reporting) and portfolio adjustment.The instruments for adjusting the portfolio consist of pricing policy, acceptance and management policy, special offers (marketing) and product development. Decisions on these adjustments are taken in the Price Risk Committee. The Committee manages the portfolio on the basis of a number of risk indicators, such as the ‘infection rate’ (the number of debtors or the lending volume in Special Management as a percentage of the total portfolio) and the ‘Loan to Foreclosure Value’ (illustrates the ‘advance financing’ by taking the total exposure as a percentage of the forced-sale value of the collateral). The mortgage loans can be specified according to nature and security as follows:


Residential property in the Netherlands- Mortgages B 75% of value under foreclosure 21,990 21,422

- Mortgages > 75% of value under foreclosure 4,395 4,242

- Mortgages with Nationale Hypotheekgarantie 6,518 5,835

Securitised mortgages 7,585 5,517

Residential property outside the Netherlands 204 217

Other property in the Netherlands 1,909 1,750

Total 42,601 38,983

Credit management, SNS Bank commercial credit portfolio Credit control at client level is implemented using the Credit Risk Management Information System, which uses a number of risk indicators each day to detect potential problems at an early stage. Risks are tracked at portfolio level on a quarterly basis using extensive reports on movements in the business credit portfolio. Besides the infection rate, the spread across the various industries is monitored in this report and adjusted where necessary. The commercial portfolio is well spread across the various lines of business. ‘Property lease and trade’, which is good for one third of the portfolio, largely concerns the mortgage-backed financing of commercial real estate. The commercial loans can be specified according to nature of the sector as follows:


Public sector 468 313

Agriculture and horticulture, forestry and fishery 20 15

Industry 80 204

Service sector companies 1,124 1,367

Financial institutions 471 224

Other (mainly business-private) 628 683

Total 2,791 2,806

Credit management, SNS Bank banking counterparties SNS Financial Markets conducts money and capital market transactions with various bank counterparties as part of its treasury and funding activities. This largely concerns short-term loans and derivative transactions to hedge against interest rate and exchange rate risks.


Credit risk of SNS Bank The table below gives an indication of the credit risk of SNS Bank, based on the weighting percentages used in regular reporting to the DNB (Dutch central bank). Generally, these percentages are 0% for claims against or guaranteed by OECD governments, 20% for claims against or guaranteed by OECD banks, 50% for loans entirely and fully covered by mortgages and 100% for the other counterparties.

In€millions Notionalamount Risk-weightedamount

Liquid assets 462 ‑‑

Banks 4,253 459

Loans and advances 45,225 18,521

Financial assets held for trade 1 295 ‑‑

Investments available for sale 1,489 86

Other financial assets 1 771 ‑‑

Associated companies 2 2

Intangible assets 12 9

Tangible fixed assets 154 154

Tax receivables 138 138

Other assets 29 29

Accrued assets 268 173

Subtotal of balance sheet items 53,098 19,571

Derivatives contract 1 ‑‑ 379

Off-balance products 2 ‑‑ 37

Solvency requirements for market risks ‑‑ 188

Total 53,098 20,175

1) The assets include derivatives contracts of € 771 million for hedging and € 144 million in other derivates. Of these, the risk-weighted assets amount to € 379 million.2) Concerns irrevocable facilities and credit replacement guarantees of € 2,452 million. Of these, the risk-weighted assets amount to € 37 million.

SNS Bank special management The timely engagement of the Special Management department is a vital part of the risk policy for retail and commercial clients. Should it emerge that a borrower is not able to fulfil their obligations to the bank, or if a borrower’s financial position has deteriorated to the extent that they will be unable to fulfil their obligations in the near future, the borrower is passed to the Special Management department. Depending on the seriousness of the problem, this department, which is part of the Credit Risk Management, will implement measures to minimise the risk for the bank. Each quarter, the department also determines the level for the necessary provision and makes a recommendation to SNS Bank’s Credit Committee to this extent. �.� Marketrisk Market risk is the risk of market prices changing such that they have negative consequences for SNS Bank’s results and net assets. Market prices include interest rates, the price of equities and exchange rates. Fluctuations in the financial markets – interest rates, the price of equities and bonds, real estate prices, exchange rates – have an impact on SNS Bank’s results and net assets. Interest rate risk features prominently in SNS Bank’s moderate risk profile. Interest rate risk is caused by differences in the interest rate sensitivity of the assets and liabilities on SNS Bank’s balance sheet. For instance, assets on the bank balance generally have a longer duration than liabilities. Given this balance sheet structure, SNS Bank usually benefits from a decrease in interest rates. The duration of the shareholders’ equity during 2005 fluctuated between 4 and 8. Because of the limited size of the portfolio, the market risk for SNS Bank’s trading portfolio is low.

Market risk – SNS Bank’s bank book The interest rate risk in the bank’s portfolio is measured, monitored and managed using duration, Value at Risk, Earnings at Risk and gapping analyses. These are used to make a comparative assessment between the risk and expected return on the interest rate position. The duration of shareholders’ equity is the primary indicator for interest rate risk. The bandwidth of this measure is between 3 and 8. This bandwidth is set each year. Risk/return factors and the short term and medium term forecast on interest rate trends are used for steering purposes within the bandwidth.


Value at Risk during 2005 did not exceed 12.5% of the fair market value of shareholders’ equity. Earnings at Risk during 2005 did not exceed 8.7% of the budgeted gross interest income on a yearly basis. No additional measures were necessary during 2005 to adjust the position on the basis of Value at Risk and Earnings at Risk. Proposal risk is the risk of the bank having to offer a lower interest rate if the interest rate drops between the moment of offering and furnishing. This risk is managed separately. Each month, the costs and the risk are used to decide whether or not to apply a hedge. In 2005, it was repeatedly decided not to hedge the proposal risk. All of SNS Bank’s foreign exchange positions are measured monthly and hedged on a structural basis. VaR and EaR are both determined using a scenario analysis. Changes in the fair market value of shareholders’s equity and changes in net interest income are determined for 10,000 scenarios for the underlying risk factors. With 99% reliability, VaR and EaR are equal to the 1% worst outcome of changes in the fair market value of shareholders’ equity and changes in the net interest income, respectively. Market risk – SNS Bank’s trading portfolio Because of its small trading portfolio, SNS Bank runs only a limited market risk with it; this risk is calculated each day and managed via a system of limits. Interest typical maturity calendar of SNS Bank Aside from equity duration, Value at Risk and Earnings at Risk, use can also be made of the net (assets less liabilities) nominal amounts due per interest rate period in a gap profile. The table below illustrates the interest typical maturity calendar of SNS Bank on the basis of the contractual maturity.

In€millions B�month >�monthB3months

>3monthsB�year

>�yearB5years

>5years Total

3�December�005AssetsCash and cash equivalents 597 ‑‑ ‑‑ ‑‑ ‑‑ 597

Loans and advances to credit institutions 3,199 828 92 ‑‑ ‑‑ 4,118

Loans and advances to customers 12,626 1,942 8,168 12,908 9,747 45,392

Derivatives 182 278 138 203 114 915

Interest-bearing securities 48 1 185 697 661 1,592

Non-interest-bearing assets 484 ‑‑ ‑‑ ‑‑ ‑‑ 484

17,136 3,049 8,583 13,808 10,522 53,098

Liabilities and equityAmounts due to credit institutions 2,253 650 200 ‑‑ ‑‑ 3,103

Amounts due to customers 4,747 2,558 5,100 4,720 2,702 19,827

Derivatives 136 332 146 164 161 939

Debt certificates 2,035 7,461 3,285 7,591 5,093 25,465

Participation certificates and subordinated debts ‑‑ 290 5 8 847 1,150

Shareholders’ equity 1,440 ‑‑ ‑‑ ‑‑ ‑‑ 1,440

Non-interest-bearing liabilities 1,174 ‑‑ ‑‑ ‑‑ ‑‑ 1,174

11,785 11,291 8,736 12,483 8,803 53,098

Interest sensitivity gap (assets - liabilities) 5,351 (8,242) (153) 1,325 1,719 ‑‑



>3monthsB�year

>�yearB5years

>5years Total

3�December�004AssetsCash and cash equivalents 829 ‑‑ ‑‑ ‑‑ ‑‑ 829

Loans and advances to credit institutions 1,655 611 212 ‑‑ ‑‑ 2,478

Loans and advances to customers 11,525 1,806 7,825 13,513 7,120 41,789

Derivatives 14 19 10 15 12 70

Interest-bearing securities 31 4 27 1,139 404 1,605

Non-interest-bearing assets 472 ‑‑ ‑‑ ‑‑ ‑‑ 471

14,526 2,440 8,074 14,667 7,536 47,242

Liabilities and equityAmounts due to credit institutions 1,425 541 330 2,295

Amounts due to customers 4,349 2,164 4,529 4,706 2,152 17,900

Derivatives 4 9 5 6 4 28

Debt certificates 2,626 5,953 2,935 6,052 5,632 23,198

Participation certificates and subordinated debts 50 240 5 8 864 1,167



11,108 8,907 7,804 10,772 8,652 47,242

Interest sensitivity gap (assets - liabilities) 3,418 (6,467) 270 3,895 (1,116) ‑‑

Effective interest SNS BankThe table below gives an indication of the average effective interest rate percentages of SNS Bank with respect to monetary financial instruments not stated at fair value through the profit and loss account.

Inpercentageterms 3�December�005 3�December�004

AssetsInvestments held for sale 4.0% 5.3%

Mortgage loans 4.2% 5.2%

Consumer loans 9.2% 9.1%

Commercial loans 7.5% 6.7%

Loans and advances to credit institutions 1.5% 1.6%

Liabilities and equitySavings 3.1% 3.3%

Other amounts due to customers 3.5% 3.4%

Amounts due to credit institutions 1.5% 1.4%

Debt certificates 3.1% 3.9%

Participation certificates and subordinated debts 5.0% 5.2%


The table below gives an indication of the foreign currency position of SNS Bank.

In€millions Balancesheetdebit Balancesheetcredit Net Derivatives

US dollar 247 1,589 (1,342) 1,338

Japanese yen 74 140 (66) 66

Pound sterling 553 493 60 (60)

Swiss franc 32 ‑‑ 32 (32)

Canadian dollar 5 65 (60) 65

Australian dollar ‑‑ 784 (784) 784

Other 450 742 (292) 292

Total 1,361 3,813 (2,452) 2,453

The terms of the hedged position and the derivatives in the context of foreign currency are the same.

�.3 Liquidityrisk Liquidity risk is the risk that funding and cash and cash equivalents are completely or partly unavailable such that the company cannot meet its financial obligations in the short term. SNS Bank pays ample attention to the management of liquidity risk so that the group has sufficient reserves at its disposal and always remains able to meet its financial obligations. The liquidity management is such that the effects of banking-specific stress factors – such as tension in the money and capital markets – can be absorbed. SNS Bank is the largest borrower within SNS REAAL. The bank has a broad investor base, an extensive range of financing instruments and unhindered access to the international money and capital markets. Maturity of the financing was extended in 2005, as a result of which the maturity of the assets and liabilities are better geared to each other. In this context, the organisation benefited from the historically low credit spreads. The liquidity risk policy of SNS Bank has four elements:1 Liquidity management assuming a going concern basis2 Diversification in the funding portfolio3 Liquidity of assets4 Planning for unforeseen events

In the first place, SNS Bank’s liquidity risk management is founded on the composition of its funding portfolio as a going concern. The daily cash management activities of the central treasury are in line with the operational requirements of SNS Bank and take place in accordance with the supervisory guidelines in this field. In the second place, SNS Bank strives towards diversification of the funding portfolio with respect to maturity, instrument, currency and type of investor. In the third place, SNS Bank has a broad portfolio of quickly convertible assets, such as government bonds. Furthermore, SNS Bank is able to securitise or sell a major part of the mortgage portfolio within a year. In the fourth place, SNS Bank performs a stress test across the bank each six months in which the contingency planning, or rather the planning for unforeseen events, plays an important role. The tests cover various risks with the emphasis on liquidity risk. The plan based on the results contains scenarios with alternatives for refinancing should sudden changes take place in the business activities or on the international financial markets.


Management of the liquidity riskThe liquidity risks are also managed on the basis of the net (assets less liabilities) nominal amounts due per interest rate period in a gap profile. The table below represents the gap profile of SNS Bank at the end of December 2004 and 2005.


>3monthsB�year

>�yearB5years

>5years Total

3�December�005AssetsLoans and advances to credit institutions 3,663 338 88 22 7 4,118

Mortgage loans to customers ‑‑ 1,109 29 344 41,119 42,601

Other loans and advances to customers 1,347 46 171 522 705 2,791

Derivatives 11 32 126 370 376 915

Interest-bearing securities 127 7 22 684 752 1,592

Non-interest-bearing assets 1,081 ‑‑ ‑‑ ‑‑ ‑‑ 1,081

6,229 1,532 436 1,942 42,959 53,098

Liabilities and equityAmounts due to credit institutions 462 252 205 662 1,522 3,103

Savings 10,894 80 140 432 787 12,333

Other amounts due to customers 6,280 94 93 367 660 7,494

Derivatives 79 24 73 444 319 939

Debt certificates ‑‑ 8,964 1,697 10,524 4,280 25,465

Participation certificates and subordinated debts ‑‑ ‑‑ ‑‑ 137 1,013 1,150



20,329 9,414 2,208 12,566 8,581 53,098

Net liquidity gap (14,100) (7,882) (1,772) (10,624) 34,378 ‑‑

3�December�004AssetsLoans and advances to credit institutions 1,938 273 229 30 8 2,478

Mortgage loans to customers ‑‑ 774 28 340 37,841 38,983

Other loans and advances to customers 1,446 68 189 516 587 2,806

Derivatives 70 ‑‑ ‑‑ ‑‑ ‑‑ 70

Interest-bearing securities ‑‑ 74 4 546 981 1,605

Non-interest-bearing assets 1,300 ‑‑ ‑‑ ‑‑ ‑‑ 1,300

4,754 1,189 450 1,432 39,417 47,242

Liabilities and equityAmounts due to credit institutions 137 384 271 809 694 2,295

Savings 9,180 155 243 550 845 10,973

Other amounts due to customers 3,752 291 174 329 2,381 6,927

Derivatives 28 ‑‑ ‑‑ ‑‑ ‑‑ 28

Debt certificates ‑‑ 7,525 1,249 9,559 4,865 23,198

Participation certificates and subordinated debts ‑‑ ‑‑ ‑‑ 144 1,023 1,167



15,751 8,355 1,937 11,391 9,808 47,242

Net liquidity gap (10,997) (7,166) (1,487) (9,959) 29,609 ‑‑


3 Risk management for insurance operations 3.� Insurancerisk The insurance risk is the risk of the volume and timing of cash outflows in connection with material risks such as mortality, invalidity, non-life claims or insurance behaviour falling short of expectations.

REAAL Verzekeringen’s portfolio has a low risk profile. The portfolio is well spread for life insurance and non-life insurance alike with the focus on the retail and business markets in the Netherlands.

Risk policy REAAL Verzekeringen limits its interest risk with a system of strict procedures and criteria for product development, acceptance and provisioning. If accepted, unsuitable risks or risks which exceed preset limits are reinsured.A panel consisting of management representatives and the Management Accounting and Actuarial departments regularly monitor the portfolio’s development. This includes analysing the development of premiums and loss ratios per sector.

Principles for determining the insurance risk The provision for life risks is based on principles used to calculate the premiums, taking account of market-specific assumptions in the Netherlands and the cost level of the insurance operations. If the premium calculation principles are not sufficient, a surcharge is added to the relevant provisions. 3.�.� Lifeinsurancerisk Composition of life insurance portfolioREAAL Verzekeringen’s life insurance portfolio contains individual and collective insurance policies, both of which are sold as policies with cash benefits (traditional policies) and with payment in units (investment or unit-linked insurance policies). REAAL Verzekeringen’s focus within its individual life insurance portfolio is on unit-linked policies, mortgage-related endowment policies and the pension and annuity insurance policies with a regular endowment.

Co-insuranceREAAL Levensverzekeringen has concluded a number of contracts in co-insurance with one or more insurance companies. In general, the risk estimates are based on information provided by the administrating company. An extra risk is run because the co-insurers are each jointly and severally liable for the total commitments. If a co-insurer withdraws, the commitments are transferred to the remaining co-insurers.

Investment risk and interest rate guaranteesWith traditional policies, the insurer bears the investment risk of how much the contract will pay out. In the case of benefits, REAAL Verzekeringen pays the policyholder a predetermined amount in euros. This contrasts with unit-linked contracts, where the insurer does not run a risk on the amount paid out. After all, this insured amount is unit-linked and depends on the value of the funds in which the units have been invested. The policyholder pays a regular or single premium for both kinds of policies. Interest rate guarantees have been issued for a number of investment-linked insurance policies. A guaranteed return on the maturity date applies to the individual investment-linked insurance policies with guarantee. In the intervening period, the technical provision is at least equal to the investment increased by the guarantee rate, after deduction of the withdrawals for costs and risk premiums. In the case of collective separated accounts, the contracting party bears the investment risk in principle. On the closing date of the contract, however, there should at least be a provision for accrued rights on the basis of the contract principles. To compensate for investment losses (up to a certain amount), an equalisation provision was formed from premium surcharges for a number of contracts.


