Legal & General Group Annual Report 2018

FY2018 Annual Report · Legal & General Group

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Leading
provider

We’re a leading UK provider of
lifetime mortgages, enabling
people to stay in their homes
and improve their finances in
retirement, with total loans of
over £1 billion in 2018.

£258bn

International AUM has grown by
23% compound annual growth
since 2014 to £258 billion.

£19.2bn

Our groupwide direct investments
portfolio increased by 34% to £19.2 billion.

£1tn+

We now have over
£1 trillion in worldwide
assets under management.

We provide pension
annuity income for
over 1 million people.

£4.4bn

We completed a £4.4bn buy-in of
British Airways pension schemes,
covering nearly 22,000 pensions
– the largest ever bulk annuity
policy with a UK pension scheme.

Improving lives through
inclusive capitalism

Legal & General Group Plc
Annual Report and Accounts 2018

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.

Front cover
Creating inclusive capitalism
through investing in Newcastle

Financial
highlights

Operating proﬁt#

(£m)

5
3
3
,
2

5
5
0
,
2

2
6
5
,
1

5
5
4
,
1

5
7
2
,
1

Net release
from operations

(£m)

1
1
4
,
1

4
5
4
,
1

0
4
4
,
1

6
5
2
,
1

4
0
1
,
1

Earnings per share

Contents

7
8
.
1
3

9
7
.
0
3

(pence)

2
2
.
1
2

6
1
.
8
1

0
7
.
6
1

2014 2015 2016 2017 2018

Return on equity

22.7%

(2017: 25.6%)

Solvency II capital
coverage ratio
(shareholder basis)

188%

(2017: 189%)
Shareholder basis as
at 31 December 2018

Worldwide employee
engagement index

72%

Based upon new
survey data for 2018.
Not comparable with
earlier years.

Profit before tax

£2,102m

(2017: £2,061m)

Note: throughout this report,
all bar chart scales start from zero

Performance measures
and remuneration
The key performance measures
(KPIs) above are included
in those used to determine
variable elements of
remuneration, as identified
by the following icon

For more details, refer to
page 74 of the Directors’
report on remuneration.

The categories to which the
above KPIs are aligned are:

• Profitability

– Operating profit

– Net release from operations

– Return on equity

– Earnings per share

• Strategic priorities and

non-financial goals

– Solvency II capital

coverage ratio

– Worldwide employee
engagement index

The group uses

alternative performance
measures (APMs) to help
explain its business
performance. Further
information on APMs,
including a reconciliation
to the financial statements
(where possible), can be
found on page 240.

# References to ‘operating

profit’ in the Strategic
Report represent ‘group
adjusted operating
profit’, an alternative
performance measure
defined in the glossary.

Strategic report

Financial highlights

Chairman’s statement

Chief Executive Officer’s Q&A

What drives our strategy

What we do

Retirement ecosystem

Investing and Annuities

Housing ecosystem

Investment Management

Insurance

Creating a responsible culture

Group Chief Financial Officer’s Q&A 40

Tax matters

Managing risk

Principal risks and uncertainties

Governance

Contents

Board of directors

Executive Committee

Letter from the Chairman

Governance report

Committed to the highest standards

Nominations Committee report

Audit Committee report

Group Risk Committee report

Directors’ report on remuneration

Financial statements

Contents

Group consolidated

financial statements

Primary statements

and performance

Balance sheet management

Additional financial information

Company financial statements

Other information

Directors’ report

Shareholder information

Alternative performance measures

Glossary

104

112

131

196

227

234

238

240

241

Our Fast Read
A summary of the annual report,
highlighting strategy, performance
and how the group is structured is
available online.

legalandgeneralgroup.com/
2018fastread

Legal & General Group Plc Annual Report and Accounts 2018Strategic report

Chairman’s
statement

Sir John Kingman
Chairman

We recognise the
growing importance of
sustainability, shown
by our commitment to
global agreements on
development goals
and climate change.”

Sir John Kingman
Chairman

Building success in challenging times
Legal & General’s strategy is underpinned by
long-term global trends which include ageing
populations, technological innovation and the
need for greater long-term investment. These
trends, which we have identified as positive
for us, play out over decades: as a long-term
business they matter more to us than
short-term market volatility or disruptions.

This was particularly important in 2018,
a year characterised by heightened political
uncertainty and correspondingly volatile
markets. The combined impacts of the
US-China trade dispute and Brexit
uncertainty clearly impacted markets and
indeed our own share price, particularly in
the latter part of the year. However, as our
financial results show, the direct impacts for
our business were limited and in relative
terms, our share price outperformed the
sector domestically and internationally.

Profit growth continues
Operating profit increased by 14% to £2.3bn
and earnings per share (adjusted for one-off
items) increased by 7% to 24.7p. Profit before
tax was flat at £2.1bn.

The Board has again considered carefully
the best medium-term trajectory of dividend
growth, taking into account both excellent
continuing financial performance, and the
importance to our shareholders of a rate of
dividend growth which is sustainable in a
wide range of potential economic scenarios.
Accordingly, the Board is recommending a
full year dividend of 16.42p for 2018, 7%
higher than 2017.

Building resilience
At the time of writing, the path of the Brexit
process is not yet clear. Nevertheless, the
strength of our business model and our
balance sheet gives us resilience, and indeed
makes us well placed to continue to take
advantage of the investment opportunities
both in the UK, and in the US, which we see
as a key growth area in the next few years.
Our strategy reflects the fact that we are a
long-term business, where our expertise in
understanding longevity has made us a market
leader in providing retirement solutions for
customers. Our direct investments mean that
our long-term funds are used to help society
through investments in future cities, housing,
and small business capital. The Board has
been working closely with Nigel Wilson, your
CEO and the Executive Committee in our
strategic development, building continued
growth for our business, its shareholders,
customers and employees.

