Scottish Widows Limited Annual Report and Accounts 2019 Member of Lloyds Banking Group SCOTTISH WIDOWS LIMITED (03196171) CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS CONTENTS PAGE(S) Company Information 3 Group Strategic Report 4-9 Directors’ Report 10-13 Independent Auditors’ Report to the Member of Scottish Widows Limited 14-20 Consolidated Statement of Comprehensive Income for the year ended 31 December 2019 21 Balance Sheets as at 31 December 2019 22 Statements of Cash Flows for the year ended 31 December 2019 23 Statements of Changes in Equity for the year ended 31 December 2019 24 Notes to the Financial Statements for the year ended 31 December 2019 25-109 2 SCOTTISH WIDOWS LIMITED (03196171) CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS COMPANY INFORMATION Board of Directors N E T Prettejohn (Chairman) A M Blance 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 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 2019. The Company is limited by share capital. The Group contributes to the results of the Insurance and Wealth Division of Lloyds Banking Group plc (“LBG”). 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 focused on the financial needs and behaviours of the customer of the future and our progress against those priorities are: Delivering a leading customer experience • Scottish Widows now offers its standard annuities on the open market allowing a wider range of customer to access the product and secure income for retirement. Aiming to achieve a 15 per cent market share by end of 2020. • Successful migration of c.400,000 policies from a number of legacy systems to a single platform managed by our partner Diligenta, enabling customers to better manage their policies with Scottish Widows. • New ‘Plan and Protect’ life and critical illness cover launched in 2019 helps create financially resilient families by understanding their needs and protecting what matters most, providing a safety net if the worst happens. • Scottish Widows won 5 star service awards at the Financial Adviser Service Awards for the fourth consecutive year. Digitising the Group • Significant progress on Single Customer View; with individual pension customers added in 2019. Over 5 million customers now able to access their insurance products alongside their bank account. Maximising the Group’s capabilities • Continued progress towards target of growing open book assets under administration by £50 billion by the end of 2020, with strong customer net inflows of £18 billion (including Zurich transfer) in 2019. Cumulative net inflows of £30 billion and market movements give overall growth of £37 billion since the start of the current strategic plan in 2018. • Sourced £0.6 billion of new long-term assets in collaboration with Commercial Banking to support five bulk annuity transactions, generating over £2 billion of new business premiums. 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. LBG, including the Group, aspires to conduct business in a way that values and respects the human rights of all the stakeholders we work with. LBG, including the Group, complies with all relevant legislation, including the UK Modern Slavery Act. 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 LBG network and direct sales. The Group also reinsures business with insurance entities external to the Group and LBG. Result for the Year The result for the year ended 31 December 2019 is a Group loss after tax £(21)m (2018 profit: £389m). The result is reflective of market conditions during the year but includes lower income due to changes in equity hedging strategy to reduce capital and earnings volatility, assumption changes, along with the sale of business to Schroders Personal Wealth (SPW). On the Balance Sheets, Group and Company have seen a £21bn increase in both assets and liabilities as a result of the acquisition of pensions business from the Zurich Insurance Group. The Directors consider the result to be satisfactory in light of these factors. 4 SCOTTISH WIDOWS LIMITED (03196171) CONSOLIDATED AND COMPANY FINANCIAL STATEMENTS GROUP STRATEGIC REPORT (continued) The United Kingdom leaving the European Union Following the UK’s exit from the EU, significant negotiation is now required on the terms of the future trade agreement. As a result, the possibility of a limited or no deal at the end of the transition period remains and could manifest in prolonged business uncertainty across the UK, including the financial services sector. The continued lack of clarity over the UK’s eventual relationship with the EU and other foreign countries, and ongoing challenges in the Eurozone, including weak growth raises additional uncertainty for the UK economic outlook. The Group's response to these risks and uncertainty includes contingency plans recalibrated and regularly reviewed for potential strategic, operational and reputational impacts. Also a no deal EU exit outcome has been analysed to identify impacts and assess robustness of contingency plans. Coronavirus Our business has primarily a UK focus and the outbreak of Covid-19, in line with its global impact, is expected 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. Climate Change Strategy The UK is committed to the vision of a sustainable, low carbon economy, and the successful transition is of strategic importance to the Group. When reporting on our strategic progress, we support the Taskforce on Climate-Related Financial Disclosure (TCFD) framework, and plan to achieve full disclosure by 2022. Our ambition LBG has set seven leadership ambitions to support the UK’s transition to a sustainable future. Those that are relevant to the Group are: • Pensions & Investments: be a leading UK pension provider that offers our customers sustainable investment choices, and challenges 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. Progress Throughout 2019, we have been actively reviewing asset exposures by type and continue to make enhancements to existing Stewardship policies and procedures. Much of our engagement activity is currently undertaken through 3rd party asset managers. In addition to our own stewardship activity, our investment managers will work with Investee Companies to influence their strategy and approach, liaising with management and voting on resolutions, with a clear focus on enhancing a company’s Environmental, Social and Governance (ESG) approach. Metrics and targets As part of our TCFD implementation plan we are developing our approach to reporting appropriate metrics and targets during 2020. Initially we will consider our exposure to carbon intensive sectors and the subsequent risks.