In€millions Premium� Insuredcapital InsuredInterest

Provisionforinsurance

commitments

Riskcapital

REAALLevensverzekeringenportfolioIndividual policies in money 418 32,413 287 7,376 26,796

Endowment mortgage 213 11,151 7 2,225 8,961

Annuity 6 ‑‑ 250 1,506 239

Risk 64 13,794 14 187 13,606

Traditional savings 92 5,018 16 2,637 2,269

Funeral insurance 43 2,448 0 821 1,722

Individual policies in investment units 464 18,684 8 2,935 20,011

Group policies in money 47 486 362 1,203 2,877

Group contracts in investment units 22 19 228 526 1,128

Reinsurance risk (4) ‑‑ ‑‑ ‑‑ (1,344)

Proportional reinsurance (14) (635) (3) (196) (681)

Total 933 50,967 882 11,844 48,787

1) Balance of premiums plus 10% of the single premiums (extrapolated on an annual basis).

Insurance technical risks for the life insurance portfolioA life insurance policy entitles the policyholder to death benefits and/or an endowment.

The most significant risk of life insurance policies is the mortality risk. The mortality risk indicates the death benefit risk of the policyholder passing away (short-life risk). In the case of an endowment, the mortality risk for REAAL Verzekeringen is that the policyholder might pass away later than expected (long life risk).

Other insurance technical risks for the life insurance portfolio are risks associated with the insurance behaviour of policyholders, such as lapse and early surrender (termination of the policy before the maturity date), conversion into a paid-up policy (the policyholder terminates the periodic premium payment before the maturity date) and invalidation or revalidation (the policyholder becomes incapacitated for work). With life insurance policies, concentrations of risks occur in the case of collective contracts. The participants under a collective contract often work at the same location or undertake joint activities. Such concentrations of risks are partly hedged in 2006 with reinsurance. The loss from one event that exceeds € 15 million and which relates to more than three people is reinsured up to € 15 million. For more information see section 3.1.3 ‘Insurance risk reinsurance’. Controlling the risks for the life insurance portfolioThe trends in the mortality and maturity insurance technical risks are regularly reviewed. The results of these reviews are used for setting rates and acceptance conditions and measuring the value of the life insurance policies. When reporting, the adequacy of the technical provision is determined in accordance with the demands of IFRS and requirements of De Nederlandsche Bank.For an explanation of the control of the investment and interest rate risk: see section 3.2 ‘Market risk’.

Liability Adequacy TestIt should be pointed out that the technical provision for insurance commitments is based on the premium calculation principles for interest and mortality. The size of this provision therefore does not follow the actual developments in these principles. By regularly performing a Liability Adequacy Test (LAT), REAAL Verzekeringen monitors the adequacy of the technical provision for insurance commitments. The results of the LAT can be seen as a minimum provision. At the moment, the technical provision for insurance commitments is well above the minimum provision calculated for the LAT. The LAT is based on current estimates of contractual cash flows. The level of the LAT is particularly sensitive to changes in the discount rate. The LAT is therefore performed on a fixed actuarial interest rate of 3% as well as on the 3% and 4% prescribed by De Nederlandsche Bank. With an actuarial interest rate of 3%, the technical provision for insurance commitments is also well above the LAT provision. Since the long-life risk has a much lower share in the portfolio than the short-life risk, the sensitivity for mortality is not quantified further.


3.�.� Non-lifeinsurancerisk Composition of non-life insurance portfolioThe emphasis of REAAL Verzekeringen’s non-life insurance portfolio is on four main segments: Accident and Health, Fire, Motor Vehicles and Other. The acquisition of the portfolio from Nieuwe Hollandse Lloyd in September 2005 has increased the number of policies in the Transport segment, even though its share in the total portfolio remains small.

Co-insuranceWith the acquisition of Nieuwe Hollandse Lloyd, REAAL has entered the co-insurance market. Nieuwe Hollandse Lloyd underwrites risks on the Rotterdam insurance exchange within the Fire, Transport (including Marine) and Miscellaneous Risks sectors. REAAL has decided to actively continue the co-insurance portfolio. CatastropheREAAL reinsures its catastrophe claims resulting from storms and terrorism (see section 3.1.3 ‘Insurance risk reinsurance’). Catastrophes arising from acts of violence, nuclear incidents or flooding are excluded under the policy conditions. Premium and non-life provisionThe total gross premium income of REAAL Schadeverzekeringen (including Proteq) in 2005 amounts to € 347 million (2004: € 317 million). The premium for 2005 referred to includes the Nieuwe Hollandse Lloyd premium during the period from 20 September to 31 December 2005 amounting to € 21 million. In 2005, € 24 million in reinsurance premium was paid. This is 6.8% of the gross premium income (2005, excluding NHL: 6.5%, 2004: 6.6%). The gross Non-life provision at year-end 2005 amounts to € 513 million (year-end 2004: € 327 million). The amounts referred to here are always before reinsurance and exclude the incoming ‘IPAP’ reinsurance contract. For more information about the IPAP contract and about own retention and shares of reinsurance per sector: see section 3.1.3 ‘Insurance risk reinsurance’.

Transport


Fire

28%

17%

2%

47%

6%

22%

10%

36%

7%

25%

Other

The diagrams above illustrate the distribution of the gross premium and the gross non-life provisions across the various sectors. The premium volume and the non-life provision for the smallest sector, Transport, originate almost entirely from the NHL portfolio acquired in September 2005. The diagrams clearly illustrate the long-term non-life obligations from disability insurance policies: compared to the small share represented by the Accident and Health sector in the total premium, there is a relatively large non-life provision. The reverse applies for the Fire sector. Due to the rapid settlement of fire claims, this sector, which is worth a quarter of the premium income, only represents a small part of the total non-life provision.

Technical insurance risks non-life insurance portfolio The technical insurance risk for REAAL Verzekeringen’s non-life insurance portfolio is primarily concentrated on covering the risk of liability claims (including bodily injury), catastrophe claims and occupational disability claims. §Motor vehicle injury liability Motor vehicle liability is the third-party insurance to cover bodily injury following a road traffic accident. REAAL Verzekeringen sells this

product through all its distribution channels. §Liability REAAL Verzekeringen offers liability insurance to both private individuals and the business sector; the latter can include professional liability.

REAAL Verzekeringen sells this product through all its distribution channels.§Occupational disability The occupational disability cover in the portfolio of REAAL Verzekeringen includes cover for both self-employed people (first-year and second-

Grosspremiumincome(�005) GrossNon-lifeprovision(year-end�005)


year risks) and employees. The latter group mainly concerns additional cover to the Disablement Insurance Act (WAO) and its successor, the Work and Income According to Labour Capacity Act (WIA).

§Fire and other damage to property The REAAL Verzekeringen fire insurance offers policyholders financial cover against damage to their property and material consequences of

business interruptions as a result of the loss incurred.

Fraud risks non-life insurance portfolio From a risk perspective, fraudulent claims are defined as claims submitted by policyholders for non-events or claims in which the extent of damage is exaggerated. Fraud supervision has been localised at the various departments, such as Acceptance, Claims and Claims Handling. Fraud prevention and detection efforts were intensified in 2006 such as by setting up a separate Fraud department. Controlling the risks for the non-life insurance portfolioThe focus on the retail and business markets has led to a portfolio characterised by diversification across various segments and sub-segments, on the one hand, and the similarity in the type of insured risks, on the other. The portfolio has a relatively low variability in the technical results. The risk of the REAAL Verzekeringen non-life portfolio is geographically concentrated in the Netherlands.

Realised claims with a run-off of more than one yearFor the run-off of the realised claims, REAAL Verzekeringen has specialised departments for bodily injury claims. The experts in these departments handle claims on an ‘item-by-item’ basis, make estimates on the size of the claim and monitor progress on claims-handling. Claims that are characterised by a run-off of more than one year are occupational disability claims, bodily injury claims and liability claims.

REAAL Schadeverzekeringen has occupational disability benefits in payment from the individual and the collective portfolio. The table below provides a summary of the key figures for the regular occupational disability benefits provision at year-end 2005. Due to the earn-out scheme agreed with Ergo, the provisions from the former NHL portfolio are not included below.

Features of the Provision for Regular Disability Benefits (Voorziening Periodieke uitkeringen AOV)

In€thousands Individual Semi-collective Total

REAALSchadeverzekeringen(exclusiveNHL)Provision for Regular Benefits 7,563 4,477 12,040

Number of benefit disbursements 125 149 274

Average insured annual interest 11.0 2.5 6.4

Average age (years) 51 50 50

Average expected residual duration of payment (years) 7.8 13.0 10.7

Maximum run-off term of old age pension benefits (AO) interest amounts (years) 35 36 36

The other claims with a run-off longer than one year concern bodily injury and liability claims. These risks are much more diverse than the occupational disability risks; this also applies to the expected duration of the payment for the claims. Since 2004, the policy of REAAL Schadeverzekeringen with respect to the settlement of these claims has been tightened and now aims for the settlement of claims within five years. In 2005, a start was made with the ‘accelerated’ settlement of claims from old claim years up until 1997. This has resulted in the settlement of a large number of files that have already been open for some time. The table below provides a summary of the insured claims with a date of origin in the claim years from 1998 to 2005 at year-end 2005.

Features of provision for other claims with run-off of more than one year

In€thousands Claimyears�998-�005

Motorinjury Liabilityinsuranceforthecommercial

sector

Liabilityinsuranceforindividuals

Total

Regionalportfolio(insuranceagents-ATP),REAALSchadeverzekeringen(exclusiveNHL)Claim payments 72,457 26,271 4,427 103,155

Claims provision (file + IBNR) 48,369 5,568 4,233 58,170

Total claim costs (gross, including IBNR provision) 120,826 31,839 8,660 161,325

Average claim costs (gross, including IBNR provision) 12.1 0.5 2.5 2.2

Number of claims 10,021 58,523 3,433 71,977


Development claims history 2005

In€thousands Provisionper�-�-�005

Paymentsin�005

Provisionper3�-��-�005

Onbalancerelease/run-off

REAALSchadeverzekeringenN.V.(afterreinsurance,excludingparticipationsinpoolsandfunds,excludingincomingreinsurance)2005Claim years:- 2001 and prior 73,209 12,868 53,496 6,845

- 2002 22,400 366 20,875 1,159

- 2003 25,577 4,473 19,513 1,591

- 2004 49,381 11,498 27,184 10,699

Total to the end of 2004 170,567 29,205 121,068 20,294

Total 2005 101,125 47,591

Total Net 130,330 168,659

Provisionper�-�-�004

Paymentsin�004

Provisionper3�-��-�004

Onbalancerelease/run-off

2004Claim years:- 2000 and prior 70,824 14,221 54,695 1,908

- 2001 23,673 3,184 18,172 2,317

- 2002 29,036 3,002 22,400 3,633

- 2003 62,429 17,460 25,165 19,804

Total to the end of 2003 185,962 37,868 120,431 27,662

Total 2004 104,750 48,715

Total Net 142,618 169,147

Adequacy of the non-life provisions The REAAL Verzekeringen actuarial department regularly performs a quantitative test on the adequacy of the non-life provisions that have been formed. This test makes use of stochastic modelling, which also includes inflation and discounting. At year-end 2005, part of the portfolio of REAAL Schadeverzekeringen (the provincial portfolio) and the non-life portfolio of Proteq were tested in this way. Moreover, this stochastic testing is supplemented with the assessment of the positive run-off results and the effects of the provisions policy on the size of the provision. Whether the claim provisions are at an adequate level becomes apparent from the combination of the testing elements. The Provision for Regular Payments for the occupational disability claims is based on the premium calculation principles for interest, revalidation and mortality. The size of this provision therefore does not follow the actual developments in these principles. By regularly performing an adequacy test on the current accounting policies, REAAL Verzekeringen safeguards the adequacy of the Provision for Regular Benefits. The results of the Liability Adequacy Test can be seen as a minimum provision. At year-end 2005, the Provision for Regular Payments is above the minimum provision calculated on the basis of the Liability Adequacy Test.

3.�.3 InsuranceriskReinsurance Reinsurance policyThe reinsurance for REAAL Life and REAAL Non-life is realigned with SNS REAAL’s risk appetite each year. Reinsurance cover takes shape on the basis of the outcomes of the risk analyses on the various portfolios. This includes looking at the effect of reinsurance on solvency, desired return and profitability.

Aside from its regular portfolio protection, REAAL Non-life also has a catastrophe contract for covered natural forces (storm, hail) and accumulation within the fire insurance portfolio (e.g. on account of the fireworks explosion in Enschede). The risk of terrorism is reinsured via NHT, the Dutch reinsurance company for terrorism claims.


Reinsurance REAAL LevenREAAL Verzekeringen’s life insurance portfolio has seen strong growth in premium income, insured capital and profitability. Research was done into the risk profile of the insurance portfolio in 2005, on the basis of which it has been decided to increase own retention. This should be put into effect with the installation of a completely new reinsurance programme in 2006.

Controlling claim run-off REAAL Verzekeringen has a special department for handling claims, including claims in respect of bodily injury. This department handles claims on an item-by-item basis, makes estimates on the size of the claim and monitors progress on claims-handling.

In€thousands �003 �004 �005 �006

OwnretentionREAALLevensverzekeringenCover:- Mortality (risk capital) per risk 400 400 400 1,000

- Occupational disability (annual interest) per risk 20 20 20 35

- Catastrophe per occurrence* 15,000 ‑‑ ‑‑ 15,000

*) Cover for catastrophe risk in 2003, first six months only

Reinsurance REAAL SchadeThe non-life insurance operations in recent years have increased REAAL’s own retention under the reinsurance contracts to a level that does justice to the size of the various portfolios. The increased size, the greater financial strength and the favourable development of the result justify this extension of the risk tolerance.

In€thousands �003 �004 �005 �006

OwnretentionREAALSchadeverzekeringenCover:- Fire per risk 500 700 700 700

- Motor vehicle liability per risk 1,200 1,200 1,200 1,200

- Personal/business liability per risk 500 500 500 500

- Accidents per risk 150 300 300 300

- Occupational disability (annual interest) per risk 8 8 8 35

- Catastrophe per occurrence 15,000 15,000 20,000 25,000

The graphs below illustrate the share of the reinsurance premium in the total premium income in the 2005 financial year and the reinsurers’ share in the paid gross non-life provision at year-end 2005. The figures for the Accident and Health sector exclude the IPAP contract. The IPAP contract is explained in more detail below.

Non-lifeprovisionyear-end�005sharereinsurer

0

20

40

80

100

60

Accident and Health

Fire Transport Motorvehicles

Other

%

Own account Reinsurance

Premiumincome�005sharereinsurer

0

20

40

80

100

60

%

Accident and Health

Fire Transport Motorvehicles

Other

Own account Reinsurance


REAAL Schadeverzekeringen has an active policy on where to reinsure its contracts. A distinction is drawn between the panel of reinsures for the property programme (fire and catastrophe) and the casualty programme (car, liability and accidents). The claim settlement in the casualty programme is characterised by a long processing time. Due to this long-term character, the continuity of the panel is the point of departure during the placing of this programme. Incoming reinsurance: IPAP contractThe IPAP contract is an incoming reinsurance contract for disability insurance related benefits. In this respect, Proteq acts as reinsurer of Loyalis. The contract has not been extended since 2004 and is now in a run-off phase. The premium in 2005 is therefore nil. The gross non-life provision at year-end 2005 amounts to € 145.6 million, after retrocession the provision amounts to € 56.2 million. 3.� Marketrisk When changes occur in the financial markets, REAAL Verzekeringen is exposed to market risk if changes in the value of investments (equities, real estate, fixed-income) do not keep pace with the value of its liabilities. 3.�.� Interestraterisk Interest rate risk occupies an important position in the market risk profile of REAAL Verzekeringen, especially for Life insurance. Interest rate risk occurs when the fixed-income assets and liabilities are not fully matched. Interest rate risks are expressed in changes in the result and/or financial position if the market interest rate fluctuates.

There can be two major causes for the fixed-income assets and liabilities not being matched: § Differences in maturity between the investments and the commiments. The investments of REAAL Verzekeringen have an average maturity of

12 years. However, the average maturity of the commitments is 18 years. This difference in maturity introduces a reinvestment risk: upon maturity of the investments, reinvestments should be made until the maturity of the commitments. The future return on this reinvestment is not yet known, whereas the return promised to policyholders is fixed until maturity.

§Conditional commitments to the policyholders. Under some of its policies, REAAL Verzekeringen makes an additional payment to policyholders on top of the guaranteed return, which depends on the income of a particular investment portfolio. As at balance sheet date, these commitments are not offset by investments offering the same combination of guaranteed commitment and conditional commitment.