Strategic reportLegal & General Group Plc Annual Report and Accounts 2018Chairman’s statement

Responsibility in business
We are committed to being a responsible
business in everything we do and we want
to inspire those companies we work with and
invest in, to be responsible too. We recognise
the growing importance of sustainability, shown
by our commitment to global agreements
on development goals and climate change.
We are committed to building an increasingly
diverse business and have already taken action
on gender diversity, both on our Board and
in senior management. Our business aims
to be economically and socially useful, and
operates with a conscious culture of
teamwork and collaboration.

Board engagement with
key stakeholders
It’s vital that our Board understands what’s
important to our shareholders, our corporate
and individual customers and our employees.
Lesley Knox has taken on additional Board
responsibility as the designated non-executive
director for engaging with our employees.
Lesley’s additional responsibilities build on
my own meetings with management teams
and employees across our businesses in both
the UK and US. I would like to thank all our
employees for their outstanding hard work
and professionalism which makes Legal &
General so successful.

Development of the Board
I’m delighted to welcome two new
non-executive directors to the Board.
Henrietta Baldock joined us in October 2018
and George Lewis in November 2018. They
both bring extensive additional financial
services expertise to the Board. I also
welcome Michelle Scrimgeour, who will
succeed Mark Zinkula as Chief Executive
Officer of LGIM later this year, subject to
regulatory approval. Mark will retire in
August 2019 and I thank him for his great
achievements in successfully building
LGIM’s scale and profitability in his eight
years as CEO. I would also like to thank
Carolyn Bradley, who resigned from the
Board at the end of 2018.

As Chairman, I place great value on engaging
effectively with all our shareholders, not
only through this annual report but also by
meeting you throughout the year. Our AGM
in May is an important opportunity to meet
shareholders and I hope to see as many of
you as possible at our new venue.

Sir John Kingman
Chairman

Annual General Meeting 2019
11am on 23 May 2019, at
The British Medical Association,
BMA House, Tavistock Square,
Bloomsbury, London, WC1H 9JP

Dividend policy
We are a long-term business
and set our dividend annually,
according to agreed principles.
The Board has adopted a
progressive dividend policy,
reflecting the group’s expected
medium-term underlying business
growth, including ‘Net Release from
Operations’ and ‘Operating Profit’.

(pence)

5
3
.
4
1

0
4
.
3
1

5
2
.
1
1

2
4
.
6
1

5
3
.
5
1

2014 2015 2016 2017 2018

11.82p

Final dividend to be
paid on 6 June 2019

Lesley Knox’s employee role
Lesley is taking up the role as the
Board Director responsible for
employees. She will work with
colleagues from around the
business to ensure that the Board
has a deeper understanding of
employee issues. Lesley said:
“Taking proper account of their
interests... is an important part
of our Board culture, and this can
only be strengthened further by
creating a specific responsibility
for employee issues on the
Group Board.”

Photo: Sir John Kingman
meeting employees on
a Board visit to Cardiff.

Legal & General Group Plc Annual Report and Accounts 2018Strategic report Chief Executive
Officer’s Q&A

Nigel became Group Chief Executive Officer in
June 2012 and his leadership of the group has
delivered over six years of successful growth.

Watch the video
legalandgeneralgroup.com/
investors/reporting-centre

Nigel Wilson
Group Chief Executive Officer

Nigel, the group continues to
deliver successful results against

the background of a difficult political
environment. Why has the company
been so successful?

means that our Board, senior managers and
employees act responsibly and ensure that
we work in the interests of all our stakeholders:
customers, shareholders and wider society,
in being economically and socially useful.

Operating profit increased by 14% to
£2.3 billion with a return on equity of

How important is investing capital in
direct investments such as housing,

22.7%. In 2018 we secured some huge
pension de-risking deals, with £9.4 billion
of sales and £1.1 billion of operating profit
(including mortality release) for Legal &
General Retirement Institutional, our biggest
business. On the retail retirement side, it’s
been a tremendous year for annuity and
lifetime mortgage sales. LGIM now has over
£1 trillion in global assets, with £258 billion
in international assets. And we now have
invested over £19 billion in direct investments,
helping to regenerate many of our biggest
cities and creating a pipeline of 3,000 new
homes. These results highlight the strength
of our individual businesses. But they are
also the direct result of our group strategy to
leverage synergies among our businesses.
This is a key reason for our success.

You have talked extensively in 2018
about inclusive capitalism. Why is

this important to you?

The biggest issue in Britain today is still
how we build greater economic growth
to improve everyone’s lives. We need to invest
to create real jobs and better infrastructure to
transform our cities and towns and boost
productivity. Without improving productivity
we will not correct the stagnant growth in real
wages that people have experienced for a
number of years. This has to be achieved in a
responsible and inclusive way which ‘raises
the boats’ for everyone, not just for the
privileged few. Inclusive capitalism also

urban regeneration, clean energy and
SME start-ups?

I’m delighted that we’ve now put over
£19 billion into these types of direct
investments. Building all types of new homes,
including many affordable homes, has become
a priority for me. Some key successes in 2018
were our housing schemes in Leeds Thorpe
Park, Walthamstow and Crowthorne and our
investments in later living accommodation. We
now have a pipeline of over 3,000 new homes
and we plan to deliver over 80,000 properties
over the next five to ten years. We have
established the UK’s largest property platform
to drive science and technology growth in
regional cities, jointly investing £360 million
to create 20,000 new jobs. This is part of our
future cities programme which is regenerating
communities in Cardiff, Salford, Leeds,
Newcastle, Walthamstow, Bristol, Bath and
Bracknell. In clean energy we now have ten
wind energy sites in operation together with
our partner, NTR.

