Legal & General Group Plc Annual Report and Accounts 2019 From building homes to transforming our towns and cities, inclusive capitalism is already at work. Improving lives through inclusive capitalism Our purpose is to improve the lives of our customers, build a better society for the long term and create value for our shareholders. This inspires us to use our long-term assets in an economically and socially useful way to benefit everyone in our communities. Strategic report Highlights Operating profit# (£m) Net release from operations (£m) Earnings per share (p) Contents Strategic report Highlights 1 2,335 31.9 2,286 30.8 30.9 Chairman’s statement 2 2,055 Chief Executive Officer’s Q&A 4 Our strategy 6 Our business model 10 1,562 1,615 21.2 1,455 1,411 1,454 1,440 Our stakeholders 14 18.2 1,256 Our businesses 16 Group Chief Financial Officer’s Q&A 18 Tax review 21 Business review 22 Institutional retirement 23 Driving international growth 26 Individual retirement 28 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 Working in our customers’ interests 30 Investment management 32 Working towards a net zero carbon future 34 Capital investment 36 Transforming towns and cities 38 Insurance 40 Return on equity Solvency II capital coverage Worldwide employee Managing risk 42 ratio (shareholder basis) engagement index Principal risks and uncertainties 46 A sustainable business 48 Governance Board of directors 56 Executive Committee 58 Letter from the Chairman 60 20.4% 184% 72% Stakeholder engagement 62 Employee engagement 65 (2018: 22.7%) (2018: 188%) (2018: 72%) Governance report 66 Committed to the highest standards 70 Nominations and Corporate Governance Committee report 72 Audit Committee report 76 Profit before tax Adjusted profit before tax Group Risk Committee report 80 Directors’ report on remuneration 82 Remuneration policy 87 Annual report on remuneration 94 Financial statements £2,156m £2,112m Group consolidated financial statements 116 (2018: £2,129m) (2018: £2,128m) Primary statements and performance 124 Balance sheet management 142 Additional financial information 213 Company financial statements 243 Other information Directors’ report 250 Shareholder information 254 Alternative performance measures 256 Glossary 257 Note: throughout this report, all bar chart scales start from zero Performance measures The categories to which the above KPIs The group uses alternative performance and remuneration are aligned are: measures (APMs) to help explain its Our Fast Read business performance. Further The performance measures used for the A summary of the annual report, • Profitability information on APMs, including purpose of determining variable highlighting strategy, performance – Net release from operations a reconciliation to the financial elements of directors’ remuneration are and how the group is structured – Operating profit statements (where possible), directly aligned to the group’s key can be found on page 256. is available online. – Return on equity performance indicators (KPIs). The legalandgeneralgroup.com/ – Earnings per share # References to ‘operating profit’ in above KPIs which form the basis of this 2019fastread the strategic report represent ‘group determination are identified with the • Strategic priorities and non‑financial adjusted operating profit’, an alternative following icon . goals performance measure defined in – Capital: Solvency II capital the glossary. For more details, refer to pages 87 to 91 coverage ratio (shareholder basis) of the Directors’ report on remuneration. – Culture: worldwide employee engagement index Legal & General Group Plc Annual Report and Accounts 2019 1 Chairman’s statement We have a proven operating A long-term business Continued financial success model, a strong balance sheet Inclusive capitalism underpins our strategy and In 2019, our operating profit was £2.3 billion, with surplus regulatory capital is at the heart of everything we do. We have down 2% from 2018. Profit before tax increased successfully identified growth areas and in doing by 1% to £2.2 billion and earnings per share and a robust risk management so, have generated consistent, sustainable and (EPS) increased by 0.1p to 30.9p. Excluding process. This, coupled with our socially beneficial returns. mortality reserve releases, operating profit long-term focus, gives us grew by 12% to £2.1 billion and EPS was up confidence in future growth In the 12 months to 31 December 2019, by 16% at 28.7p. we achieved a total return of over 40% for and the ability to navigate shareholders, reflecting the consistently strong Our growth strategy economic and political events.” performance of the business and greater Our strategy is driven by long-term global trends political and market clarity towards the year-end. which include ageing populations, globalisation Sir John Kingman While concerns about Covid‑19 have had of asset markets and climate change. Chairman minimal effect on our business to date, they have driven a return to more volatile markets Our historic base in the UK continues to provide