In€billion �005

InsuranceforownriskREAALInsuranceWith conditional commitments 3.4

Without conditional commitments 3.0

This excludes savings amounts totalling € 2.2 billion.

The main quantification of interest rate risks is done by means of duration analyses, scenario analyses and economic capital calculations. A significant variable in the management of the interest rate risk is the duration of the shareholders’ equity. This duration measures the percentage change in the market value of shareholders’ equity with a parallel shift of the interest rate curve by one base point. REAAL Verzekeringen does not include the investments and commitments that are almost matched in its analysis. This includes endowments policies accrued under endowment mortgages and the portion of the balance sheet kept on behalf of policyholders. REAAL Verzekeringen regularly adapts the duration of shareholders’ equity to its interest rate forecast and risk budget by means of swaps within the fixed-income investment portfolio and with the aid of interest rate swaps. Using a scenario analysis, the effect of changes in the market interest rate on the result, equity and solvency is regularly reviewed. The table below illustrates the effect of interest rate changes of 1% as at balance sheet date (indicative).

In€millions Shareholders’equity

EUsolvency

FairvalueShareholders’

equity

REAALVerzekeringen’sinterestratesensitivityasatbalancesheetdateInterest rate +1% ‑200 none +19

Interest rate -1% +200 none ‑185

For the definition of fair value, please see section 4.

The effect of the interest changes stated above on the result is negligible.


The summary below illustrates the effective accounting interest rate percentages of the financial assets and liabilities of REAAL Verzekeringen as at balance sheet date:

Inpercentages �005 �004

Financialassets(notmeasuredatfairvaluethroughprofitandloss)Investments for own account and risk:- Held to maturity 4.4% 4.3%

- Available for sale (excluding shares) 5.5% 3.4%

- Loans and receivables 6.5% 6.6%

Loans and advances to clients and credit institutions 0.0% 0.0%

Cash and cash equivalents 0.1% 0.5%

FinancialobligationsatamortisedcostSubordinated debts 5.6% 7.9%

Technical insurance provisions for own account and risk 4.2% 4.0%

Amounts owed to clients and credit institutions 0.0% 0.0%

Debt certificates 0.0% 0.0%

Insurance policies on behalf of policyholders The insurer basically does not bear any interest rate, price, currency or credit risk for insurance policies where policyholders bear the investment risk. The volume of this category of policies amounts to € 3.4 billion. However, in a number of cases the insurer has issued minimum guarantees, as a result of which these contracts also present interest rate, price and currency risks for the account and risk of the insurer. Approximately € 702 million of the € 3.4 billion provision referred to here relates to policies for which REAAL Verzekeringen has issued some form of guarantee. When REAAL Verzekeringen has to honour these guarantees, it takes the corresponding expenses to the income statement.

In€billion �005

InsurancepoliciesonbehalfofpolicyholdersWithout guarantee 2.8

With guarantee 0.7

3.�.� Equityandpropertyrisk The value of REAAL Verzekeringen’s equity investments at year-end 2005 was € 1.118 million. These equity investments are spread across the European, Americas and Far East regions. REAAL Verzekeringen regularly assesses the effect that changes on the equity and property market has on the result, equity and solvency. The table below shows the results of this analysis as at balance sheet date (indicative).

In€millions IFRSShareholders’

equity

EUsolvency

ResultofthescenarioanalysisofequityandpropertychangesEquities +10% +76.5 +15%

Equities -10% ‑76.5 ‑15%

Property +10% +13.8 +3%

Property -10% ‑13.8 ‑3%

3.�.3 Currencyrisk The currency risk for REAAL Verzekeringen arises through a combination of investments and obligations in foreign currency that do not net on zero.

As far as the fixed interest investments are concerned, REAAL Verzekeringen pursues the policy that no currency risk is allowed. The currency risk on fixed-income securities denominated in foreign currency are therefore hedged at micro level (= at the level of individual bonds) with the aid of currency swaps.

Currency risks also present themselves in the equity investments of REAAL Verzekeringen. 75% of this currency risk is structurally hedged with the aid of exchange forward contracts.


The table below gives an indication of the foreign currency position of REAAL Verzekeringen as at balance sheet date.

In€millions Balancesheetdebit

Balancesheetcredit

Net Derivatives

CurrencypositionsofREAALVerzekeringenUS dollar 471 36 435 (368)

Japanese yen 57 ‑‑ 57 (41)

Pound sterling 179 7 172 (125)

Swiss franc 19 ‑‑ 19 ‑‑

Australian dollar ‑‑ 13 (13) ‑‑

Other 35 12 23 ‑‑

Total 761 68 693 (534)

Using scenario analyses, the effect that changes on the currency markets have on the result, equity and solvency are regularly reviewed. The table below shows the results of these analyses as at balance sheet date (indicative).

In€millions Shareholders’equity

EUsolvency

Currency +10% +9.5 +2%

Currency -10% ‑9.5 ‑2%

3.3 Creditrisk

REAAL Verzekeringen recognises various types of credit risk. The most important of these is the credit risk in the investment portfolio and in the loan portfolio to intermediaries. The mortgage loans of REAAL Verzekeringen are properly covered and have a relatively high age. As a result, the chance of default is low; therefore, the risk profile of the mortgage portfolio of REAAL Verzekeringen can be seen as very low.

Tasks, authorisations and responsibilities are determined for officers and committees (with stepped decision-making powers) per credit risk class. These are set down in the policy documents for each credit risk class.

In€millions 3�December�005 3�December�004

BreakdownofREAALVerzekeringen’screditportfolio Fixed-income investment portfolio with credit risk 2,884 2,808

Loans to intermediaries 50 63

Mortgage loans (excluding savings amounts) 986 987

Receivables from reinsurance companies 371 299

4,291 4,157

Credit risk management in the fixed-income investment portfolio of REAAL Verzekeringen The credit risk in the fixed-income investment portfolios of REAAL Verzekeringen is the risk that the issuing institution of a bond or a debtor in a private loan can no longer meet their obligations. The strategic scope of the different categories of creditworthiness in the fixed-income portfolio is determined within an ALM context and documented in mandates with the asset managers. There are regular checks and reports on whether the asset managers comply with the mandates. The fixed-income investment portfolios of REAAL Verzekeringen only work with European and US debtors, with no single debtor representing an interest of more than 10% in the fixed-income investment portfolio. Exceptions allowed to this rule concern investments in loans to states considered by the market to have top-ranking creditworthiness. The summary below illustrates the spread of the fixed income investments across the different categories of creditworthiness as at balance sheet date (excluding mortgages).



Creditspreadoffixed-incomeinvestmentsofREAALVerzekeringenAAA/AA fixed income 1,514 1,472

A/BBB fixed income 1,242 1,183

High Yield fixed income 128 153

Credit risk management in the portfolio of loans to intermediaries REAAL Verzekeringen manages credit extension to intermediaries through a credit committee and by using strict testing criteria upon acceptance. Credit risk management in the mortgage portfolio REAAL Verzekeringen faces a limited credit risk on its mortgage portfolio. The redemption of a large portion of the mortgages is in fact guaranteed by the Dutch national mortgage guarantee (Nationale Hypotheek Garantie). In addition, the rise in the prices of houses in recent years has significantly increased their execution value. In the case of default, the insurer will usually be able to collect its entire debt by foreclosing. Credit risk management with respect to receivables from reinsurance companies REAAL Verzekeringen uses a panel consisting of a fixed group of leading reinsurance companies with a minimum rating of A+ for reinsuring vehicle third-party and the liability policies. For the reinsurance of fire and catastrophes, reinsurance companies with a minimum rating of A- are used. 3.4 Liquidityrisk Reaal Verzekeringen must have adequate cash resources to pay out claims arising from the insurance portfolio. The liquidity risk at REAAL Verzekeringen is very limited, because the nett cash flows from investments and insurance liabilities for the coming ten years are positive.

4 Hedging en hedge accounting

Financial institutions make use of derivatives to hedge undesirable market risks on an economic basis. Under IFRS, derivatives must be carried at market value on the balance sheet and the changes in market value must be included in the income statement irrespective of the valuation method for the position or the instrument that is hedged. This entails potential volatility in the IFRS result. Hedge accounting is used to eliminate this volatility as much as possible. Derivatives are linked to specific instruments (micro-hedge) or sub-portfolios (macro-hedge). These instruments or sub-portfolios are therefore carried at market value so that the valuation method is the same as that for derivatives. SNS REAAL uses various strategies for hedging its interest rate and currency risks, including currency swaps, interest rate swaps and interest-rate options. In this context, SNS REAAL draws a distinction between so-called micro hedges on the one hand, with risks being hedged on separate contracts, and the so-called macro hedges on the other hand, with the risk of a portfolio of contracts being hedged. All the hedges were effective during the whole of 2005 and no relationships were severed out of necessity. A gain of € 2,6 million was recognised for 2005 due to an ineffective position in the hedge accounting.

4.� HedgingSNSBank SNS Bank uses interest rate swaps to partially hedge the non-optional risk of the bank book. The policy pursued in this respect is that the duration of the interest-bearing shareholders’equity lies between three and eight years. In addition, SNS Bank uses interest rate derivatives to hedge specific embedded options in mortgages such that the interest cannot rise above a ceiling or such that interest rate changes are cushioned when charged on to the client. Finally, SNS Bank uses interest rate swaps to convert fixed interest funding and, to a limited extent, fixed interest investments into variable funding or investments, and uses currency swaps to convert funding in a non-euro currency into euros.

The market value of the swaps for hedging the non-optional risk in the banking book was equal to - € 392 million on 31 December 2005 and equal to - € 449 million on 31 December 2004. The Plafond [ceiling], Stabiel [stable] and Rentedemper [interest damper] mortgage products are the specific options in mortgages. At the end of 2005, the nominal value of these mortgages was € 3.8 billion, € 1.8 billion and € 956 million respectively. At year-end 2004, it was € 4.0 billion, € 2.6 billion and € 527 million respectively. The policy pursued by SNS Bank is to hedge 70 to 80% of the embedded options of the ‘Plafond’ mortgages with caps and those of the ‘Stabiel’ and ‘Rentedemper’ mortgages with caps and floors. The market value of these derivatives was equal to € 43 million as at 31 December 2005 and equal to € 47 million as at 31 December 2004. 4.� HedgeAccountingSNSBank SNS Bank has defined the following hedge relationships for the above-mentioned hedge activities.


Fair value hedge accounting for the ALM hedge in the Bankbook (Macro hedge) The hedged portfolio comprises the fixed-interest mortgages of SNS Bank. These are mortgages that carry a fixed-interest period varying from a minimum of 1 to a maximum of 20 years. The hedging instruments are interest rate swaps concluded in the context of interest rate management in the ALM process. Only the fixed legs of these swaps are included because they provide the actual hedge. The risk being hedged is the risk of changes occurring in the market value of the portfolio’s expected cash flows as a result of changes in the swap curve. Fair-value hedge accounting for embedded derivatives (Macro) The embedded caplets of all the ‘Plafond’ mortgages sold by SNS Bank form the hedged items in this relationship. The hedged instruments are all the caplets ensuing from the caps concluded to hedge the embedded caplets in the ‘Plafond’ mortgages. The risk being hedged is the volatility of the market value of the expected interest income in the case of changes in the 1-month swap interest rate. The ‘Rentedemper’ mortgage has a number of embedded options consisting of caps and floors. The caps and floors are composed of separate caplets and floorlets. The caplets and floorlets form the hedged items. The hedged instruments are all the caplets and floorlets ensuing from the caps and floors concluded to hedge the embedded caplets in the ‘Rentedemper’ mortgages. The risk being hedged is the volatility of the market value of the expected interest income as a result of the fluctuations in the 6-month swap interest rate. Fair value hedge accounting funding and investments (Micro) SNS Bank uses micro hedges to swap fixed interest funding with interest rate swaps for variable interest. If the funding is in a foreign currency, currency swaps are used. SNS Bank also hedges fixed interest investments to a limited extent by swapping them with interest rate swaps to variable interest. The interest and currency risk is hedged by means of these instruments. 4.3 HedgingREAALVerzekeringen REAAL Verzekeringen uses currency swaps to hedge the currency risk on individual fixed interest non-euro investments. REAAL Verzekeringen makes use of interest rate swaps to manage the duration of the shareholders’ equity. At year-end 2005, the market value of these swaps was € 166.2 million (2004: € 81.9 million). In addition, REAAL Verzekeringen hedges the currency risk within its share portfolio at macro level using exchange forward contracts. 4.4 HedgeaccountingREAALVerzekeringen REAAL Verzekeringen has also defined hedge relationships for the above-mentioned hedge activities: Cash flow hedge accounting REAAL Verzekeringen has increased the effective maturity of its investment portfolio at macro level by using interest rate swaps. Thus they ensure that the interest income remains fixed for a longer period. The risk hedged in this way is the variability in the interest at the time of reinvestment. The cash flow hedge consists of a combination of a short-term contracted swap and a long-term issued swap. At the time of reinvestment (i.e. the period to maturity of the short-term swap), the long-term swap is sold and reinvestment takes place in fixed interest securities which, with respect to maturity and coupon due dates, correspond to a great extent with the remaining period to maturity of the long-term swap. At year-end 2005, the periods during which the cash flows are likely to take place and when they are expected to be taken into account were as follows:

In€thousands Notionalamounts

Total B�year >�yearB5year >5year

Interest rate swaps 1,570,000 200,000 905,000 465,000

At year-end 2005, there were no future transactions to which hedge accounting had been applied previously but that were unlikely to take place. Fair value hedge accounting REAAL Verzekeringen hedges the currency risks in its share portfolio at macro level using exchange forward contracts. These exchange forward contracts are in a fair value hedge relationship with the equities whose currency risk they hedge.

4.5 Summaryofderivativesforhedgingpurposes

The contracted amounts and notional amounts of the derivatives for hedge purposes are shown in the summary below (including the breakdown by residual term to maturity), reflecting the extent to which SNS REAAL is active in the various markets. The derivatives for trading purposes are not included in the summary.


In€thousands Notionalamounts Fairvalue

Total B�year >�yearB5years >5years Positive Negative

Interest rate contracts:- Swaps and FRAs 25,256,860 2,342,917 12,008,654 10,905,289 806,477 (670,062)

- Purchased options 2,599,234 ‑‑ 1,972,234 627,000 30,290 (9,561)

- Futures ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑

Currency contracts:- Swaps 3,391,905 345,527 2,757,593 288,785 84,770 (119,113)

- Forwards 421,685 421,685 ‑‑ ‑‑ (6,653) ‑‑

Forward commodity contracts:- Swaps ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑

Total 31,669,684 3,110,129 16,738,481 11,821,074 914,884 (798,736)

The notional amounts show the units of account that, in relation to derivatives, reflect the relationship to the underlying values of the primary financial instruments. These notional amounts give no indication of the volume of the cash flows or the price and credit risks attendant on the transactions. 5 Fair value of financial assets and liabilities The table below sets out the estimated fair value of the financial assets and liabilities of SNS REAAL. In a number of instances, estimates were used. The balance sheet items have not been included in this table because they do not satisfy the definition of a financial asset or liability. The total of the fair value shown below does not represent the underlying value of SNS REAAL and should, therefore, not be interpreted as such.