As Britain leaves the EU, are you
relying more on your US businesses

to ensure growth continues?

I’m convinced that the UK remains a
fantastic place to do business. It’s not
only because of the UK’s unrivalled financial
services sector but it’s also related to our
advantages in technology and manufacturing,
our highly skilled workforces and world-class
research in our universities.

The biggest issue in
Britain today is still
how we build greater
economic growth to
improve everyone’s lives.
We need to create real
jobs that transform our
cities and towns and
boost productivity.”

Nigel Wilson
Group CEO

Strategic reportLegal & General Group Plc Annual Report and Accounts 2018Chief Executive Officer’s Q&A

The US is the largest and most competitively
accessible economy in the world and we
can build more success in many of the areas
that have worked so well for us in the UK:
investment management, the need to de-risk
pension schemes, providing good-value life
insurance and investing in infrastructure.
We now have over one million life insurance
customers in the US.

So how are companies like
Legal & General changing to

ensure future success?

This report highlights our many recent
investments in digital innovation right

across our businesses. In Insurance our
strategy is to create competitive advantages
both in the UK and the US, enabling customers
to apply, be accepted for and change their
policies wholly online. We have established
our own Fintech business within Legal &
General Insurance and have invested in
SalaryFinance, a financial wellbeing platform
which now has over 700,000 employees on
its platform, and Smartr365, a digital mortgage
broking platform. In General Insurance, our
SmartQuote and SmartClaim systems enable
household insurance customers to purchase
and make claims easily and quickly. This has
increased customer satisfaction and reduced
operational costs.

Finally, how is your belief in inclusive
capitalism being borne out in the

day-to-day lives of your employees?

Inclusivity and diversity is a key
business principle and I’m delighted
that three of our seven divisional CEOs are
women. Our ambitious 50/50 by 2020 target,
which aims to have 50% of senior management
roles filled by women by 2020, has helped
develop the careers of many talented women
who are now managing vital parts of our
business. I have been working with our Group
HR Director, Emma Hardaker-Jones, to help
ensure that management positions are filled
by talented and committed people regardless
of their gender, disability, ethnicity, age or
sexual orientation. Inclusivity also means
championing organisations that help our
communities. I’m pleased that we have been
major supporters of the ‘Not a Red Card’
campaign, which has been successful in
changing attitudes towards mental health.

We have put over
£19 billion into
direct investments

Investing in later
living homes

Investing in science
and technology

Investing in
future cities

Investing in
the US

Investing in UK
business growth

Legal & General Group Plc Annual Report and Accounts 2018Strategic report What drives
our strategy

We have created our strategy based upon six growth
drivers which affect people across the world and
enable us to develop growth opportunities.

These six long-term global growth drivers remain constant despite
shorter-term changes in political and economic circumstances.

Achieve global leadership
in pensions de-risking and
become the UK leader in
retirement income products.

Businesses benefitting
LGR Institutional
LGR Retail
LGIM (Workplace)
LGIM (Personal Investing)
LGIM (LDI)

Continue to build a
world-class international asset
management business.

Businesses benefitting
LGIM
LGR Institutional

Use long-term capital
to become the leader
in direct investments.

Businesses benefitting
LGC
LGIM Real Assets
LGR Institutional
LGR Retail

2018 achievements
• Only company active in all
global risk transfer markets

• Achieved record year in LGRI,

with sales of £9.4bn

• Lifetime mortgage sales up
19%. Share of approx. 30%

Looking forward
The PRT market offers huge
opportunities with around £2tn
in UK DB pensions. We’re well
placed to succeed in the £0.7tn
UK annuity market and benefit
from £1.5tn of over-55s
housing equity.

2018 achievements
• £258bn in international AUM

• £11bn external US net flows

• Building European distribution

capability

Looking forward
We can benefit from US market
growth in PRT and defined
contribution pensions (DC).
We’re seeking expansion in
Asian and EMEA markets.
Our ETF developments can
help drive growth in our
European businesses.

2018 achievements
• £19.2bn in groupwide direct

investments

• Future cities programmes in

Newcastle, Leeds and Salford

• New build-to-rent sites with
pipeline of 3,300 homes

• Ten new clean energy sites

Looking forward
We will continue to invest in
future cities and SME finance,
and to build growth in multi-
tenure housing with strong
opportunities in affordable
housing and build-to-rent.

Ageing demographics
Ageing populations mean that pension savings
need to last longer, for individuals and companies
alike. Companies have seen an increasing need
to restructure their pension schemes to meet
rising costs.

Globalisation
According to PwC, global assets exceed
$80 trillion. Like many other UK asset managers
we need to step up to take advantage of the
potential of expanding global markets in North
America, Asia Pacific and the Middle East.

Creating real assets
There’s an urgent need to invest in infrastructure
and urban regeneration in the UK, US and EU.
Many cities outside London need investment to
match global competitors. At the same time the UK
continues to experience a serious housing shortage.

Strategic reportLegal & General Group Plc Annual Report and Accounts 2018What drives our strategy

Welfare reforms
There’s a growing need for people to be
financially independent, saving more for
retirement and their future wellbeing and using
insurance to survive financially following death,
disability or long-term sickness.

Help people achieve
financial security affordably
through insurance,
workplace pensions
and savings.

Businesses benefitting
LGI
LGIM (Workplace)
LGIM (Personal Investing)

Achieve market leadership
in digital provision of insurance
and retail investments.
Use technology to improve
customer outcomes and
increase efficiency.

Technological innovation
Consumers increasingly expect digital ways to
organise their finances. In the low-cost world,
technological solutions can mean the difference
between success and failure.

Businesses benefitting
LGI
General Insurance
LGIM (Workplace)
LGIM (Personal Investing)

Build economic growth
and earnings by investing
in Britain’s future.

