Scottish Widows Limited Annual Report and Accounts 2020 Member of Lloyds Banking Group SCOTTISH WIDOWS LIMITED (03196171) CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS CONTENTS PAGE(S) Company Information 3 Group Strategic Report 4-15 Directors’ Report 16-20 Independent Auditors’ Report to the Member of Scottish Widows Limited 21-30 Consolidated Statement of Comprehensive Income for the year ended 31 December 2020 31 Balance Sheets as at 31 December 2020 32 Statements of Cash Flows for the year ended 31 December 2020 33 Statements of Changes in Equity for the year ended 31 December 2020 34 Notes to the Financial Statements for the year ended 31 December 2020 35-118 2 SCOTTISH WIDOWS LIMITED (03196171) CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS COMPANY INFORMATION Board of Directors N E T Prettejohn (Chair) J R A Bond W L D Chalmers K Cheetham J E M Curtis J C S Hillman* J F Hylands A Lorenzo* C J G Moulder S J O’Connor G E Schumacher * denotes Executive Director Company Secretary J M Jolly Independent Auditors PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors 2 Glass Wharf Temple Quay Bristol BS2 0FR Registered Office 25 Gresham Street London EC2V 7HN Company Registration Number 03196171 3 SCOTTISH WIDOWS LIMITED (03196171) CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS GROUP STRATEGIC REPORT The Directors present their strategic report on Scottish Widows Limited ('the Company') and its subsidiary undertakings (together referred to as 'the Group') for the year ended 31 December 2020. The Company is limited by share capital. The Group contributes to the results of the Insurance and Wealth Division of Lloyds Banking Group. Scottish Widows was founded in 1815, and since then we have been focused on helping customers protect themselves today whilst preparing for a secure financial future. Our objective is to be the best insurance and retirement savings business for customers; providing simple, trusted, value for money products accessible through our customers’ preferred channels. As we look to the future, we see the external environment evolving rapidly. The rapid pace of technological change, new regulation and increased competition are driving significant changes in customer needs and expectations. As a customer- driven business, we see these as opportunities. Our strategic plan responds to all of these challenges and transforms the Group for success in a digital world. We have identified the following strategic priorities for the Insurance and Wealth Division of Lloyds Banking Group, focused on the financial needs and behaviours of the customer of the future, and the Division's progress against those priorities are: Delivering a leading customer experience • Achieved 5 stars for the fifth consecutive year in the Financial Adviser Service Awards in Investments, and Pensions and Protection, together with the Editor’s Achievement Award for 30 years’ Consistent Service • Being the first major pensions and insurance provider to target halving the carbon footprint of its investments by 2030 on its path to net zero by 2050 • Commenced £2 billion investment in BlackRock's Climate Transition fund which delivers around 50 per cent carbon reduction compared to benchmark; helping customers save for retirement, whilst investing in sustainable businesses • Announced commitment to divest at least £440 million from companies that do not meet our ESG standards • Achieved Group Strategic Review target of 15 per cent market share of Workplace business, up from 10 per cent at start of 2018 Digitising the Group • Launched the Scottish Widows app in the fourth quarter to approximately 500,000 customers. Customers are able to engage with their retirement planning, representing a key strengthening of our proposition • Single Customer View expanded to include stockbroking portfolios with 6.5 million customers able to access their Insurance and Wealth products alongside their bank account (up from over 5 million at the end of 2019) Maximising the Group’s capabilities • Grew open book assets under administration by £46 billion, or 68 per cent, over the two-year period to 31 December 2020 to £113 billion, narrowly missing the Group Strategic Review £50 billion growth target despite challenging market conditions • Further exceeded Group Strategic Review target set in January 2018 of 1 million new pension customers, with 1.5 million now added • Completed migration to Schroders Personal Wealth. Continue to strive to become a top 3 financial planning business Our strategy will enable us to transform ourselves into a digitised, simple, low risk, customer focused, UK financial services provider. Our strong foundations, differentiated business model and our great, highly engaged team will enable sustainable success in a digital world and ensure we continue to help Britain prosper. Our Insurance Strategy will create a scalable and efficient business and deliver value for money propositions for our customers that are aligned to clear and growing customer needs. Principal activities The principal activity of the Group is the undertaking of ordinary long-term insurance and savings business and associated investment activities in the United Kingdom. The Group also has freedom of services overseas through branches, which administer a relatively small amount of business, principally in Germany. This business is administered through a subsidiary, Scottish Widows Europe S.A. (SWE). The Group offers a wide range of life insurance products such as annuities, pensions, whole life, term life and investment type products through independent financial advisors, the Lloyds Banking Group network and direct sales. The Group also reinsures business with insurance entities external to the Group and Lloyds Banking Group. 4 SCOTTISH WIDOWS LIMITED (03196171) CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS GROUP STRATEGIC REPORT (continued) Result for the Year The result for the year ended 31 December 2020 is a Group loss after tax £(196) million (2019 loss: £(21) million). The result is reflective of market conditions during the year following Covid-19 impacts, but also reflects the effect of assumption changes, principally expense assumptions. The United Kingdom leaving the European Union The UK / European Union (EU) Trade and Cooperation Agreement (TCA) means a disorderly Brexit has been avoided. While the TCA contains limited, high-level provisions on financial services, further detail is expected to emerge during this year, and the Group will continue to monitor developments closely. Activity to respond to potential risks include the transfer of business to a European subsidiary in 2019 to ensure continuation of certain business activities, customer communications, market volatility scenario exercises, contingency planning and monitoring of emerging European Economic Area (EEA) regulatory requirements. Covid-19 Our business has primarily a UK focus and the outbreak of Covid-19, in line with its global impact, is expected to continue to adversely impact the UK economy as well as causing volatility in global financial markets. As the situation continues to evolve, so does our assessment of the risks and the degree to which they might crystallise. The Company’s resilience to such events is regularly reviewed through stress and scenario testing; plans to continue to operate critical business processes are in place and are being reviewed in light of the Covid-19 outbreak. Note 37 provides further details of the impact on market risk (note 37 (c) (1)), insurance underwriting risk (note 37 (c) (2)), credit risk (note 37 (c) (3)) and capital risk (note 37 (c) (4)). Climate Change Strategy Lloyds Banking Group’s unique position within the UK economy means that the successful transition to a more sustainable, low carbon economy is of strategic importance to us. Lloyds Banking Group supports the aims of the 2015 Paris Agreement, the UK government’s Net Zero target and Ten Point Plan for a Green Industrial Revolution; and the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD). Our ambition Lloyds Banking Group has set seven leadership ambitions to support the UK’s transition to a sustainable future, those that directly apply to the Group are: • Pensions and investments: Be a leading UK pension provider that offers our customers and colleagues sustainable investment choices, and challenges the companies we invest in to behave more sustainably and responsibly • Our own footprint: Be part of a leading UK bank in reducing our own carbon footprint and challenging our suppliers to ensure our own consumption of resources, goods and services is sustainable The Group has announced a target of reaching net zero carbon emissions across our investment book by 2050, with an intermediate target of halving our investments’ relative carbon footprint by 2030. We cannot rely on mass carbon offsetting schemes; instead we have committed to driving carbon reduction in the real economy to achieve net zero goals. We intend to reach the target through proactive investment in climate solutions, selective divestments and using our influence through stewardship to drive the transition to a low carbon future, following the Institutional Investors Group on Climate Change (IIGCC)’s Net Zero Investment Framework. Pensions and Investments The Group has focused on building robust foundations for future Responsible Investment (RI) activity, launching our Responsible Investment Framework in March 2020 and developing Stewardship and Exclusions Policies. These have a