In€millions SNSBank REAALVerzekeringen

Groupactivities Consolidationadjustments

Total

AssetsTangible fixed assets ‑‑ 44 ‑‑ ‑‑ 44

Investment property ‑‑ 232 ‑‑ ‑‑ 232

Subsidiaries ‑‑ ‑‑ 3,592 (3,592) ‑‑

Investments 4,060 10,435 ‑‑ ‑‑ 14,495

Investments for insurance products on behalf of policyholders ‑‑ 3,462 ‑‑ ‑‑ 3,462

Associated companies ‑‑ 77 150 ‑‑ 227

Derivatives 29,624 ‑‑ 22 ‑‑ 29,646

Mortgage loans to customers 42,462 ‑‑ ‑‑ ‑‑ 42,462

Other loans and advances to customers 2,343 ‑‑ 64 ‑‑ 2,407

Other assets 550 126 413 (402) 687

Cash and cash equivalents 2,982 631 269 ‑‑ 3,882

Total 82,021 15,007 4,510 (3,994) 97,544

LiabilitiesandequityShareholders’ equity 2,704 888 3,483 (3,592) 3,483

Third-party interests ‑‑ 3 ‑‑ ‑‑ 3

Participation certificates and subordinated debts 232 92 440 ‑‑ 764

Debt certificates 7,638 ‑‑ 189 ‑‑ 7,827

Technical provisions, insurance operations ‑‑ 12,526 ‑‑ ‑‑ 12,526

Amounts due to customers and credit institutions 40,932 597 353 ‑‑ 41,882

Derivatives and payables 29,731 33 ‑‑ ‑‑ 29,764

Other liabilities 784 868 45 (402) 1,295

Total 82,021 15,007 4,510 (3,994) 97,544


The fair values represent the amounts for which financial instruments can be traded at balance sheet date on a realistic commercial basis between properly informed parties prepared to enter into a transaction (‘at arm’s length’). The fair value of financial assets and liabilities is based on market prices, insofar as these are available. If not, various techniques have been developed for estimating the fair value of these instruments. These techniques are subjective by nature and rely on different assumptions with respect to the discount rate and the moment and volume of the expected future cash flows. Changes in these assumptions can have a significant influence on the estimated fair value. This can lead to the stated fair value not being an accurate estimate of the net fair value. Furthermore, the estimated fair value is based on the market conditions at a given moment and, therefore, possibly not an accurate estimate of the future fair value.The following methods and assumptions have been applied in order to determine the fair value of the financial instruments. Financialassets Associated companies The fair value of participating interests is based on the stock market prices of the shares in these participating interests or, if unlisted, the estimated market value based on the stock market prices of similar securities. The fair value of receivables from participating interests is determined in the same way as described below for fixed-income securities. Investments The fair value of shares and convertible bonds is based on stock market prices. The fair value of interest-bearing securities, insofar as these are not mortgage loans, is also based on stock market prices or – if stock market prices do not produce reliable fair values – on the cash value of the expected future cash flows. This cash value is based on the current market interest rate as applicable given the liquidity, the creditworthiness and the maturity of the relevant investment. Derivatives The fair value of derivatives is based on stock market prices or, if unlisted, on estimated market values based on the stock market prices of similar securities. Mortgage loans to customers The fair value of mortgage loans is estimated by determining the cash value of the expected future cash flows, using the interst rate currently applicable to similar loans taking into account the effect of future early redemption.

Other loans and advances to customersThe fair value of loans and advances is estimated on the basis of the present value of the expected future cash flows, using the interest rate currently applicable to loans and advances under similar conditions. Other assets The book value of the Other receivables is considered to be a reasonable estimate of the fair value. Cash and cash equivalents The book value of the liquid assets is considered a fair estimate of the fair value. Financialliabilities Participation certificates The estimated fair value of the participation certificates is based on the present value of cash flows, using the interest rate applicable to similar instruments. Debt certificates The estimated fair value of the Debt certificates is based on the present value of cash flows, using the interest rate applicable to similar instruments. Technical provisions, insurance operations The fair value of technical insurance provisions is based on the cash value of the expected future cash flows. This calculation also takes account of the effect of profit sharing, surplus interest and other conditional benefits to policyholders, the costs associated with the settlement of the provision, as well as the effect of the potential uncertainty in the insurance parameters. Amounts due to customers and credit institutions The book values of the demand deposits and deposits without agreed terms is considered a fair estimate of the fair value.The estimated fair value of deposits with agreed terms is based on the expected present value of the future cash flows, using the interest rate currently applicable to deposits with the same residual term.


The fair value of amounts due to banks is estimated on the basis of the present value of the future cash flows, using the interest rate currently applicable to amounts due to banks under similar conditions. Other liabilities The book value of the other liabilities is considered a fair estimate of the fair value. InterestThe interest rate applied when determing the fair value is based on the market interest rate curve as at balance sheet date.

6 Statutory solvency requirements SNSBank For SNS Bank, the capital requirements, in accordance with the BIS requirements, amounts to 8% of the risk-weighted assets, off-balance sheet items and market risk of the trading portfolio (the so-called ‘BIS standard’). At year-end 2005, this came to € 1,618 million (2004: € 1,694 million).


Core capital (Tier 1) 1,753 1,747

Supplementary capital (Tier 2) 652 690

Available Tier 3 capital ‑‑ ‑‑

Deductible items (participating interests) (4) (90)

Qualifying capital (excluding Tier 3) 2,401 2,347

Risk-weighted assets 20,175 20,037

Tier 1 ratio 8.7% 8.7%

BIS ratio 11.9% 11.7%

REAALVerzekeringen European directives require insurance companies based in one of the member states of the European Union to maintain a minimum solvency margin. The solvency with respect to the Life insurance operations as at 31 December 2005 was 233% (2004: 192%) and with respect to Non-life 275% (2004: 261%).


Acquisitions SNS REAAL completes acquisition of Nieuwe Hollandse Lloyd

On September 20th 2005 SNS REAAL and ERGO Insurance Group have completed the negotiations concerning the acquisition of Nieuwe Hollandse Lloyd Verzekeringsgroep N.V. (NHL). On the same date, the transfer of all shares of Nieuwe Hollandse Lloyd was completed. This acquisition is an important strategic step for SNS REAAL. The expansion and strengthening of its non-life insurance operations are a strategic priority for SNS REAAL. The acquisition of NHL, which is particularly strong in the non-life market, will increase the non-life portfolio of SNS REAAL by some 40%. The co-insurance activities of NHL will be continued and further expanded by SNS REAAL. SNS REAAL thus provides a significant impulse for its activities on the commercial non-life market. The acquisition will produce substantial synergy benefits and contributes directly to the result of SNS REAAL. The fact that both SNS REAAL and NHL focus on private and business clients and are committed to intermediaries means that services to both clients and intermediaries will improve after the acquisition.

Nieuwe Hollandse Lloyd has contributed € 3.4 million to the Group net income for the period September 20th up to December 31st 2005. If the shares were acquired on January 1st 2005 the contribution to the net income of SNS REAAL for the 2005 financial year would have been € 9.4 million. When calculating this result, account was taken of the former shareholders’ right to the profit and the accounting principles applied by NHL until 31 December 2005 were applied. The fair value of the most important acquired assets and liabilities and goodwill can be specified as follows:


Investments 560,7

Reinsurance contracts 104,0

Loans and advances to clients 53,2

Other assets 57,9

Technical provisions, insurance operations (669,4)

Goodwill on the acquisition amounts to € 0.3 million. The fair value of the acquired assets and liabilities are based on the discounted cash flow model. No provisions have been formed for the acquisition.

AcquisitionofthebondportfolioofVanderHoopBankiers SNS Securities acquired the bond portfolio of Van den Hoop Bankiers on December 28th 2005. This acquisition involved a total of € 79.6 million. In the context of this acquisition 19 employees of Van den Hoop Bankiers have joined SNS Securities.

SNS REAAL Financial Statements 2005 notes to the consolidated balance sheet�44 SNS REAAL Financial Statements 2005 notes to the consolidated balance sheet

Notes to the consolidated balance sheet

Assets � Goodwillandotherintangibleassets

In€millions Bank Insurance Total

�005 �004 �005 �004 �005 �004

Software 12 12 8 3 20 15

Capitalised acquisition costs in connection with insurance operations ‑‑ ‑‑ 421 233 421 233

Value of Business Acquired (VOBA) ‑‑ ‑‑ 118 121 118 121

Total 12 12 547 357 559 369

Software Acquisitioncosts VOBA Total

�005 �004 �005 �004 �005 �004 �005 �004

Accumulated acquisition cost 41 25 568 332 123 123 732 480

Accumulated amortisation and impairments (21) (10) (147) (99) (5) (2) (173) (111)

Balance as at 31 December 20 15 421 233 118 121 559 369

Balance as at 1 January 15 15 233 169 121 117 369 301

Effect of conversion to IFRS 4 ‑‑ ‑‑ 47 ‑‑ ‑‑ 47 ‑‑

Investments 14 10 189 99 ‑‑ 3 203 112

Divestments ‑‑ (2) ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ (2)

Amortisation (9) (8) (48) (35) (3) 1 (60) (42)


Amortisation of intangible assets is recognised in the income statement under Depreciation of tangible fixed assets and amortisation of intangible assets. Impairment of intangible assets is recognised in the income statement under Impairment of financial instruments and other assets.

� Tangiblefixedassets

In€millions Bank Insurance Groupactivities Total

�005 �004 �005 �004 �005 �004 �005 �004

Land and buildings in own use 91 97 32 28 73 69 196 194

IT equipment 24 25 11 9 ‑‑ ‑‑ 35 34

Other assets 38 42 33 30 ‑‑ ‑‑ 71 72

Total 153 164 76 67 73 69 302 300

SNS REAAL Financial Statements 2005 notes to the consolidated balance sheet �45SNS REAAL Financial Statements 2005 notes to the consolidated balance sheet

Landandbuildings ITequipment Otherassets Total

�005 �004 �005 �004 �005 �004 �005 �004

Accumulated acquisition cost 172 171 113 92 161 143 446 406

Accumulated revaluations 54 51 ‑‑ ‑‑ ‑‑ ‑‑ 54 51

Accumulated depreciation and impairment (30) (28) (78) (58) (90) (71) (198) (157)


Balance as at 1 January 194 201 34 38 72 81 300 320

Revaluations 4 (1) ‑‑ ‑‑ ‑‑ ‑‑ 4 (1)

Acquisitions 6 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 6 ‑‑

Investments 1 5 23 20 20 11 44 36

Divestments (7) (9) (9) (9) (7) (2) (23) (20)

Depreciation (2) (2) (13) (15) (14) (18) (29) (35)


The book value of land and buildings in own use on basis of historical cost is € 142 million (2004: € 143 million). Appraisal of land and buildings in own use The value of land and buildings in own use are assessed by an external surveyor once every three years. The entire portfolio was assessed by an external surveyor in 2004. The table below shows the balance sheet value of the assessed land and building per business unit and in totals. The final column shows the balance sheet value of the assessed land and buildings in relation to the land and buildings in own use.

Bank Insurance Groupactivities Total Inpercentageterms

2005 20 ‑‑ 42 62 32%

2004 97 28 69 194 100%

3 Associatedcompanies

In€millions Bank Insurance Groupactivities Eliminations Total

�005 �004 �005 �004 �005 �004 �005 �004 �005 �004

Total book value 2 5 77 ‑‑ 50 49 (3) (3) 126 51

Total market value 2 5 77 ‑‑ 50 49 (3) (3) 126 51


Movements in the participating interest are broken down as follows:

�005 �004

Balance as at 1 January 51 142

Acquisitions and expansions 29 3

Disposals and reductions (8) (148)

Reclassifications 39 ‑‑

Income from participating interests 9 4

Result on sale of participation interests ‑‑ 40

Direct changes in equity 6 ‑‑

Revaluations 2 (1)

Other changes (2) 11

Balance as at 31 December 126 51

Summary of the most important participating interests of SNS REAAL:

Country Interest Shareinshareholders’

equity

Shareintheresult

Assets Liabilities Income

�005 �004 �005 �004 �005 �004 �005 �004 �005 �004

ParticipatinginterestswithsignificantinfluenceDucatus N.V. NL 32% 75 ‑‑ 2 ‑‑ 233 346 ‑‑ 51 24 35

LaSer-Lafayette Services Nederland B.V. NL 40% 20 18 2 ‑‑ 753 691 704 645 62 61

Parnassus Participatiefonds B.V. NL 38% 8 8 (1) (1) 19 19 ‑‑ ‑‑ ‑‑ ‑‑

Masterfleet N.V. NL 40% 5 5 ‑‑ ‑‑ 117 116 104 104 53 57

Others NL 20‑50% 8 6 5 4 69 72 57 65 95 143

116 37 8 3 1,191 1,244 865 865 234 296

OtherparticipatinginterestsLife Science Partners II B.V. NL 13% 5 5 (2) ‑‑ 75 75 1 1 ‑‑ ‑‑

NeSBIC CTE Fund B.V. NL 14% 1 2 ‑‑ ‑‑ 1 1 3 3 2 1

NeSBIC CTE Fund II B.V. NL 10% 1 1 4 ‑‑ 7 9 ‑‑ ‑‑ 23 ‑‑

Interpay Nederland B.V. NL 3% 1 1 ‑‑ ‑‑ 1,087 894 1,019 847 353 314

Others various 3%‑14% 2 5 (1) 1 14 17 25 27 30 29

10 14 1 1 1,184 996 1,048 878 408 344

Due to an increase in the interest in Ducatus N.V., this participating interest is included under associates in 2005. In 2004, this participating interest was accounted for as an investment and is therefore included as such in the comparative figures.

A total of € 235 million (2004: € 257 million) of loan was distributed to the participating interests. The loans are stated under the heading Other loans and advances to clients.


4 Investmentproperty

In€millions Bank Insurance Eliminations Total

�005 �004 �005 �004 �005 �004 �005 �004

Land and buildings used by third parties 1 2 201 192 (73) (69) 129 125

To ensure reconciliation with the segment information, the property that the insurance operations rents out to other business units are recognised as investment property by the insurer. At group level, the property in question is recognised under tangible fixed assets and has therefore been eliminated from the Investment property.

Movements in the investment property are broken down as follows:

�005 �004

Balance as at 1 January 125 130

Investments ‑‑ 1

Divestments (2) (6)

Revaluations 6 ‑‑


5 Investments

In€millions Fairvaluethrough

ProfitandLoss

Availableforsale

Heldtomaturity

Loansandreceivables

Total

�005 �004

Banking 151 1,490 ‑‑ ‑‑ 1,641 1,703

Insurance 175 3,980 2,052 1,649 7,856 6,879

Group activities ‑‑ 117 ‑‑ ‑‑ 117 ‑‑

Eliminations ‑‑ ‑‑ ‑‑ (403) (403) (349)

Total 326 5,587 2,052 1,246 9,211 8,233

MovementofinvestmentsBalance as at 1 January 132 4,770 1,932 1,421 8,255 9,020

Reclassifications ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ (615)

Effect of conversion to IAS 32 and 39 ‑‑ 107 ‑‑ 15 122 ‑‑

Transfer to associated companies ‑‑ (39) ‑‑ ‑‑ (39) ‑‑

Purchases and advances ‑‑ 5,042 111 64 5,217 5,836

Acquisition ‑‑ 314 ‑‑ 2 316 ‑‑

Disposals and redemptions ‑‑ (4,682) ‑‑ (287) (4,969) (5,991)

Revaluations ‑‑ 73 ‑‑ ‑‑ 73 76

Impairments ‑‑ ‑‑ ‑‑ (5) (5) ‑‑

Amortisation ‑‑ ‑‑ 9 54 63 ‑‑

Changes in investments held for trading 194 ‑‑ ‑‑ ‑‑ 194 (107)

Other ‑‑ 2 ‑‑ 1 3 36

Balance as at 31 December 326 5,587 2,052 1,265 9,230 8,255


In€millions Fairvaluethrough

ProfitandLoss

Availableforsale

Heldtomaturity

Loansandreceivables

Total

�005 �004

MovementprovisionforinvestmentsBalance as at 1 January ‑‑ ‑‑ ‑‑ 22 22 30

Acquisition ‑‑ ‑‑ ‑‑ 2 2 ‑‑

Withdrawal ‑‑ ‑‑ ‑‑ (5) (5) (8)

Balance as at 31 December ‑‑ ‑‑ ‑‑ 19 19 22

Total investments 326 5,587 2,052 1,246 9,211 8,233

Availableforsale

Heldtomaturity

Loansandreceivables

Total

�005 �004

BreakdownbybusinesssectorPublic sector 2,680 1,763 29 4,472 4,124

Financial institutions 1,312 273 1,099 2,684 2,584

Trade, industry and other services 650 ‑‑ 5 655 549

Investment funds 718 ‑‑ 127 845 394

Other 227 16 5 248 472

Total 5,587 2,052 1,265 8,904 8,123

Bank Insurance Groupactivities

Total

�005

FairvaluethroughprofitandlossShares and similar investments:- Listed 33 ‑‑ ‑‑ 33

Bonds and fixed-income securities:- Listed 118 46 ‑‑ 164

- Unlisted ‑‑ 129 ‑‑ 129

Total 151 175 ‑‑ 326

Bank Insurance Groupactivities

Total

�005

InvestmentsavailableforsaleShares and similar investments:- Listed 13 994 117 1,124

- Unlisted 3 124 ‑‑ 127

Bonds and fixed-income securities:- Listed 1,474 2,851 ‑‑ 4,325

- Unlisted ‑‑ 11 ‑‑ 11

Total 1,490 3,980 117 5,587


The revaluation of the investments available for sale can be broken down as follows:

Sharesandsimilarinvestments Bondsandfixed-incomesecurities

�005

Cost / amortised cost 1,084 4,251

Unrealised gains 167 85

Total 1,251 4,336

Insurance Eliminations Total

�005

InvestmentsheldtomaturityBonds and fixed-income securities:- Listed 2,052 ‑‑ 2,052

Total 2,052 ‑‑ 2,052

Insurance Eliminations Total

�005

LoansandreceivablesPrivate loans:- Unlisted 1,668 (403) 1,265

1,668 (403) 1,265

Provision for bad debts 19 ‑‑ 19

Total 1,649 (403) 1,246

6 Investmentsforinsuranceproductsonbehalfofpolicyholders

Investments on behalf of policyholders include separate deposits for account and risk of policyholders, investments for unit-linked insurances and separate investments for large group pension contracts.