Businesses benefitting
LGC
LGIM Real Assets

Providing today’s capital
In recent years, equity and investment capital
have been in short supply. The UK needs
investment in modern, digital start-up businesses
to create jobs and stimulate economic growth.
This can also help improve UK productivity.

2018 achievements
• UK’s No 1 retail life insurer

• £73bn of mortgages

facilitated. 539k surveys.

• A leading UK DC asset manager

with over 3.1m customers

• Retail investment AUM of
£30.6bn, positive net flows

Looking forward
We will use our capabilities
in UK Insurance to develop the
US business, and address the
UK savings gap with strategic
growth in DC, retail funds,
personal investing and ETFs.

2018 achievements
• SmartClaim and SmartQuote

delivering improved
customer experience

• Use of robotics in
administration and
enhanced sophistication
in medical underwriting

• Cloud, AI, big data, block
chain all built and utilised

Looking forward
We aim to become a fully
digital and data enabled insurer.
We will use technology
solutions in DC/Workplace.

2018 achievements
• Pemberton approaching
€4bn AUM across all
SME funds

• Total SME finance of £414m

• Total investments in
early-stage start-ups
now £102m

Looking forward
We will continue to commit
capital to help UK fintechs
compete globally. We will
continue to meet demand
for SME finance from the
non-bank sector.

Legal & General Group Plc Annual Report and Accounts 2018Strategic report What we do

We describe our business as three focused
business areas which deliver our strategy.

Our strategic purpose is to improve the lives of our customers, to build a better society
and to create value for our shareholders. We always take a long-term business focus,
whether it’s managing assets, understanding the changing patterns of how long people
live or delivering solutions to meet our customers’ changing needs throughout life.

Business area

Investing and Annuities
We aim to provide reliable and secure
pension income for individuals and
corporate pension scheme members,
investing an increasing share of our assets
in various types of direct investments.

Legal & General
Retirement Institutional (LGRI)
We work with companies, pension fund trustees
and their advisers to provide risk transfer solutions
in the UK and US.

Legal & General
Retirement Retail (LGRR)
We work directly with individuals or through their
financial advisers to provide retirement income
products. We are one of the leading providers of both
lifetime mortgages and individual annuities in the UK.

Legal & General Capital (LGC)
We seek out direct investments to provide improved
returns on retirement assets and the group’s own
funds. This includes investments in future cities with
urban regeneration schemes and the development of
clean energy, providing finance to SMEs and building
multi-tenure housing.

Investment Management
We provide corporate and individual
investment management services,
looking after the investments of
many of the UK’s biggest corporate
pension schemes.

Legal & General Investment
Management (LGIM)
Defined benefit (DB) investment management
The UK’s leading investment manager for DB pensions.
– experts in LDI and equity index funds.

Workplace/defined contribution (DC) pensions
We’re a market leader in auto-enrolled pensions
for UK companies, with over 3.1m members.

Retail funds/personal funds
We offer individual consumers a range of retail
funds through IFAs, wealth managers or online.

International
A growing strength in active fixed income, multi asset
and real assets. A leading US LDI manager. An increasing
presence in Asia, the Middle East and Europe.

Business area

Insurance
We help people safeguard their families’
financial futures with life, critical illness,
long-term sickness and general insurance.

Legal & General Insurance (LGI)
We have provided life insurance since 1836. We are the
UK’s No 1 retail life insurer and also offer workplace
insurance cover. In the US we provide term life
insurance cover.

General Insurance (GI)
We offer buildings and possessions, pet and
travel insurance.

Strategic reportLegal & General Group Plc Annual Report and Accounts 2018What we do

What makes us different
Asset management

We’re one of the world’s largest
asset managers

Our investment expertise enables us to cover
a wide spectrum of asset classes for DB pension
schemes, helping them to match their liabilities
and manage any credit risk. Our capabilities in
investing also include managing funds for DC
pension customers and ensuring that annuities
are backed with sound investments.

Longevity expertise

We’re a leading longevity
and mortality expert

We have a deep understanding of longevity risk and
the science of life expectancy, through a wide range
of expertise across statistical analysis, demography
and actuarial modelling.

Our unique space

Combining asset management
and risk expertise

We’re able to do this because we understand
both the asset and liability side of financial services.
We believe no other company in the world can partner
with clients on their full pensions de-risking journey.

But we do much more than this.

We’re the UK’s biggest life insurer and we have
a growing portfolio of direct investments that are
improving the lives of people throughout society.
We also help over one million people manage their
finances in retirement and help over three million
people save for retirement in DC pensions.

Our ecosystems
Our business areas work together
to deliver our strategic purpose and
to drive synergies across the group.

This collaborative approach is what we refer to as an
‘ecosystem’. We have developed four ecosystems,
which aim to address the significant needs of our
customers. These are:

• Retirement – We focus on meeting individuals’
full ‘retirement’ needs. LGRI, LGRR, LGIM and
LGC work together to provide a complete suite
of products and services aimed at those saving
towards retirement as well as those already retired.

• Housing – We aim to address housing needs
by building homes of all types of ownership,
facilitating mortgage financing and providing
equity release products, as well as offering
household, life, critical illness and income
protection insurance products. LGIM, LGC,
LGRR, LGI and GI combine strengths to support
customers’ comprehensive requirements.

• Workplace – We provide a range of savings,

lending and protection products to employers and
their employees. Together, LGI and LGIM support
a substantial offering of employee benefits.

• Real assets – We support the creation of real

assets through the provision of corporate credit,
as well as infrastructure and real estate debt and
equity investments. These help to build jobs,
businesses, towns and communities through our
future cities programme. LGIM, LGRI, LGRR and
LGC align to help customers and society.