in the current quarter. outstanding opportunities for business growth. However, the US is increasingly our second We have a proven operating model, a strong home market and we are successfully building balance sheet with surplus regulatory capital our businesses there in pension risk transfer, and a robust risk management process. This, life insurance and investment management. coupled with our long-term focus, gives us We are also taking advantage of investment confidence in future growth and the ability opportunities in Europe and Asia, with notable to navigate economic and political events. recent success in Japan. At the same time, we have invested £26 billion Our strategy reflects the fact that we are a into direct investments. These investments focused and long-term business, where our deliver positive outcomes for society and are investment expertise and understanding of focused on areas such as clean energy, longevity has made us a market leader in affordable housing, science and technology. providing retirement solutions for customers. Our direct investments mean that our long-term We have seen continued growth both in the funds provide both economic and social benefits UK and overseas. We see significant global through investments in future cities, housing, opportunities for additional scale, whilst and SME finance. The Board has been continuing to support the UK through our working closely with Nigel Wilson, your CEO, investments and commitment to our customers. and the Executive Committee in our strategic development, building continued growth for our business, its shareholders, customers and employees. 2 Legal & General Group Plc Annual Report and Accounts 2019 Strategic report Strategic report Dividends Board engagement with key stakeholders Annual General Meeting 2020 The Board has again considered carefully the In Board discussion and decision making, we 11am on 21 May 2020, at The British best medium-term trajectory of dividend growth, keep the interests of our stakeholders front of Medical Association, BMA House, taking into account both excellent continuing mind and consider the impact our decisions have Tavistock Square, Bloomsbury, London, financial performance, and the importance to on our wider stakeholder group. Where interests WC1H 9JP our shareholders of a rate of dividend growth do not align, we seek to balance their needs and Dividend policy which is sustainable in a wide range of potential ensure all stakeholders are treated fairly. We are a long-term business and set our economic scenarios. Accordingly, the Board is dividend annually, according to agreed recommending a full year dividend of 17.57p for In the UK, we have now completed the sale of principles. The Board has adopted a 2019, 7% higher than 2018. our General Insurance business and expect the progressive dividend policy, reflecting sale of our Mature Savings business to complete the group’s expected medium-term Responsibility in business in the first half of 2020. underlying business growth, including We are committed to being a responsible ‘Net release from operations’ and business in everything we do and we want to We set out details of our engagement with ‘Operating profit’. inspire those companies we work with and stakeholders on pages 62 to 64. invest in, to be responsible too. We recognise the growing importance of sustainability, not just I mentioned in last year’s annual report that Full year dividend (p) through our commitment to global agreements Lesley Knox had been appointed as our on building sustainable growth and climate designated non-executive director to engage change, but in our daily stewardship activities. with our workforce. Our company cannot 17.57 Our business aims to be economically and continue to be successful without the 16.2 15.35 socially useful, and operates with a conscious contribution of our people, who remain at the 1.35 culture of teamwork and collaboration. heart of our business. Lesley’s employee 13.0 engagement activities throughout 2019 can be Each year, I ask for nominations for my found on pages 65 of this report. I should like to ‘Chairman’s Awards’ which recognise the thank all our people for their outstanding work people who go above and beyond in their and professionalism in 2019, which has made charitable and community efforts in every our company so successful. country where we have a presence. This year I received a wide range of entries, demonstrating I have continued to meet with a range of our the outstanding commitment of our employees shareholders through the year in London, 2015 2016 2017 201 2019 to their communities. Edinburgh and New York, and I have valued the opportunity for open and constructive two-way We believe that it is important for our Board to dialogue. As always, the AGM offers a have a broad range of insights and perspectives particularly valuable opportunity for the Board to help us make better decisions as a business to meet our shareholders in person and to hear Final dividend to be paid on and create an inclusive culture for our people.