In€millions Insurance Total

�005 �004 �005 �004

Shares and similar investments:- Listed 1,393 1,080 1,393 1,080

- Unlisted 1,337 1,036 1,337 1,036

Bonds and fixed-income securities:- Listed 362 355 362 355

- Unlisted 334 327 334 327

Total 3,426 2,798 3,426 2,798


�005 �004

Balance as at 1 January 2,798 2,972

Purchases / advances 602 477

Acquisition 256 ‑‑

Disposals / redemptions (588) (1,124)

Reclassifications ‑‑ 363

Revaluations 353 101

Other 5 9

Balance as at 31 December 3,426 2,798

7 Derivatives

Derivatives are financial instruments embedded in contracts whose value depends on one or more underlying primary financial instruments. Derivatives contain rights and obligations as a result of which one or more of the financial risks attendant on the underlying primary financial instruments are transferred between parties. The transactions do not lead to the transfer of the underlying primary financial instrument when the agreement is entered into, nor need any transfer take place at the expiration date of the agreement.

In€millions Positivefairvalue

Negativefairvalue

�005

SummaryofderivativesDerivatives held for cash flow hedging:- Unlisted 208 33

Deriviatives held for fair value hedging:- Unlisted 707 766

Derivatives held in the context of asset/liability management but that do not qualify for hedge accounting:- Unlisted 142 82

Other derivatives:- Unlisted 117 95

Total 1,174 976

Total

�005

MovementsinderivativesBalance as at 1 January 61

Effect of conversion to IAS 32 and 39 (173)

Reclassifications conversion to IAS 32 and 39 (370)

Purchases 120

Disposals 53

Revaluations 245

Exchange differences 265

Other (3)

Balance as at 31 December 198

SNS REAAL Financial Statements 2005 notes to the consolidated balance sheet �5�SNS REAAL Financial Statements 2005 notes to the consolidated balance sheet

8 Deferredtaxreceivablesandliabilities


�005 �004 �005 �004 �005 �004 �005 �004

ThesourceofthedeferredtaxreceivablescanbespecifiedasfollowsReal estate ‑‑ ‑‑ ‑‑ ‑‑ 1 ‑‑ 1 ‑‑

Investments ‑‑ ‑‑ 8 ‑‑ ‑‑ ‑‑ 8 ‑‑

Bonds ‑‑ ‑‑ ‑‑ 31 ‑‑ ‑‑ ‑‑ 31

Derivatives 16 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 16 ‑‑

Subordinated loans 4 ‑‑ ‑‑ ‑‑ 1 ‑‑ 5 ‑‑

Debt certificates 33 ‑‑ ‑‑ ‑‑ 5 ‑‑ 38 ‑‑

Technical provisions, insurance operations ‑‑ ‑‑ 10 32 ‑‑ ‑‑ 10 32

Interest rate rebates ‑‑ ‑‑ 5 1 ‑‑ ‑‑ 5 1

Provision for employee benefits 3 ‑‑ 3 ‑‑ 8 59 14 59

Reorganisation provision 4 6 2 ‑‑ ‑‑ 1 6 7

Other provisions 3 7 ‑‑ 6 ‑‑ 3 3 16

Other loans and advances to clients 18 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 18 ‑‑

Tax-deductible losses 2 ‑‑ ‑‑ ‑‑ 2 2 4 2

Other 2 19 2 ‑‑ ‑‑ ‑‑ 4 19

Net tax receivable 85 32 30 70 17 65 132 167

ThesourceofthedeferredtaxliabilitiescanbespecifiedasfollowsGoodwill and other intangible assets ‑‑ ‑‑ 19 ‑‑ ‑‑ ‑‑ 19 ‑‑

Value of Business Acquired ‑‑ ‑‑ 17 ‑‑ ‑‑ ‑‑ 17 ‑‑

Real estate 2 2 42 42 ‑‑ ‑‑ 44 44

Investments 16 ‑‑ 63 32 ‑‑ ‑‑ 79 32

Derivatives ‑‑ ‑‑ 51 ‑‑ 6 ‑‑ 57 ‑‑

Mortgages 101 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 101 ‑‑

Equalisation reserve ‑‑ ‑‑ 2 ‑‑ ‑‑ ‑‑ 2 ‑‑

Other ‑‑ 1 5 5 ‑‑ ‑‑ 5 6

Net tax liabilities 119 3 199 79 6 ‑‑ 324 82

The tax-deductible losses for which a deferred tax item has been recognised can be specified as follows:

�005 �004

Total tax-deductible losses 14 6

Tax deductible losses carried as deferred tax receivable 4 2

Average tax rate 29.6% 31.5%

SNS REAAL Financial Statements 2005 notes to the consolidated balance sheet�5� SNS REAAL Financial Statements 2005 notes to the consolidated balance sheet

9 Mortgageloanstocustomers


�005 �004 �005 �004 �005 �004

With (government) guarantee 6,518 5,835 145 161 6,663 5,996

Other 36,083 33,148 843 829 36,926 33,977

42,601 38,983 988 990 43,589 39,973

Provision for bad debts 43 46 2 3 45 49

Total 42,558 38,937 986 987 43,544 39,924

The mortgage loans can be specified according to nature and security as follows:

�005 �004

Residential property in the Netherlands 41,476 38,006

Residential property outside the Netherlands 204 217

Other property in the Netherlands 1,909 1,750

Total 43,589 39,973

Movements in the principals of the mortgage loans were as follows:

�005 �004


Effect of conversion to IAS 32 and 39 461 ‑‑

Advances 9,122 8,059

Redemptions (5,931) (4,140)

Acquisitions 47 ‑‑

Change in fair value due to hedge accounting (91) ‑‑

Other 8 15


In addition, SNS REAAL has agreed a synthetic securitisation in the form of credit guarantees, buying credit risk cover for a mortgage portfolio of € 731 million. Movements in the provision for bad debts were as follows:

Bank Insurance Total

�005 �004 �005 �004 �005 �004

Balance as at 1 January 46 43 3 2 49 45

Effect of conversion to IAS 32 and 39 5 ‑‑ ‑‑ ‑‑ 5 ‑‑

Withdrawal (26) (17) ‑‑ ‑‑ (26) (17)

Additions 19 27 ‑‑ 1 19 28

Release (1) (7) (1) ‑‑ (2) (7)

Balance as at 31 December 43 46 2 3 45 49


�0 Otherloansandadvancestocustomers

In€millions Bank Groupactivities Eliminations Total

�005 �004 �005 �004 �005 �004 �005 �004

Private loans 615 618 ‑‑ 38 ‑‑ ‑‑ 615 656

Commercial loans 2,176 2,188 632 635 (696) (716) 2,112 2,107

Lease contracts ‑‑ ‑‑ ‑‑ 2 ‑‑ ‑‑ ‑‑ 2

2,791 2,806 632 675 (696) (716) 2,727 2,765

Provision for bad debts 124 98 4 40 ‑‑ ‑‑ 128 138

Total 2,667 2,708 628 635 (696) (716) 2,599 2,627

Loans and advances to clients are specified according to type of counterparty as follows:

Bank Groupactivities Eliminations Total

�005 �004 �005 �004 �005 �004 �005 �004

Public sector 468 313 ‑‑ ‑‑ ‑‑ ‑‑ 468 313

Private business market 445 266 632 675 (696) (716) 381 225

Private market 1,878 2,227 ‑‑ ‑‑ ‑‑ ‑‑ 1,878 2,227

Total 2,791 2,806 632 675 (696) (716) 2,727 2,765

The Other loans and advances to clients include an amount of € 11 million (2004: € 11 million) in receivables with a subordinated nature. For the maturity of loans and advances to clients, please refer to the notes to liquidity risks in the section Risk management on page 122 and following.

Loans and advances to clients are specified according to business sector as follows:

�005 �004

Public sector 468 313

Agriculture and horticulture, forestry and fishery 20 15

Industry 80 204

Service sector companies 1,124 1,367

Financial institutions 471 224

Other (mainly private) 564 642

Total 2,727 2,765

The movements in the principals of the other loans and advances to clients were as follows:

�005 �004


Effect of conversion to IAS 32 and 39 (1) ‑‑

Advances 365 586

Redemptions (282) (432)

Other ‑‑ ‑‑

Change in current accounts (120) (194)


The current portion of the other loans and advances to clients concerns bank overdrafts, revolving credits and bridging loans.


Provisionforbaddebts Movements in the provision for bad debts were as follows:

Bank Groupactivities Total

�005 �004 �005 �004 �005 �004


Effect of conversion to IAS 32 and 39 13 ‑‑ ‑‑ ‑‑ 13 ‑‑

Withdrawal (23) (31) (1) ‑‑ (24) (31)

Addition 61 68 2 ‑‑ 63 68

Release (25) (26) (37) ‑‑ (62) (26)


�� Loansandadvancestocreditinstitutions

This item concerns loans and advances to banks, insofar as not in the form of interest-bearing securities with a term of more than three months.

�� Othertaxreceivables

Concerns receivables concerning wage tax, social security charges, value added tax and corporation tax.

�3 Otherassets


Amounts due from direct insurance:- Policyholders (60) 39

- Intermediaries 27 19

- Reinsurers 3 16

Other receivables 38 52

Accrued assets:- Accrued interest 252 229

- Other accrued assets 44 118

Total 304 473

�4 Cashandcashequivalents

Cash and cash equivalents include demand deposits at De Nederlandsche Bank, deposits of REAAL Verzekeringen at other banks and loans and advances by SNS Bank to credit institutions with a term of less than three months.

Cash and cash equivalents can be specified as follows:


Deposits at the central bank 383 355

Short-term bank balances 615 632

Cash 78 87

Total 1,076 1,074


Liabilities and equity

�5 Shareholders’equity


Group equity 2,528 1,880

For more detailed information on shareholders’ equity please refer to ‘Consolidated statement of changes in shareholders’ equity’.

�6 Participationcertificatesandsubordinateddebts


Participation certificates 298 298

Subordinated debts 1,318 1,145


Participationcertificates This item includes participation certificates issued by SNS Bank to third parties. The certificates have an open-ended term, with SNS Bank maintaining the right to early redemption in full after 10 years, provided permission is given by DNB. Dividend in the form of a coupon rate is fixed over a period of 10 years and equal to the CBS return on 9-10 year Government bonds with a surcharge (CBS: Central Bureau of Statistics/Statistics Netherlands).

�005 �004

SubordinateddebtsBond loans 1,138 951

Private loans 133 142

1,271 1,093

Final bonus account 47 52

Total 1,318 1,145

Balancesheetvalue Nominalvalue Nominalvalue

�005 �004

BondloansSNS REAAL 7.250% 1996-2006 114 114 114

SNS Bank 6.250% 1997-2009 137 136 136

SNS Bank 5.125% 1999-2011 115 116 116

SNS Bank 4.000% 1999-2019 5 5 5

SNS Bank Variable 2000-2010 ‑‑ ‑‑ 50

SNS Bank Variable 2000-2010 ‑‑ ‑‑ 50

SNS Bank Variable 2001-2011 80 81 81

SNS Bank 7.625% Perpetual 80 80 80

SNS Bank 5.750% Perpetual 199 200 200

SNS Bank Variable 2003-2013 110 110 110

SNS REAAL Variable 2005-2012 198 200 ‑‑

SNS Bank Variable 2005-2015 100 100 ‑‑

Total 1,138 1,142 942

The two perpetually subordinated bond loans mentioned above have a term that is basically open-ended. However, both loans will be reassessed after 10 years, when the new interest rate will be set. At that time, redemption can be opted for.


Privateloans The private loans were concluded by SNS Bank N.V. and form part of the qualifying capital in assessing the solvency of SNS Bank N.V. by DNB. The average interest rate amounts to 6.3% (2004: 6.3%). Finalbonusaccount The final bonus account commitments were entered into by REAAL Verzekeringen N.V. and form part of the qualifying capital in assessing the solvency of REAAL Verzekeringen N.V. by DNB.

The final bonus account is largely of a long-term nature. �7 Debtcertificates

Debt certificates concern bonds and other debt certificates with a fixed or variable interest rate insofar as not subordinated.

The debt certificates have an average interest rate of 3.1% (2004: 3.9%).

SNS REAAL has securitised a portion of the mortgage loans. With these securitisation transactions, as part of the Hermes programme, the beneficial ownership of mortgage loans is transferred to separate companies. These loans are transferred at nominal value plus a deferred sale price. A positive result within the separate companies creates a positive value for the deferred selling price. SNS REAAL retains an economic interest in the Hermes companies in this context, and has fully consolidated these companies in its consolidated financial statements.

The Hermes transactions with effect from Hermes III have what is called a ‘ call + step-up’ structure. This means that after a specific date, the company will have the right to redeem the bonds prematurely. Additionally, at this specific date, the coupon on the bonds will be subject to a rise in interest rate (step-up). Under normal market conditions, this will create an economic incentive to redeem the bonds prematurely. A summary of the securitisation under the Hermes programme is as follows:

Initialprincipal Dateofsecuritisation

PrincipalDec.3�st�005

PrincipalDec.3�st�004

Firstcall-optiondate

Contractualdateofexpiry

As at 31 December 2005, the following portfolios were outstanding:Hermes I 437 Nov 1999 130 184 n.a. Jul 2009Hermes II 665 Nov 2000 237 336 n.a. Apr 2012Hermes III 900 Jun 2001 329 442 18 Jul 2009 Jun 2009Hermes IV 800 Nov 2001 305 402 18 Jul 2009 Oct 2033Hermes V 1,100 Nov 2002 561 742 18 Jan 2011 Oct 2034Hermes VI 1,250 May 2003 701 922 18 Nov 2009 May 2035Hermes VII 1,250 Sep 2003 1,172 1,255 18 Feb 2010 Nov 2037Hermes VIII 1,250 May 2004 1,209 1,234 18 Nov 2013 May 2038Hermes IX 1,500 May 2005 1,460 ‑‑ 18 Feb 2014 May 2039Hermes X 1,500 Sep 2005 1,481 ‑‑ 18 Mar 2015 Sep 2039

Total 10,652 7,585 5,517

Except for a subordinated loan extended to Hermes I, with an outstanding principal sum of € 4.1 million at year-end 2005 (2004: € 4.8 million), no debts securities are held at SNS REAAL that are issued by a Hermes company.


�8 Technicalprovisions,insuranceoperationsandreinsurancecontracts

In€millions Gross Reinsurance

�005 �004 �005 �004

Provision for life insurance obligations(a) 8,579 8,136 196 197

Unamortised interest rate rebates(b) (132) (150) ‑‑ ‑‑

Provision for profit-sharing, bonuses and rebates(c) 9 9 ‑‑ ‑‑

Life, for own account and risk 8,456 7,995 196 197

Provision for life insurance obligations (d) 3,461 2,845 ‑‑ ‑‑

Life, on behalf of policyholders 3,461 2,845 ‑‑ ‑‑

Provision for premium shortfalls and current risks (e) 3 1 1 ‑‑

Provision for unearned premiums(f ) 85 66 2 ‑‑

Provision for payable claims(g) 570 364 151 67

Provision for events incurred not yet reported(h) 83 59 15 5

Non-life 741 490 169 72

Total 12,658 11,330 365 269

The technical provisions for insurance operations are largely of a long-term nature.

Profitsharing Non-profitsharing Total

�005 �004 �005 �004 �005 �004

a Provisionforlifeinsuranceobligations

GrossBalance as at 1 January 2,086 2,004 6,050 5,675 8,136 7,679

Acquisitions 38 ‑‑ 93 194 131 194

Payments (159) (252) (596) (671) (755) (923)

Premiums received 191 241 737 625 929 866

Interest added 85 80 272 275 357 355

Technical result (19) (18) (64) (18) (83) (36)

Changes in other assumptions or principles ‑‑ ‑‑ ‑‑ 30 ‑‑ 30

Other changes (11) 31 (124) (60) (136) (29)

Balance as at 31 December 2,211 2,086 6,368 6,050 8,579 8,136

Reinsurance componentBalance as at 1 January ‑‑ ‑‑ 197 220 197 220

Payments ‑‑ ‑‑ (18) (15) (18) (15)

Premiums received ‑‑ ‑‑ 21 16 21 16

Interest added ‑‑ ‑‑ 11 9 11 9

Technical result ‑‑ ‑‑ (11) (3) (11) (3)

Other changes ‑‑ ‑‑ (4) (30) (4) (30)

Balance as at 31 December ‑‑ ‑‑ 196 197 196 197


Lifeownrisk

�005 �004

b Unamortisedinterestraterebates

GrossBalance as at 1 January 150 145

Rebates given in financial year 13 41

Amortised in the result (31) (36)


Lifeownrisk

�005 �004

c Provisionforprofit-sharing,bonusesandrebates

GrossBalance as at 1 January 9 10

Profit sharing, bonuses and rebates given in the financial year ‑‑ (1)


Gross

�005 �004

d TechnicalprovisionsforinsurancepoliciesonbehalfofpolicyholdersBalance as at 1 January 2,845 3,143


Premiums received 514 506

Payments (397) (735)

Interest added 22 34

Exchange rate differences 338 106

Technical result (31) (29)

Other changes (85) (180)


The technical insurance provisions with policyholders bearing the investment risk are linked to the investments for insurance products on behalf of policyholders.