More detail on the Retirement and Housing
ecosystems, and the resulting positive impact
of this collective way of working, is presented
on pages 10-11 and 20-21.

Legal & General Group Plc Annual Report and Accounts 2018Strategic report 3.1m

Our research indicates that there are now
3.1 million last time buyer households in
the UK, with the number of homeowners
who have considered downsizing rising
from 32% to 39%. Almost half (49%) of
last time buyers said it was because there
were no suitable properties available.

£9.4bn

In aggregate, in 2018 we have
completed over £9 billion of global
pension de-risking transactions.

£4.4bn

We completed a £4.4 billion buy-in of the
British Airways pension scheme, covering
nearly 22,000 customers – the largest ever
bulk annuity policy with a UK pension scheme.

Strategic report

Retirement ecosystem

We meet our customers’ needs
by providing a suite of products
across all aspects of their
retirement journey.

Together, our different business areas have the
unique opportunity to support individuals by
offering a range of retirement solutions, which
are, themselves, inter-connected:

• Retirement income – providing institutional DB
payments through UK and US PRT businesses,
as well as a range of individual annuities
(LGRI and LGRR).

• Retirement savings – supporting the growth
of individuals’ retirement funds through our
Personal Investing arm and our Workplace DC
pension schemes (LGIM).

• Retirement borrowing – helping to access

property assets through our lifetime mortgage
business (LGRR).

• Retirement living – investing in the building and
provision of Later Living accommodation (LGC).

Retirement
income

Retirement
savings

Retirement
ecosystem

Retirement
living

Retirement

Legal & General Group Plc Annual Report and Accounts 2018

Strategic reportRetirement ecosystem

1,100

Through Inspired Villages,
we now have seven retirement
sites with a property portfolio
of 1,100 apartments.

1.1m

We provide pension
income for over
one million people.

30%

Our market share of
lifetime mortgages is
approximately 30%.

£711bn

We’re the UK’s largest investment
manager of pension scheme assets.

S
t
r
a
t
e
g
i
c
r
e
p
o
r
t

£71bn

We’re a leading manager
of UK DC pensions with
over £71 billion in assets

3.1m

We have over three million
DC pension customers

£63bn

We have over £63 billion
in annuity assets.

$2.5bn

US pension risk transfer
assets built since 2015

Legal & General Group Plc Annual Report and Accounts 2018

Strategic report

Business area

Investing
and Annuities

We want to give people secure
and comfortable retirements by
providing individuals and corporate
pension scheme members with
reliable pension income. We use
direct investments to help increase
the returns on these pension assets
and benefit wider society through
socially responsible investing.

Groupwide direct
investments

£19.2bn

Groupwide direct investments

2
.
9
1

X
(£bn)

4
.
4
1

0
.
0
1

2016 2017 2018

Direct investments
Across the group, direct
investments (DI) reached £19.2bn,
an increase of 34% or £4.8bn
compared with 2017. Growth was
driven by our continued success in
sourcing attractively priced assets
to support both new and existing
LGR business, with the portfolio
up 29% at £15.7bn. LGC DI
increased by £0.9bn to £2.4bn,
and LGI hold £1.0bn.

Legal & General Group Plc Annual Report and Accounts 2018
Investing and annuities

Legal & General
Retirement

What we do
Our retirement businesses manage the
retirement income of over one million people.
We have two main businesses. Our UK retail
business provides annuities and lifetime
mortgages for individuals. Our institutional
business helps defined benefit (DB) pension
schemes manage risk, often by taking over
the liabilities to pay pensioners regular annuity
income. We operate in the UK and the US.

We invest part of our £63 billion annuity assets
directly into the UK economy. These direct
investments help us match our liabilities and
enable us to invest the money from people’s
retirement savings in a way which benefits
society as a whole.

2018 overview
In 2018 we experienced very favourable
market conditions, with almost £22 billion
of liabilities being transacted in the pensions
risk transfer (PRT) market and record volumes
of equity released in the lifetime mortgage
market. Both our retail and institutional
businesses benefitted from increased
new business volumes, as well as positive
mortality experience.

£301m

Growth in operating profit

£4.8bn

Increase in total annuity assets

8
4
5
,
1

7
4
2
,
1

X
(£m)

9
0
8

X
(£bn)

0
.
3
6

2
.
8
5

4
.
4
5

2016 2017 2018

LGR operating profit
Operating Profit grew 24% to £1.5 billion
(2017: £1.2bn), driven by higher new
business in PRT, individual annuities
and lifetime mortgages. Higher mortality
reserve releases and positive mortality
experience also contributed, with LGRI
up 27% to £1,149 million and LGRR up
17% to £399m.

Annuity assets
Total annuity assets increased
by 8% to £63.0 billion, driven
by £9.9 billion of annuity sales,
partly offset by the ongoing
impact of the run-off of existing
business over time.

Legal & General Retirement Institutional (LGRI)

What we do
Legal & General Retirement Institutional is
our pension risk transfer business and works
closely with trustees of DB pension schemes
and their sponsoring companies to ensure that
pension promises made to current and past
employees are met.

We are a multi award-winning business
bringing together expertise in investment
management, defined benefit pension
provision, an in-depth understanding of
mortality trends and longevity risk, as well
as excellence in payroll, administration and
communication services.

Strategy and future plans
2018, as predicted by the industry towards
the end of 2017, was a record-breaking year for
the de-risking market, with the largest volume
of transactions ever written. We expect to see
a continuation of this trend in 2019. Strong
investment returns and improved funding
levels, coupled with revised views on mortality
have led to an acceleration of schemes being
able to de-risk their arrangements and secure
their member benefits.