Gross Reinsurance

�005 �004 �005 �004

e ProvisionforpremiumshortfallsandcurrentrisksBalance as at 1 January 1 1 ‑‑ ‑‑

Acquisitions 2 ‑‑ 1 ‑‑

Balance as at 31 December 3 1 1 ‑‑


Gross Reinsurance

�005 �004 �005 �004

f ProvisionforunearnedpremiumsBalance as at 1 January 66 60 ‑‑ ‑‑


Additions during the year 57 65 ‑‑ ‑‑

Releases added to the result (69) (59) (5) ‑‑

Balance as at 31 December 85 66 2 ‑‑

Gross Reinsurance

�005 �004 �005 �004

g ProvisionforpayableclaimsBalance as at 1 January 364 377 67 32


Claims reported, current period 207 193 14 9

Claims reported, prior periods (16) (24) (12) 20

Claims paid, current period (155) (131) (13) (7)

Claims paid, prior periods (52) (51) (13) (1)

Release added to the result (6) (3) 8 12

Interest added 12 9 10 8

Other changes 6 (6) 9 (6)

Balance as at 31 December 570 364 151 67

Gross Reinsurance

�005 �004 �005 �004

h ProvisionforeventsincurrednotyetreportedBalance as at 1 January 59 68 5 4


Additions during the year 15 14 3 2

Release added to the result (24) (23) (4) (1)

Balance as at 31 December 83 59 15 5

�9 Provisionforemployeebenefits


Cash value of financed commitments 86 1,446

Fair value of fund investments 27 1,168

Cash value of net commitments 59 278

Unrecorded actuarial gains and losses (2) (111)

Pension provision for former Zurich employees ‑‑ 11

Commitment by virtue of staff discounts 16 9

Other 3 ‑‑

Total 76 187


As at 1 January 2005, the defined-benefits scheme (average pay) for staff, except for the former staff of Zurich and NHL, was converted to a defined-contribution scheme. The Group pays a fixed agreed contribution under this scheme. Because there is further no legally enforceable obligation to make additional contributions, the pension entitlements and the corresponding investment are no longer recognised in the balance sheet. The same applies to the actuarial losses (€ 111 million) not recognised at year-end 2004; these are no longer charged to the Group’s result or equity.

�005 �004

MovementoftheProvisionforemployeebenefitsCommitments by virtue of defined-benefit entitlements as at 1 January 187 303


Premiums payed (64) (173)

Reclassification from technical provision 34 ‑‑

Transfer to Pension Fund (144) ‑‑

Cost recorded in profit and loss account 59 57

Release added to the result (8) ‑‑

Total 76 187

Following the transition to a defined-contribution scheme, a transfer of € 144 million was made to Stichting Pensioenfonds SNS REAAL.

The remaining portion of € 6 million of the average-pay provision was released.

�005 �004

ChargeincludedintheincomestatementCurrent service costs 50 48

Interest on the liability 1 60

Expected return on fund investments ‑‑ (51)

Total 51 57

�0 Otherprovisions


�005 �004 �005 �004 �005 �004 �005 �004

Reorganisation provision 14 16 5 14 1 5 20 35

Other provisions 9 13 1 2 14 0 24 15

Total 23 29 6 16 15 5 44 50

Other provisions as at year-end 2005 include € 19 million (2004: € 13 million) for legal actions and tax claims.

Reorganisationprovision

Otherprovisions

Total

�005 �004 �005 �004 �005 �004


Additions 11 14 18 12 29 26

Withdrawals (19) (21) (8) (4) (27) (25)

Releases (7) (12) (1) ‑‑ (8) (12)

Other changes ‑‑ ‑‑ ‑‑ 2 ‑‑ 2


SNS REAAL Financial Statements 2005 notes to the consolidated balance sheet �6�SNS REAAL Financial Statements 2005 notes to the consolidated balance sheet

�� Savings

The Savings item comprises balances of savings accounts, savings deposits and term deposits of private clients. This item does not include interest payable on savings.

�� Otheramountsduetocustomers

In€millions Bank Insurance Groupactivities Elimination Total

�005 �004 �005 �004 �005 �004 �005 �004 �005 �004

Non-current debt 2,295 1,996 369 330 67 101 (666) (568) 2,065 1,859

Demand deposits 4,815 4,580 ‑‑ ‑‑ 460 379 (646) (823) 4,629 4,136

Mortgage deposits 384 351 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 384 351

Total 7,494 6,927 369 330 527 480 (1,312) (1,391) 7,078 6,346

�3 Amountsduetocreditinstitutions

In€millions Bank Insurance Groupactivities Elimination Total

�005 �004 �005 �004 �005 �004 �005 �004 �005 �004

Due on demand 254 77 ‑‑ ‑‑ 108 77 (26) (59) 336 95

Deposits and certificates 2,849 2,218 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 2,849 2,218

Other ‑‑ ‑‑ 425 129 ‑‑ ‑‑ (191) ‑‑ 234 129

Total 3,103 2,295 425 129 108 77 (217) (59) 3,419 2,442

�4 Othertaxliabilities

Concerns liabilities in connection with wage tax, social security charges, value added tax and corporation tax.

�5 Otherliabilities


Debts in relation to direct insurance 144 166

Debts to reinsurers (7) 18

Other liabilities 412 792

Accrued liabilities:- Accrued interest 721 678

- Other accrued liabilities 89 60

Total 1,359 1,714

Off-balancesheetcommitments


ContingentliabilitiesCommitments regarding sureties and guarantees issued 108 106

Commitments arising from irrevocable facilities 1,334 1,301

In order to meet its clients requirements, SNS REAAL offers loan-related financial products, such as securities and guarantees. The underlying value of these products is not accounted for as assets or liabilities in the balance sheet. For these products, the underlying value indicates the maximum potential credit risk incurred by SNS REAAL, assuming that all its counterparties would default on their contractual obligations and all existing sureties would be worthless.

Guarantees concern both credit replacement and non-credit replacement guarantees. It is expected that the majority of guarantees will expire without any claim being made against them and will therefore not cause any future cash flows.

SNS REAAL Financial Statements 2005 notes to the consolidated balance sheet�6� SNS REAAL Financial Statements 2005 notes to the consolidated income statement

The irrevocable facilities consist mainly of credit facilities granted to clients, but which have not yet been used. These facilities are granted for a specified period and at a floating interest rate. The majority of the irrevocable credit facilities that have not yet been used have sureties pledged for them.

Earn-outschemeofNHLPursuant to the acquisition of NHL, it has been agreed contractually that a significant portion of both the positive and negative run-off results of the portfolio as at 31 December 2004 will be for the account of the former owner for a period of five years.

Rentalcommitments The future rental commitments arising from operating lease contracts as at 31 December are as follows:

�005 �004

2006 5 5

2007 3 3

Legalproceedings SNS REAAL is involved in legal proceedings. Although it is impossible to predict the result of pending or threatened legal proceedings, on the basis of information currently available and after consulting legal advisors, the Group Executive Board believes that the results of these proceedings are unlikely to adversely materially affect the financial position or results of SNS REAAL’s activities.

Without prejudice to the aforementioned, we should point out the following: SNS Bank has extended loans to a number of clients of an intermediary in the field of financial services. This intermediary advised its clients to invest part of the loan in, among other things, investment funds and securities lease products (neither from SNS REAAL). When the income turned out to be less than expected because of the deteriorating stock exchange climate, clients started legal action against the intermediary in question and the financial service provider that had offered the securities lease products. Some clients are claiming compensation from SNS Bank. The majority of these claims have been settled. However, it is not certain whether it will be possible to settle the remaining claims, and it is possible that more claims could follow. In connection with this risk, SNS Bank formed a provision in 2005.

SNS Bank used to offer securities lease products in the past. Other than with most of the securities lease products of other providers, these concerned guarantee products. The guarantee does not cover the amount payable by the investor for interest and expenses. For this reason some clients filed claims. They argue that the product information was misleading on this point. In addition, a number of investors appeal to the fact that their spouses had not signed the agreements and/or that the Consumer Credit Act has been breached. Most of the claims have been settled. A number of clients have started legal proceedings. Only in one instance has it been ruled that SNS Bank did not make it sufficiently clear that not all the amounts invested by the investor (being interest of up to a maximum of € 6,000 per contract and costs) were covered by the guarantees. The verdict was that SNS Bank did not have to pay all the damage incurred because the fact that the applicant had not made any enquiries can be imputed to him/her. SNS Bank was ordered to pay a portion of the amount claimed. In connection with the risk that SNS Bank has to compensate investors, SNS Bank formed a provision in 2005.

SNS REAAL Financial Statements 2005 notes to the consolidated balance sheet �63SNS REAAL Financial Statements 2005 notes to the consolidated income statement

Notes to the consolidated income statement Income

�6 Interestincome,bankingoperations


Interest income, banking operations 1,996 2,111

Interest charges, banking operations 1,374 1,518

Total 622 593

Interestincome,bankingoperationsInterest income from banking operations includes income arising from lending activities and related transactions, as well as related commission and other income of an interest-related nature. This also includes results on financial instruments insofar as these serve to reduce interest rate risks.

�005 �004

Mortgage receivables 1,723 1,774

Other loans and advances to clients 171 207

Loans and advances to credit institutions 49 36

Investments 52 72

Other 1 22

Total 1,996 2,111

Interestcharges,bankingoperationsInterest charges from banking operations includes costs arising from the borrowing funds and related transactions, as well as other costs of an interest-related nature.

�005 �004

Debt certificates 675 849

Participation certificates and subordinated debts 58 60

Savings 363 343

Amounts due to customers 250 246

Amounts due to credit institutions 28 20

Total 1,374 1,518

SNS REAAL Financial Statements 2005 notes to the consolidated income statement�64 SNS REAAL Financial Statements 2005 notes to the consolidated income statement

�7 Netpremiumincome

Net premium income concerns insurance premiums net of reinsurance premiums.

In€millions Total

�005 �004

Regular life premiums 859 780

Reinsurance premium life 21 19

838 761

Single premium life 584 593

Reinsurance premium life ‑‑ ‑‑

584 593

Net premium income life 1,422 1,354

Non-life insurance 346 317

Reinsurance premium non-life 23 21

Net premium income non-life 323 296

Total 1,745 1,650

�8 Netcommissionandmanagementfees

This item includes fees for services rendered, insofar as these are not of an interest-bearing nature.

In€millions Bank Insurance Eliminations Total

�005 �004 �005 �004 �005 �004 �005 �004

Money transfer activities 22 22 ‑‑ ‑‑ ‑‑ ‑‑ 22 22

Securities 18 12 ‑‑ ‑‑ (7) (8) 11 4

Insurance 40 35 22 12 (21) (17) 41 30

Management fees 46 40 11 11 ‑‑ ‑‑ 57 51

Other activities 12 12 10 8 ‑‑ ‑‑ 22 20

138 121 43 31 (28) (25) 153 127

Commission and management fees due 24 12 ‑‑ ‑‑ ‑‑ ‑‑ 24 12

Total 114 109 43 31 (28) (25) 129 115

�9 Investmentincome


�005 �004 �005 �004 �005 �004 �005 �004 �005 �004

Investments fair value through profit and loss 18 21 1 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 19 21

Investments available for sale 8 ‑‑ 188 328 ‑‑ (1) 2 ‑‑ 198 327

Investments held to maturity ‑‑ ‑‑ 88 ‑‑ ‑‑ ‑‑ ‑‑ 88 ‑‑

Loans and receivables ‑‑ ‑‑ 245 279 34 72 (54) (70) 225 281

Investment property ‑‑ ‑‑ 23 11 ‑‑ ‑‑ (4) ‑‑ 19 11

Total 26 21 545 618 34 71 (56) (70) 549 640

In 2004, investment income from fixed-interest securities was not split into available for sale or held to maturity, but was entirely classified as available for sale.

SNS REAAL Financial Statements 2005 notes to the consolidated income statement �65SNS REAAL Financial Statements 2005 notes to the consolidated income statement

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�005 �004

CompositionofresultoninvestmentsInterest 6 103 88 219 ‑‑ 416 473

Dividend ‑‑ 7 ‑‑ ‑‑ ‑‑ 7 14

Rent ‑‑ ‑‑ ‑‑ ‑‑ 13 13 14

6 110 88 219 13 436 501

Realised gains 18 88 ‑‑ 6 ‑‑ 112 81

Unrealised gains (5) ‑‑ ‑‑ ‑‑ 6 1 58

13 88 ‑‑ 6 6 113 139

Total 19 198 88 225 19 549 640

Rent from investment property includes both the rental income and the directly attributable operating expenses. The operating expenses amounted to € 5 million (2004: € 5 million). 30 Investmentincomeonbehalfofpolicyholders

In€millions Insurance Total

�005 �004 �005 �004

Interest 86 33 86 33

Dividend 26 29 26 29

112 62 112 62

Revaluations 282 64 282 64

Total 394 126 394 126

3� Resultonderivativesandotherfinancialinstruments


�005 �004 �005 �004 �005 �004

Foreign exchange gains and losses 1 1 ‑‑ ‑‑ 1 1

Result on derivatives 26 ‑‑ (2) ‑‑ 24 ‑‑

Other financial instruments 6 (8) ‑‑ ‑‑ 6 (8)

Total 33 (7) (2) ‑‑ 31 (7)


3� Otheroperatingincome

This includes income from securities and participating interests and all income that cannot be accounted for under other headings.


�005 �004 �005 �004 �005 �004 �005 �004 �005 �004

Income from securities and participating interests ‑‑ ‑‑ ‑‑ 5 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 5

Other income (4) 2 5 5 ‑‑ 2 ‑‑ (1) 1 8

Total (4) 2 5 10 ‑‑ 2 ‑‑ (1) 1 13


Expenses

33 Technicalexpensesoninsurancecontracts

Technical expenses on insurance contracts include: reinsurance premiums, additions to insurance provisions, payouts, surrender of policies, claims and claim handling costs. Profit-sharing and rebates are also included.


Life insurance expenses:- Payments for own account 737 908

- Change in technical provisions for own account 356 288

- Profit-sharing and rebates 55 54

1,148 1,250

Non-life insurance expenses:- Claims for own account 181 173

- Change in provision for payable claims (10) (21)

- Change in provision for unearned premiums (6) 2

- Profit-sharing and rebates ‑‑ 2

165 156

Total 1,313 1,406

34 Technicalexpensesoninsurancecontractsonbehalfofpolicyholders

Expenses concerning insurance contracts on behalf of policyholders include: reinsurance premiums, additions to insurance provisions, payouts, surrender of policies, claims and claim handling costs. Profit-sharing and rebates are also included.


Life insurance expenses:- Payments for account of policyholders 397 735

- Change in technical provisions for account of policyholders 361 (313)

- Profit-sharing and rebates 24 9

Total 782 431

35 Acquisitioncostsforinsuranceoperations

In€millions Insurance Eliminations Total

�005 �004 �005 �004 �005 �004

Life insurance 103 66 (4) (4) 99 62

Non-life insurance 85 74 (17) (14) 68 60

Total 188 140 (21) (18) 167 122

Acquisition costs include amortisation on capitalised acquisition costs for an amount of € 48 million (2004: € 35 million).


36 Valueadjustmentsonfinancialinstrumentsandotherassets

This item includes value adjustment for bad debts and value adjustments to fixed assets.

In€millions Valueadjustments Reversals Total

�005 �004 �005 �004 �005 �004

Investments 2 ‑‑ 2 ‑‑ ‑‑ ‑‑

Loans and advances to customers 60 71 ‑‑ ‑‑ 60 71

Total 62 71 2 ‑‑ 60 71

37 Staffcosts


�005 �004 �005 �004 �005 �004 �005 �004

Salaries 153 155 77 83 36 29 266 267

Pension costs 34 35 18 18 (1) 4 51 57

Social costs 18 18 9 9 3 2 30 29

Other staff costs 53 43 23 41 20 14 96 98

Total 258 251 127 151 58 49 443 451

�005 �004

The pension costs for own staff break down as follows:- Pension premiums 59 ‑‑

- Interest charge ‑‑ 60

- Increase in cash value of entitlements 3 50

- Members’ contributions (3) (2)

- Expected income from investments ‑‑ (51)

- Release (8) ‑‑

Total 51 57

�005 �004

EmployeesThe average number of staff calculated on the basis of full-time equivalents:- SNS Bank 3,158 3,328

- REAAL Verzekeringen 1,732 1,749

- Group / SNS REAAL Invest 446 306

Total 5,336 5,383

SNS Reaal has not issued any options to management or staff. RemunerationofExecutiveBoardandSupervisoryBoard General policy The policy pursued by SNS REAAL with respect to the remuneration of the members of the Executive Board is in line with that of other managers within the group. The policy is aimed at attracting and retaining high-quality people and to motivate them, in accordance with the strategic and derived financial objectives. The remuneration of the Executive Board is decided by the Supervisory Board.


The table below provides an overview of the salaries and bonuses of the individual members of the Executive Board.

In€thousands Regularpayments

Deferredpayment

Severancepayment

Profit-sharing&bonuses

Total

Remuneration of the Group Executive Board in 2005 S. van Keulen 575 132 ‑‑ 223 930

C.H. van den Bos 438 100 ‑‑ 168 706

M.W.J. Hinssen 438 100 ‑‑ 168 706

R.R. Latenstein van Voorst 438 100 ‑‑ 156 694

Total 1,889 432 ‑‑ 715 3,036

Remuneration of the Group Executive Board in 2004 S. van Keulen 563 189 ‑‑ 193 945

C.H. van den Bos 428 127 ‑‑ 145 700

M.W.J. Hinssen 428 96 ‑‑ 145 669

R.R. Latenstein van Voorst 396 62 ‑‑ 124 582

Total 1,815 474 ‑‑ 607 2,896

In€thousands AsmemberoftheBoard

Asmemberofacommittee

Total

Remuneration of the Supervisory Board in 2005 J.L. Bouma 38 18 56

H.M. van de Kar 30 15 45

J.V.M. van Heeswijk 25 8 33

J. den Hoed 25 8 33

D. Huisman 25 8 33

S.C.J.J. Kortmann 25 8 33

H. Muller 25 11 36

Total 193 76 269

Remuneration of the Supervisory Board in 2004 J.L. Bouma 37 6 43

H.M. van de Kar 30 6 36

J.V.M. van Heeswijk 25 10 35

J. den Hoed 25 5 30

D. Huisman 25 10 35

S.C.J.J. Kortmann 25 6 31

H. Muller 25 9 34

Total 192 52 244

In€thousands Averageinterestrate �005 �004

Mortgage loans to executive and supervisory directors S. van Keulen 5.5% 194 197

M.W.J. Hinssen 4.6% 558 567

H.M van de Kar 6.6% 120 120

J.V.M. van Heeswijk 4.0% 90 90

S.C.J.J. Kortmann 4.4% 117 113

H. Muller 6.7% 68 68

Total 1,147 1,155


38 Otheroperatingexpenses


�005 �004 �005 �004 �005 �004 �005 �004

Accommodation costs 29 30 7 5 6 5 42 40

IT costs 21 20 ‑‑ ‑‑ 9 7 30 27

Marketing and public relations costs 29 25 12 18 2 2 43 45

External consultancy costs 7 7 4 4 14 18 25 29

Other expenses 86 78 46 33 (71) (34) 61 77

Total 172 160 69 60 (40) (2) 201 218

39 Otherinterestcharges

This includes interest expenses related to non-banking activities, which are attributable to the financial year.

In€millions Insurance Groupactivities Eliminations Total

�005 �004 �005 �004 �005 �004 �005 �004

Bond loans ‑‑ ‑‑ 17 37 ‑‑ ‑‑ 17 37

Private loans 18 19 11 24 (17) (41) 12 2

Interest on deposits of reinsurers 15 11 ‑‑ ‑‑ ‑‑ ‑‑ 15 11

Other interest charges and investment costs 8 25 21 15 (13) (15) 16 25

Total 41 55 49 76 (30) (56) 60 75

40 Shareintheresultofassociatedcompanies

This includes the share in the net profit of the associated companies. 4� Taxes


Tax due on profit: - Financial year 103 80

- Adjustments for prior years (7) ‑‑

Deferred taxes: - Origin and settlement of temporary differences (5) (19)

- Change in the tax rate 2 9

Total 93 70

Reconciliation between statutory and effective tax rate:- Operating profit before taxation 416 357

- Nominal tax rate 31.5% 34.5%

Nominal tax amount 131 124

Effect of participation exemption (30) (49)

Revaluation of deferred taxes in connection with a change in the tax rate 2 15

Prior year adjustments (including release of tax provision) (7) (19)

Other tax facilities (3) (1)

Total 93 70

Effective tax rate 22.4% 19.6%

It has been announced in the tax plans for 2006 that the corporation tax rate will be reduced from 31.5% to 29.6%. This has resulted in the deferred

SNS REAAL Financial Statements 2005 notes to the consolidated income statement �7�SNS REAAL Financial Statements 2005 notes to the consolidated income statement

corporate income tax. The effect of this is accounted for under ‘Revaluation of deferred taxes in connection with a change in the tax rate’.

4� Netearningsperordinaryshare


Net earnings 323 288

Weighted average number of issued shares (in millions) 209 209

Dilution (in millions) ‑‑ ‑‑

Average number of ordinary shares adjusted for dilution (in millions) 209 209

Earnings per share (in euros) 1.55 1.38

SNS REAAL Financial Statements 2005 notes to the consolidated income statement�7� SNS REAAL Financial Statements 2005 notes to the consolidated income statement

Implementing IFRS

The 2005 financial statements of SNS Reaal have been prepared in accordance with International Financial Reporting Standards as adopted for use in the EU. The comparative figures for 2004 have been restated in accordance with IFRS, with the permitted exception of IAS 32 and 39 and IFRS 4. This means that the comparative information with respect to financial instruments and insurance contracts is prepared primarily on the basis of the old accounting principles of SNS REAAL. As a result, the figures in this transitional year are not so easy to compare. The summaries below separately show the effects of the adoption of IFRS on 1 January 2004 and the application of IAS 32 and 39 and IFRS 4 on 1 January 2005.

In€millions �January�005 �January�004

Reconciliationofshareholders’equityShareholders’ equity under SNS REAAL GAAP 1,962 1,643

Equity adjustments following implementation of IFRSPension provision (111) (111)

Fund for General Banking Risks 70 70

Revaluation of buildings (14) (14)

Participation certificates tax effect (6) ‑‑

Provisions 1 1

(60) (54)

Impact of IFRS Adjustment to the 2004 results (22)

Equity adjustments following implementation of IAS 32 and 39 and IFRS 4Investment portfolio 137

Internal acquisition costs 32

Funding (40)

Mortgages 24

Provision for bad debts (15)

Derivatives 22

Other (1)

159

Shareholders’ equity under IFRS 2,039 1,589

Changesinaccountingpolicies

SNS REAAL has implemented IFRS with retrospective effect using the following transitional provisions:§ Goodwill is only capitalised for acquisitions after 1 January 2004. Goodwill on acquisitions before that date was charged to equity and not

adjusted. § Hedge accounting is applied to hedges that satisfy the hedge-accounting criteria of IAS 39 as at 1 January 2005.§ Actuarial losses on pensions and other employee benefits that were not taken to the result are charged to equity as at 1 January 2004.

ExplanationofdifferencesbetweenIFRSandSNSREAALGAAP

An explanation is given below of the differences between the accounting policies as applied to the 2004 financial statements (SR GAAP) and IFRS (as applied with effect from 2005):§ Differences between SNS REAAL GAAP and IFRS, excluding IFRS 4, IAS 32 and IAS 39, which were applied with effect from 1 January 2004 to the

comparative figures for 2004; § Differences arising from the implementation of IFRS 4, IAS 32 and IAS 39 as at 1 January 2005.


DifferencesbetweenSNSREAALGAAPandIFRSexcludingIFRS4,IAS3�andIAS39.

SecuritisationThe securitised mortgage portfolio is consolidated with effect from 2004 (implementation of IFRS).

GoodwillUnder SR GAAP, goodwill was charged to shareholders’ equity. Goodwill charged to shareholders’ equity before 1 January 2004 is not adjusted. Under IFRS, goodwill is capitalised and subject to a regular impairment test.

Real estate - Investment propertyUnder IFRS, investment property is measured at fair value with value adjustment taken to the result. Under SR GAAP, investment property was also carried at fair value, but value adjustments were taken to the revaluation reserve in shareholders’ equity. Under SR GAAP, the cumulative revaluation upon disposal was taken to the result.

Real estate - In own useUnder both IFRS and SR GAAP, property in own use is measured at fair value, with value adjustments, taking into account deferred taxes, are taken to shareholders’ equity (revaluation reserve). Under IFRS, a depreciation charge on property in own use, based on the economic life and taking into account a residual value, is accounted for in the income statement. Under SR GAAP, property in own use at REAAL Verzekeringen is not depreciated. Under SR GAAP, property in own use was included in Investment property. Under SR GAAP, the portion of the revaluation reserve related to the disposal is taken to the result upon disposal. Under IFRS, the revaluation reserve is released in the other reserves.

Staff pension provisionsThe measurement bases for pensions are different under IFRS. Under IFRS, IAS 19 is applied, whereas under SR GAAP, RJ 271 was applied. In addition, on 1 January 2005 the pension scheme was converted from a defined-benefit scheme to a defined-contribution scheme. Upon transition to IFRS, actuarial losses on pensions and other employee benefits that had not been taken to the result as at 1 January 2004 were charged to shareholders’ equity.

Fund for general banking risksUnder SR GAAP, a fund for general banking risks was kept. Under IFRS, this fund has been added to other reserves.

Classification of equity instrumentsUnder SR GAAP, participation certificates of SNS Bank were classified as shareholders’ equity. At consolidated level, this concerns a third-party interest. Under IFRS, these instruments are recognised as a liability. Payments to holders of participation certificates are stated as interest under IFRS. Under SR GAAP, they were part of the profit distribution. Because of this change, the comparative figures for 2004 have been restated. With respect to solvency reporting, this item remains part of the available qualifying capital.

TaxesDeferred taxes have been adjusted in accordance with the above differences between SR GAAP and IFRS.

DifferencearisingfromtheimplementationofIFRS4,IAS3�andIAS39asat�January�005.

On 1 January 2005, IAS 32 and 39 and IFRS 4 were also applied for the first time under IFRS. The cumulative effect of this is stated in shareholders’ equity, taking account of deferred taxes.

Participating interestsUnder SR GAAP, participating interests were measured at acquisition price or lower market value. Under IFRS, participating interest over which SNS REAAL does not have significant influence are measured at fair value, with value adjustment taken to the revaluation reserve in shareholders’ equity.

Investments

Under IFRS, investments are divided into the following four categories:§ Investments at fair value through profit and loss. This category includes trading positions held. Measurement under IFRS is the same as under

SR GAAP, which is the stock market price on the final reporting day; however, the provisions for impairment are based on stricter methods. In addition, under SR GAAP at REAAL Verzekeringen, unrealised and realised value adjustments on equities, taking into account deferred taxes, were taken to the revaluation reserve. From this, an amount was stated in the income statement as supplement to the dividend (indirect return method). Under IFRS, the realised gains and losses on equities are taken directly to the income statement

§ Available for sale. This category includes the listed debt instruments that are not part of the trading portfolio and that are also not held to maturity. These debt instruments are stated at fair value. Under IFRS, value adjustments, taking into account deferred taxes, are taken to the revaluation reserve in shareholders’ equity, while realised gains and losses are taken to the income statement. Under SR GAAP, these instruments are stated at redemption value. The difference between the redemption value and the purchase price (share premium or discount)


is included under deferred assets or deferred liabilities, as appropriate, and is taken to the income statement as interest income in proportion to the residual term to maturity of the related asset. Gains or losses are taken to the income statement as interest income on the basis of the weighted average term of the portfolio concerned.

§ Held to maturity. Under IFRS, these loans are stated at amortised cost. The balance of expenses and commission (paid and received) is capitalised and amortised according to effective return method. The management has designated a portion of the bond portfolio of REAAL Verzekeringen as ‘held to maturity’. Under SR GAAP, these bonds were stated at redemption value. Share premium and discount were recognised in a straight line in the result over the duration.

§ Loans and receivables. Under IFRS, loans and receivables are measured at amortised cost. Transaction costs and commission form part of the initial measurement and are amortised based on the effective return method. Under SNS REAAL GAAP, these items were carried at redemption value.

Mortgages Under IFRS, mortgages are recognised at amortised cost, and penalty interest is stated in the profit and loss account in the year of receipt and is no longer amortised.

Loans, funding and hybrid savings productsUnder IFRS, these items are stated at amortised cost. Costs and commission are capitalised and amortised. Under SR GAAP, loans are stated at redemption value. The balance of expenses and commission (paid and received) is largely taken directly to the result (for example, handling fees).Under IFRS, amortisation of premium and discount is based on the effective interest method while, under SR GAAP, they are recognised in a straight line in the result. Under IFRS, realised gains and losses are taken to the result. Under SR GAAP, these were amortised over the residual term.

Derivatives and embedded derivativesUnder IFRS, derivatives are measured at fair value, including derivatives embedded in contracts, and presented on balance. Both the realised and the unrealised gains and losses are taken to the income statement, except in the case of hedge accounting for cash-flow hedging.

Hedge accountingUnder IFRS, changes in the value of derivatives that are part of a cash-flow hedge are recognised in equity, taking into account deferred taxes. Upon realisation, these value changes are taken to the income statement in the same period as the result on the hedged instrument is accounted for. For fair value hedges, the hedged asset or liability is measured at fair value insofar as it concerns the hedged risk. Value changes are taken to the result. These value changes partly compensate the value changes in the income statement of the derivative that serves as hedging instrument.

Provision for credit risksUnder IFRS, specific provisions for bad debts are based on stricter methods, including the formation of a provision for unidentified bad debts in portfolio (IBNR). For business loans, the cash value is determined item by item on the basis of the estimated future cash flows.

Capitalisation of initial costsUnder SNS REAAL GAAP, capitalised acquisition costs include commission paid for long-term life insurance contracts. Under IFRS, it has been decided, more in line with the matching principle, to also capitalise a portion of the internal acquisition costs. The costs are amortised in line with the period in which the premiums are realised with a maximum of 12 years. The effect over 2004 is recorded in equity per 1 January 2005. The cumulative effect of prior years was not accounted for, as this was considered to be impracticable. By virtue of an exemption upon first-time adoption of IFRS, the comparative figures have not been adjusted.

TheimpactofIFRSontheresultofSNSREAAL The table below shows that net profit for 2004 under IFRS was € 288 million, compared to net profit of € 310 million on the basis of the accounting principles of SNS REAAL. This difference is primarily due to changes in the accounting for pensions.



ReconciliationofconsolidatednetprofitNet profit SNS REAAL GAAP 310

Adjustment of net profit due to adoption of IFRSNet interest income (18)

Staff costs (26)

Result on investments (6)

Taxes 11

Minority interests 18

Other (1)

Total adjustment to result following implementation of IFRS (22)

Net profit IFRS 288

SNS REAAL Financial Statements 2005 company financial statements sns reaal groep n.v.�76 SNS REAAL Financial Statements 2005 company financial statements sns reaal groep n.v.

Company balance sheet


Assets

Participating interests in subsidiaries� 2,662 2,148

Receivables from subsidiaries � 388 368

Investments 3 117 ‑‑

Derivatives 4 22 ‑‑

Deferred tax receivables 17 64

Loans and advances to credit institutions ‑‑ 9

Other assets 95 41

Cash and cash equivalents5 269 225

Total assets 3,570 2,855

Liabilitiesandequity

Shareholders’ equity: 6- Issued share capital 340 340

- Share premium 15 15

- Revaluation reserve 38 39

- Cash flow hedge reserve 135 ‑‑

- Fair value reserve 203 ‑‑

- Profit sharing reserve 38 ‑‑

- Statutory reserve 97 10

- Other reserves 1,339 1,188

- Retained profit 323 288

2,528 1,880

Subordinated debts 7 419 227

Capital base 2,947 2,107

Debt certificates 8 189 266

Provision for employee benefits 28 184

Other provisions 4 5

Derivatives 4 4 8

Deffered tax liabilities 6 ‑‑

Other amounts due to customers9 245 151

Amounts due to credit institutions�0 108 77

Other tax liabilities ‑‑ 18

Other liabilities 39 39

Total liabilities and equity 3,570 2,855

The numbers mentioned with the balance sheet items refer to the notes starting on page 178.

SNS REAAL Financial Statements 2005 company financial statements sns reaal groep n.v. �77SNS REAAL Financial Statements 2005 company financial statements sns reaal groep n.v.

Company income statement


Result of subsidiaries after taxation 345 317

Other results after taxes (22) (29)

Net profit 323 288

Earnings per ordinary share (in euros) �� 1.55 1.38

The number mentioned with the income statement item refers to the note on page 182.


Notes to the company balance sheet

GeneralFor further details on the accounting policies, reference is made to the general notes to the consolidated financial statements on page 104 and following. Insofar as items are not explained in the balance sheet, please refer to the notes to the consolidated balance sheet.

In accordance with section 402, Book 2 of the Netherlands Civil Code, only the result from participating interest after deduction of tax is shown as a separate item in the income statement.