99%

Growth in new business

X
(£bn)

4
.
9

6
.
4

7
.
4

2016 2017 2018

LGRI new business
Total LGRI new business sales increased
by 99% to £9.4bn (2017: £4.7bn). We had
the largest ever bulk annuity buy-in with
British Airways (£4.4bn) and a buy-out
for Nortel Networks (£2.4bn). In the US
we completed 21 new deals totalling
$0.8bn, bringing the total US sales to
date to $2.5bn. L&G Re also achieved
new business sales of £143m during
the year (2017: £nil).

£2tn

Over £2tn of private scheme
UK pension liabilities available

95%

US DB pension liabilities still
available for transfer from
$3.5tn DB market

Legal & General Group Plc Annual Report and Accounts 2018Strategic report

Growth in the market is largely driven by
factors such as premium costs from the
US government agency Pension Benefit
Guarantee Corporation (PBGC) and increased
contributions in response to tax reform. Plan
terminations are likely to accelerate as well
hedged plans’ experience improves. We’re
already seeing an uptick in plan terminations
for 2019 and expect an increasing amount
in 2020 to 2021.

Understanding the risks
Over the years we have
amassed considerable
expertise in LGR in assessing
and pricing for the risk of
longevity and through LGIM
we have extensive knowledge
of selecting and managing
the assets that back our
promises. As we grow our
direct investment portfolio,
combining the property
market expertise of LGC and
LGIM Real Assets with our
credit assessment capability,
enables us to assess each
transaction and its alignment
with our risk appetite.

Strategic report

Strategically, LGRI is well placed to meet the
increasing demand for pension de-risking. The
continued development of our administration
and pricing platforms ensures that we can
scale our business to meet the demand for
quotes, transactions and the subsequent
increase in volumes of pension scheme
member administration, if required.

Through LGIM, LGC and LGRR, we have
access to a wide range of assets to back future
liabilities. The expansion of LGIM’s real asset
capabilities, LGC’s continued development and
investment in real assets and the continued
growth of LGRR’s business will collectively
provide us with opportunities to source assets
in an ever more competitive market.

Key activities
We completed a number of significant
transactions in 2018, including the £4.4 billion
buy-in with the British Airways (BA) sponsored
Airways Pension Scheme – the largest UK
buy-in to date – and the £2.4 billion buyout of
Nortel Networks UK Pension Plan. We have
now completed four of the five largest
transactions in the UK market.

We also remain committed to supporting
pension schemes of all sizes and in 2018
we completed 10 transactions of less than
£50 million, including a £4 million buyout
with a UK pension scheme.

Our wide expertise, execution capabilities,
ability to deal with complex situations and
capacity to develop and offer innovative
solutions were important considerations in
many of the more complex transactions.

£4.4 billion buy-in with BA’s Airways
Pension Scheme
In September, we announced a £4.4 billion
buy-in with BA’s Airways Pension Scheme
covering nearly 22,000 pensioners.

This important transaction included the
conversion of existing longevity insurance into
a bulk annuity – demonstrating our ability to
deal with a complex situation by drawing on
the broad experience and capabilities of the
wider Legal & General group.

Longevity insurance for smaller schemes
In August, we completed a £287 million
longevity insurance contract with a medium-
sized pension scheme. Longevity insurance
contracts have traditionally been the preserve
of much larger schemes.

This transaction showed that we can offer
longevity insurance as a realistic option for
most pension schemes, including schemes
not yet ready to enter into buy-in or buyout,
but who want to manage their longevity risk.

Our innovative approach
Our £325 million buy-in transaction with the
BAA Pension Scheme in June was undertaken
with the sponsor issuing a bespoke corporate
bond to support the transaction.

We understand that this is the first time a
bond with this structure has been issued in
the public debt market, making the buy-in
one of the most noteworthy transactions
in recent years.

Customer service excellence
In 2018 our client services team paid over
£750 million in pension payments to Trustees,
answered almost 30,000 calls, and issued
almost 15,000 retirement quotes to members.

In October, our team were awarded global
standard accreditation for the service we provide
to our customers from the Customer Contact
Association (CCA), which is the industry
benchmark for customer service excellence.

Investing to make a positive difference
To back our pension commitments, our
dedicated Direct Investments and Real
Assets teams across the group have made
over £19.2 billion of direct investments.
Our investments include windfarms and
other clean energy sources, as well as
investments in ports, airports, housing
and transport projects.

US de-risking business
Our US pensions de-risking business,
benefitting from a scaled-up team, increased
sales with $844 million in premiums, resulting
in premiums since launch of nearly $2.5 billion.
At the end of 2018, we had over 50,000
participants under our administration. The US
represents a significant market opportunity,
with $3.5 trillion of DB liabilities as of
30 September 2018.

We estimate the total market volume for
2018 to be around $27 billion, compared to
$23 billion in 2017. We expect to see continued
growth in the US PRT market despite relatively
flat funding levels as a result of the downturn
in equity markets at the end of 2018.

The picture here shows Legal &
General Retirement’s customer
event where pension scheme
members from previous workplace
schemes had the opportunity to
meet the team and discuss how
their pension is administered by
Legal & General.

Strategic reportLegal & General Group Plc Annual Report and Accounts 2018Investing and annuities

Legal & General Retirement Retail (LGRR)

What we do
Legal & General Retirement Retail focuses
on providing retirement lending and retirement
income products. Our lending business is now
four years old and helps retired people use the
equity in their homes to boost their retirement
finances. Our retirement income business
offers people who are retiring the security of
buying annuities which provide a guaranteed,
stable income.

Strategy and future plans
Demographic changes will see LGRR’s target
market continue to grow, both in terms of the
numbers of retirees and the levels of wealth
they hold. We are developing new, innovative
products for individual annuities and lifetime
mortgages. In 2018 we focused on refining our
enhanced annuity offering and expect this to
allow us to compete effectively in this growing
market segment.