Assets � Participatinginterestsinsubsidiaries


SNS Bank 1,440 1,313

REAAL Verzekeringen 1,190 806

Other 32 29

Total 2,662 2,148


Effect of conversion to IAS 32 and 39 and IFRS 4 152 ‑‑

Revaluations 191 ‑‑

Released revaluations (46) ‑‑

Result 345 317

Dividend received (131) (143)

Other changes 3 25


� Receivablesfromsubsidiaries


Breakdown by residual term to maturity:- Payable on demand ‑‑ ‑‑

- > 1 month B 3 months 300 288

- > 3 months B 1 year ‑‑ ‑‑

- > 1 year B 5 years 10 ‑‑

- > 5 years 78 80

Total 388 368

SNS REAAL Financial Statements 2005 company financial statements sns reaal groep n.v. �79SNS REAAL Financial Statements 2005 company financial statements sns reaal groep n.v.

3 Investments


Investments available for sale 117 ‑‑

MovementofinvestmentsavailableforsaleBalance as at 1 January ‑‑ ‑‑

Acquisitions and advances 117 ‑‑

Balance as at 31 December 117 ‑‑

4 Derivatives

In€millions Debit Credit

�005

MovementderivativesBalance as at 1 January ‑‑ (8)

Effect of conversion to IAS 32 and 39 and IFRS 4 13 ‑‑

Acquisitions ‑‑ 3

Value adjustments 8 ‑‑

Exchange differences 1 1

Balance as at 31 December 22 (4)

5 Cashandcashequivalents

Cash and cash equivalent include demand deposits at SNS Bank with a term of less than three months.


Liabilities and equity 6 Shareholders’equity

In€millions

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Balance on 1 January 2004 340 15 36 ‑‑ ‑‑ ‑‑ 15 940 243 1,589

Transfer of 2003 net profit ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 243 (243) ‑‑

Other unrealised revaluations ‑‑ ‑‑ 1 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 1

Revaluation transfer in connection with realisation of revaluations ‑‑ ‑‑ (3) ‑‑ ‑‑ ‑‑ ‑‑ 3 ‑‑ ‑‑

Net profit 2004 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 288 288

Other changes ‑‑ ‑‑ 5 ‑‑ ‑‑ ‑‑ (5) 2 ‑‑ 2

Balance on 31 December 2004 340 15 39 ‑‑ ‑‑ ‑‑ 10 1,188 288 1,880

Change in accounting principles to IAS 32 and 39 and IFRS 4 ‑‑ ‑‑ ‑‑ 52 113 49 47 (102) ‑‑ 159

Transfer of 2004 net profit ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 288 (288) ‑‑

Unrealised revaluations from cash flow hedges ‑‑ ‑‑ ‑‑ 71 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 71

Deferred interest income from cash flow hedges ‑‑ ‑‑ ‑‑ 12 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 12

Other unrealised revaluations ‑‑ ‑‑ 3 ‑‑ 123 ‑‑ ‑‑ ‑‑ ‑‑ 126

Revaluation transfer in connection with realisation of revaluations ‑‑ ‑‑ (1) ‑‑ ‑‑ ‑‑ ‑‑ 1 ‑‑ ‑‑

Realisation of revaluations via the income statement ‑‑ ‑‑ ‑‑ ‑‑ (43) ‑‑ ‑‑ ‑‑ ‑‑ (43)

Change in profit sharing reserve ‑‑ ‑‑ ‑‑ ‑‑ 9 (11) ‑‑ 2 ‑‑ ‑‑

Net profit 2005 ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ ‑‑ 323 323

Other changes ‑‑ ‑‑ (3) ‑‑ 1 ‑‑ 40 (38) ‑‑ ‑‑

Balance on 31 December 2004 340 15 38 135 203 38 97 1,339 323 2,528

The share premium reserve is recognised for tax purposes.

The statutory reserve was formed for the costs of research and development software capitalised on the balance sheet and the capitalised internal acquisition costs.

In total, 208,801,030 shares have been issued and fully paid up. The nominal value of a share is € 1.63.

SNS REAAL Financial Statements 2005 company financial statements sns reaal groep n.v. �8�SNS REAAL Financial Statements 2005 company financial statements sns reaal groep n.v.

7 SubordinateddebtsThis concerns debts that are subordinated to the other obligations.


Bond loan variable interest 2005/2012 198 ‑‑

Bond loan 7.25% 1996/2006 114 114

Private loans 107 113

Total 419 227

Subsidiaries hold subordinated bonds to the value of € 4 million (2004: € 5 million).

The balance of the subordinated loans with a term longer than five years is € 305 million (2004: € 113 million).

The average interest rate of the private loans amounts to 6.3 %.

8 Debtcertificates


EMTN loans 189 266

Total 189 266

Themedium-termnoteshavearesidualtermlessthanfiveyears.Theaverageinterestrateamountsto3.0%.

9 Otheramountsduetocustomers


Private loans 25 59

Demand deposits 220 92

Total 245 151

The average interest rate of the private loans amounts to 4.5% (2004: 4.5%).


Private loans according to residual term as at year-end 2005:- Payable on demand ‑‑ ‑‑

- > 1 month B 3 months 2 2

- > 3 months B 1 year 5 32

- > 1 year B 5 years 17 17

- > 5 years 1 8

Total 25 59

�0 Amountsduetocreditinstitutions

Amounts due to credit institutions concern debts to banks, insofar as not in the form of debt certificates, and are due on demand within one year.

SNS REAAL Financial Statements 2005 company financial statements sns reaal groep n.v.�8� SNS REAAL Financial Statements 2005 most important subsidiaries and other equity participations

Notes to the company income statement

�� Netearningsperordinaryshare


Net earnings 323 288

Weighted average number of issued shares (in millions) 209 209

Dilution (in millions) ‑‑ ‑‑

Average number of ordinary shares adjusted for dilution (in millions) 209 209

Earnings per share (in euros) 1.55 1.38

Guarantees

Guarantees in the sense of section 403, Book 2 of the Netherlands Civil Code have been issued for most of the subsidiaries of SNS Bank and SNS REAAL Invest. Barring a few exceptions, no such guarantees have been issued for the subsidiaries belonging to REAAL Verzekeringen. SNS REAAL Groep N.V. has issued guarantees to meet the commitments of REAAL Schadeverzekeringen N.V. for specific insurance contracts entered into after 1 September 2000.

Together with a significant part of its group companies, SNS REAAL Groep N.V. forms a tax entity for corporation and value added tax purposes. All the companies in the tax entity are jointly and severally liable for the corporation and value added tax debts of the entity as a whole.


Supervisory Board Board of Directors

J.L. Bouma S. van Keulen H.M. van de Kar C.H. van den Bos J.V.M. van Heeswijk M.W.J. Hinssen J. den Hoed R.R. Latenstein van Voorst D. Huisman S.C.J.J. Kortmann H. Muller

SNS REAAL Financial Statements 2005 company financial statements sns reaal groep n.v. �83SNS REAAL Financial Statements 2005 most important subsidiaries and other equity participations

Most important subsidiaries

The most important group companies are listed below, broken down under banking operations, insurance operations and SNS Reaal Invest. Ownership is 100%, unless stated otherwise.

Bankingoperations

SNS Bank N.V. UtrechtAlgemene Spaarbank voor Nederland ASN N.V. ’s-GravenhageCVB Bank N.V. ’s-HertogenboschBLG Hypotheekbank N.V. GeleenSNS Securities N.V. AmsterdamSNS Assurantiën B.V. MaastrichtSNS Assuradeuren B.V. Maastricht

Insuranceoperations

REAAL Verzekeringen N.V. UtrechtREAAL Levensverzekeringen N.V. AlkmaarREAAL Schadeverzekeringen N.V. ZoetermeerREAAL Reassurantie S.A. LuxemburgProteq Levensverzekeringen N.V. AlkmaarProteq Schadeverzekeringen N.V. AlkmaarNieuwe Hollandse Lloyd Levensverzekeringmaatschappij N.V. WoerdenNieuwe Hollandse Lloyd Schadeverzekeringmaatschappij N.V. WoerdenSNS Verzekeringen B.V. Zoetermeer

SNSREAALInvest

SNS Reaal Invest N.V. ’s-HertogenboschForesta Investerings Maatschappij N.V. ’s-Hertogenbosch

List of the most important other equity participations

The most important equity participations are listed below.

ParticipatinginterestsofSNSREAALInvest

Masterfleet N.V. (40%) ’s-HertogenboschLaSer-Lafayette Services Nederland B.V. (40%) ’s-HertogenboschNeSBIC CTE Fund B.V. (13.6%) UtrechtNeSBIC CTE Fund II B.V. (10%) UtrechtParnassus Participatiefonds B.V. (38%) AmsterdamLife Sciences Partners II B.V. (13.2%) AmsterdamSkala Home Electronics B.V. (50%) ’s-Hertogenbosch

ParticipatinginterestofREAALVerzekeringen

Ducatus N.V. (32%) ’s-Hertogenbosch

Other

The overview in the sense of Sections 379 and 414, Book 2 of the Netherlands Civil Code has been filed with the trade register of the Chamber of Commerce in Utrecht.

SNS REAAL Financial Statements 2005 other information�84 SNS REAAL Financial Statements 2005 other information

Profit appropriation under the articles of associationArticle3434.� Subject to the approval of the Supervisory Board, the Group Executive Board may reserve as much of the profit as it deems fit. The General

Meeting of Shareholders is authorised to reserve part of the profit, proposed by the Group Executive Board and approved by the Supervisory Board, for social and cultural projects.

Any profits not reserved pursuant to the preceding sentence are at the disposal of the General Meeting of Shareholders for full or partial reservation or full or partial distribution to the ordinary shareholders in proportion to their holdings of ordinary shares.

If there is an appropriation of profit to the shareholders, a distribution shall be made on the priority share of a percentage of the face value equal to the statutory interest rate on the last day of the last completed financial year. No other distribution of profit will be made on the priority share.

34.� The company may only make payments to shareholders and others entitled to the distributable profits in so far as its shareholders’ equity exceeds the total amount of issued share capital plus the statutory reserves.

34.3 Distribution of profits may only take place following the adoption of the financial statements in which such distribution is approved.

Profit 2005: € 323 million.

The profit is accounted for as retained profit as part of the shareholders’ equity.

SNS REAAL Financial Statements 2005 other information �85SNS REAAL Financial Statements 2005 other information

Auditor’s reportIntroductionWe have audited the 2005 financial statements of SNS REAAL Groep N.V. in Utrecht as included on pages 93 to 182 of this report. The financial statements consist of the consolidated and company financial statements. These financial statements are the responsibility of the company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

ScopeWe conducted our audit in accordance with auditing standards generally accepted in the Netherlands. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

OpinionwithrespecttotheconsolidatedfinancialstatementsIn our opinion, the consolidated financial statements give a true and fair view of the financial position of the company at 31 December 2005 and of the result and the cashflows for the year then ended, in accordance with International Financial Reporting Standards as adopted by the European Union and also comply with the financial reporting requirements included in Part 9, Book 2 of the Netherlands Civil Code, as far as applicable. Furthermore we have established to the extent of our competence that the annual report is consistent with the financial statements.

OpinionwithrespecttothecompanyfinancialstatementsIn our opinion, the company financial statements give a true and fair view of the financial position of the company at 31 December 2005 and of the result for the year then ended, in accordance with accounting principles generally accepted in the Netherlands and also comply with the financial reporting requirements included in Part 9, Book 2 of the Netherlands Civil Code.Furthermore we have established to the extent of our competence that the annual report is consistent with the financial statements.

Amstelveen, 9 March 2006

KPMG ACCOUNTANTS N.V.

S.J. Kroon RA

SNS REAAL Financial Statements 2005 other information�86 SNS REAAL Financial Statements 2005 other information

Curricula vitae of the members of the Supervisory Board

The Supervisory Board of SNS REAAL has seven male members as at 1 January 2006, all of Dutch nationality. All supervisory directors were appointed in 1997 when SNS Group and REAAL Group merged to form SNS REAAL, with the exception of Mr. Den Hoed, who was appointed in May 2003. Some of the supervisory directors were already supervisory director for legal predecessors of the merger partners.

Prof.J.L.Bouma(7�),chairmanEmeritus professor in business economics at Groningen University; member of the Royal Dutch Academy of Sciences; member of the Supervisory Boards of Albron B.V.,Burgfonds B.V., Eriks Group N.V., Intereffekt Investment Funds N.V., Koop Holding Europe B.V., Middle European Real Estate N.V., O. de Leeuw B.V., Raab Karcher Bouwstoffen B.V. and Versatel Telecom International N.V.

H.M.vandeKar(6�),deputychairmanUniversity lecturer at the tax-economics faculty at Leiden University; member of the board of Stichting Uitgeverij Aksant; chairman of the board of the International Institute for Social History; chairman of the Pension Fund for the Dutch Theatre; auditor of the International Institute of Public Finance; dean of Crisis and Disaster Management training; chairman of the Sports Fund Foundation Leo van de Kar.

J.V.M.vanHeeswijk(67)Supervisory Board member of Tref B.V., Mammoet Holding B.V.; former managing director of Geveke; former chairman of the Supervisory Board of Calpam International Petroleum Company, SSM Coal, Merrem & La Porte and Sligro.

J.denHoedRA(68)Supervisory Board member of Connexxion B.V. and ASMI N.V.; chairman of the Supervisory Council of St. Jansdal Hospital; Deputy member of the companies’ division court of appeal council; member of the Supervisory Council of the Dutch Vaccine Institute; member of the Capital Market committee of AFM.

D.Huisman(70)Former chairman of the board of Friesland Chamber of Commerce; former deputy chairman of the Dutch Association of Insurers; former deputy chairman of the Executive Board of Avéro-Centraal Beheergroep; former chairman of the Supervisory Council of MCL/Zorggroep Noorderbreedte; former chairman of the Supervisory Board of Ophtec.

Prof.S.C.J.J.Kortmann(55)Professor in civil law at Nijmegen Radboud University; chairman of Onderzoekscentrum Onderneming & Recht (RU Nijmegen), chairman of the board of Stichting Grotius Academie, deputy judge Courts of Arnhem and ‘s-Hertogenbosch; supervisory director of Kropman B.V. en Dela Coöperatie; chairman or member of various boards of trust offices or anti-takeover foundations of listed companies.

H.Muller(63)Member of the Supervisory Board of ASN Beleggingsfondsen N.V.; chairman of the Nederlands Participatie Instituut; member of the SNV supervisory council, Nederlandse Ontwikkelingsorganisatie; chairman of the board of De Burcht (Nationaal Vakbondsmuseum and Henri Polak Instituut); chairman of the Nederlands Platform Ouderen en Europa; former federation manager and treasurer of FNV (Dutch trade union federation), former member of the Sociaal-Economische Raad and Stichting van de Arbeid.

Retirementrota

2006 D. Huisman2007 H.M. van de Kar Prof. S.C.J.J. Kortmann J. den Hoed2008 J.V.M. van Heeswijk Prof. J.L. Bouma2009 H. Muller

SNS REAAL Financial Statements 2005 other information �87SNS REAAL Financial Statements 2005 other information

Additional positions of the members of the Group Executive Board

S.vanKeulen,chairman(59)Board member of Pharmaccess Inc.

C.H.vandenBosRA(53)Member of the Board of the Dutch Association of Insurers; Supervisory Board member of the Dutch Institute for the Banking and Stockbroking Industry (NIBE-SVV) and N.V. Trustinstelling Hoevelaken; chairman of the board of the Insurance Science Foundation.

M.W.J.Hinssen(49)Member of the Board of the Dutch Bankers’ Association (NVB); chairman of the Payments Policy Committee (NVB)*; Board member of the Efficient Payment Promotion Foundation; member of the Supervisory Board of Currence Holding BV*; Board member of the European Savings Banks Group; Board member of the World Savings Banks Institute.

R.R.LatensteinvanVoorstMBA,ChiefFinancialOfficer(4�)Supervisory Director of LaSer–Lafayette Services Nederland BV.

*) Stepped down on 1 January 2006.

ColophonConceptanddesignVBAT, Amsterdam

PhotographyChantal Spieard, FotoFormation AmsterdamBrigitte Vincken, House of Orange AmsterdamMarco van Middelkoop, Aerophoto SchipholMaarten Noordijk, AmsterdamHans van Ommeren, Woerden

TypesettingMelis Graphic Services bv, Helmond

LithographyDe Schutter’Neroc, Capelle a/d IJssel

PrintingvanGrinsven drukkers Venlo bv

PublicationSNS REAALCroeselaan 1P.O. Box 84443503 RK UtrechtThe Netherlands

PaperThis annual report has been printed on environmentally friendly paper.

WiththankstoJachthaven Messink Yachting, EnkhuizenDutchband, AmsterdamBruidswinkel Bruidssuite, Amstelveen

Documents

Annual Report - jaarverslag.com · This annual report 2005 is a translation of the Dutch annual report 2005. Annual Report 2005 SNS REAAL Annual Report 2005 SNS REAAL Annual Report