Our leading lifetime mortgage business, which
made £1.2 billion advances in 2018, currently
has a market share of around 30%. The Equity
Release Council said in January 2019 that total
lending activity for 2018 grew for a seventh
consecutive year to reach £3.9 billion, up 29%
year-on-year.

19%

Growth in lifetime mortgages

18%

Growth in individual annuity sales

7
9
1
,
1

4
0
0
,
1

X
(£m)

0
2
6

X
(£m)

5
9
7

1
7
6

8
7
3

2016 2017 2018

Lifetime mortgages
The lifetime mortgages business has
continued to grow with £1.2 billion
of sales (2017: £1.0bn), achieved
through product innovation and
new partnership agreements.

Denotes a scale break.
Throughout this Annual Report,
all bar chart scales start from zero.
We use a scale break where charts
of a different magnitude, but the
same unit of measurement, are
presented alongside each other.

Individual annuity sales
Individual annuity sales are up 18%
at £795 million driven by our strong
competitive position in lifetime
annuities and small bulk
transactions won as part of an
exclusive reinsurance arrangement
negotiated with New Ireland.

£2.4 billion buyout with Nortel
Networks UK Pension Plan
In October, LGRI completed a
£2.4 billion buyout for the
telecommunications company
Nortel Networks UK Pension Plan
covering around 15,500 pensioner
members and around 7,200
deferred members; one of the
largest buyouts ever completed
in the market.

The Plan’s sponsor went into
administration in 2009 and the Plan
entered a Pension Protection Fund
(PPF) assessment period. Working
with Legal & General, the Trustee
has been able to secure benefits in
excess of PPF levels and the Plan
will not now enter the PPF. We
helped the Trustees secure a result
that has a tangible and positive
impact on the security of thousands
of members’ retirement income.

Legal & General Group Plc Annual Report and Accounts 2018Strategic report Strategic report

Help at hand from the ‘Bank of
Nanny and Grampy’.
Pictured is Becca whose
grandparents took out a Legal &
General lifetime mortgage to
help their granddaughter and
her partner, Adam, buy their first
home. Becca said: “We knew we
wanted to buy our own house
but it was a good few years off,
if it hadn’t been for Nanny and
Grampy’s help. My grandparents
are gems; they mean the absolute
world to me. It’s so nice that
they’re so close to us – they’re
five minutes round the corner
and we go there for Nanny’s
roast on a Tuesday.”

Key activities
Annuities
2018 was a successful year for our individual
annuity business. We are top three in the UK
individual annuity market and have almost
tripled our market share in the past two years,
with a current market share of nearly 19%.

We benefitted from improvements to our
underwriting process and greater product
diversification. 2018 saw a revised approach
to underwriting individual annuity risks, where
we built internal expertise to provide better
risk assessment and more individual pricing
for customers. This improved underwriting
approach enabled us to grow our enhanced
annuity volumes.

A key development in 2018 was the research
we carried out with think-tank Demos to
assess the impact of financial choices on
wellbeing in later life and ultimately improve
customer outcomes.

Distribution
Over the course of 2018, we took further steps
to help address the interest-only challenge.
This included new partnerships with Virgin
Money in August and NatWest in December.
This means we can offer their interest-only
customers aged 55 and over our lifetime
mortgage range including OPLM, without
requiring affordability checks.

These arrangements add to existing
partnerships with Santander and The
Co-operative Bank, and are a tangible
response to the FCA’s call for more
options from the mortgage industry for
interest-only borrowers.

These partnerships now make our range of
lifetime mortgages available to 38% of all UK
interest-only mortgage customers.

These relationships with major lending brands,
as well as a buoyant later life lending market
and an increase in understanding of the
benefits of retirement lending, have
strengthened Legal & General Home
Finance’s position as a leading lifetime
mortgage lender in the UK.

Lifetime mortgages
Lifetime mortgage advances were up 19%
at £1.2 billion, which has been supported
through new product innovation and a
number of strong distribution and partnership
agreements. Our success in this market to
date has allowed us to achieve a market
share of 30%.

We have now reached over £3 billion of total
lending since entering the market in 2015,
representing a ‘significant milestone’ on our
journey to bringing later life lending into the
mainstream. Legal & General Home Finance
is now responsible for 1 in 3 new lifetime
mortgage originations in the UK.

We have positioned ourselves as the
mortgage lender of choice for over 55s with a
series of key product launches. These include
the launch of the Optional Payment Lifetime
Mortgage (OPLM) in April 2018, which
enables borrowers to make monthly interest
payments. Our Income Lifetime Mortgage,
which gives customers the ability to use their
housing wealth to provide a regular monthly
income, was piloted in November 2018 and
fully launched in January of this year.

Using housing equity to enhance retirement
living is beginning to be seen by customers as
a positive financial change. In previous years,
customers viewed equity release as a way of
repaying debt. It is now much more likely to be
used for home improvements, holidays and as
a gift for children and grandchildren.

Strategic reportLegal & General Group Plc Annual Report and Accounts 2018Investing and annuities

Legal & General Capital (LGC)

What we do
Legal & General Capital has a strategically
important position at the centre of the group,
working directly with LGIM and LGR’s
businesses. LGC uses shareholder capital to
achieve three goals. Firstly to deliver attractive
financial returns for shareholders, secondly to
deliver attractive investments for our annuity
business and, finally, to grow third-party
opportunities for LGIM. We are able to create
value for shareholders, provide stability for
annuity customers and benefit communities
right across the UK.

Strategy and future plans
We use our long-term, patient capital to invest
in real assets, primarily across the UK.

• Future Cities: We provide investment in

infrastructure, commercial and residential
property to create the cities of the future,
with innovation in urban regeneration and
clean energy

• Homes: Investing in a multi-tenure portfolio

of homes

• SME Finance: We invest in early stage

enterprises and SMEs in the UK and Europe.

Breakdown of direct
investment portfolio

63%

Growth in direct investments

X
(£m)

9
5
3
,
2

0
5
4
,
1

7
3
1
,
1

18%

Growth in operating profit

X
(£m)

2
2
3

7
5
2

2
7
2

Future Cities 33%
Housing 49%
SME Finance 18%

2016 2017 2018

Direct investments
During the year we have made
further progress across our core
focus areas of Future Cities,
Housing and SME Finance, with
total new investments and new
commitments of £1.3 billion,
including investments in the
science and technology sector.
The direct investments portfolio
totalled £2.4 billion at the end of
the year (an increase of 63%
versus 2017).

Operating profit
Operating profit increased
by 18% led by growth in the
Direct Investment portfolio,
including full ownership of CALA.
Operating profit on the traded
portfolio reduced following a
strategic reduction in the equity
portfolio due to volatile equity
markets. Profit before tax was
£49 million, reflecting negative
investment variance in the
traded portfolio. The net portfolio
return of the direct investments
business was 7.4% (2017: 8.1%).

Legal & General Group Plc Annual Report and Accounts 2018Strategic report

Strategic report

Direct investments across the group
LGC, LGR and LGIM Real Assets have all
developed direct investments. LGC invest in
Future Cities, Clean Energy and SME Finance.

Future cities
We work with local authorities, government,
universities and partners to deliver real estate
and infrastructure developments and to invest
in clean energy technologies of the future.

New investments
In September 2018, we established a
landmark 50:50 partnership with Bruntwood.
We jointly invested £360 million of capital,
property and intellectual assets into a new
company, Bruntwood SciTech, with a business
plan to create 20,000 high value jobs. This
investment created the UK’s largest property
platform dedicated to driving science and
technology in UK cities.

We also invested in WiredScore, a rapidly
growing property technology company and
global leader in digital connectivity certification
for commercial property. WiredScore,
founded in New York in 2013, provides digital
connectivity ratings and accreditation for real
estate globally.

Regeneration projects
We invest in many UK towns and cities
through large scale regeneration in places
such as Bracknell, Cardiff, Leeds, Salford,
Newcastle and Manchester.

Newcastle
In December 2016, we partnered with
Newcastle City Council and Newcastle
University to help build and finance the
£350 million Helix development. As one of
the biggest urban regeneration projects of its
kind in the UK, Newcastle Helix is set to create
over 4,000 jobs, 500,000 sq. ft. of office and
research space, and 450 new homes.

Leeds
We’re a major player in the regeneration of
Leeds. Thorpe Park Leeds is already home to
over 60 businesses employing around 4,500
people. The current development plan will
provide new retail shopping, office space,
300 new homes, a 113-acre public park with
sports facilities and a new railway station.

New developments in London
In July we exchanged contracts on our largest
build-to-rent (BTR) site to date, located in
Woolwich, south-east London, in partnership
with PGGM. This is our third BTR scheme
in London, with existing developments
progressing in Walthamstow and Croydon.

Clean energy
We continue to invest long-term capital into
the energy sector to accelerate the progress to
a low-cost, low-carbon economy, reducing the
cost of power for consumers. This includes
renewable wind and solar power generation,
energy-efficient houses and buildings and
innovative technologies to control, manage
and store energy.

SME finance
We invest in venture capital to support UK
growth and, through our minority owned
partner Pemberton, provide corporate lending
for European mid-market businesses.

Total SME finance assets increased to
£414 million from £296 million in 2017.

Over the past two years we have committed
£102 million to the UK Venture Capital sector
through investments in eight venture
managers. These managers have now
invested in over 250 companies in the UK
and beyond.

Our 40% owned private credit manager
Pemberton had another successful year with
over €4 billion committed AUM across all
its funds.

CALA Homes
In 2018 we purchased the
remaining share of CALA,
bringing them fully into the
Legal & General group. CALA
began building homes over
30 years ago and has a
reputation for creating
high-quality homes.

Legal & General Group Plc Annual Report and Accounts 2018Investing and annuities

Bruntwood
We have created the UK’s largest science
and technology partnership with Bruntwood,
dedicated to driving science and technology
growth in regional cities.

Crowthorne
Legal & General Homes is committed to delivering
quality homes across all tenures. We are building
1,000 new homes at our 250-acre, Buckler’s Park
site in Crowthorne, Berkshire.

Clean energy
Our commitment to clean energy is shown by
LGR’s investments in three wind farms which
have the capacity to provide enough power to
service over two million homes.

Housing
We’re delivering housing of all forms of tenure.
These include build-to-sell, build-to-rent,
affordable housing and specialist housing for
the elderly through CALA Homes.

Our build-to sell developments include both
CALA Homes and Legal & General Homes.

CALA Homes
We acquired the remaining 52.1% stake in
homebuilder CALA Homes. CALA is on track
to deliver an annual capacity of 2,500 units and
revenue of around £1 billion in 2020, with the
capability to build in excess of 3,000 units each
year. CALA has seen revenues grow from
£228 million in 2013 to £880 million in 2018.

Legal & General Homes
Our housebuilding arm, Legal & General
Homes, has a housing pipeline of over
3,000 new homes.

20,000

High value jobs projected in
Bruntwood’s business plan.

2 million

Homes which can be powered from
our three wind farm investments.

Later living accommodation
We provide later living accommodation
through partnering with Inspired Villages
Group and ‘Guild Living’, developers of later
living accommodation. Inspired Villages
Group’s development portfolio currently has
around 1,100 homes and ‘Guild Living’ is a
partnership with global experts in architecture,
development operations and wellness for later
living accommodation.

Build-to-rent
Our total investment capability for the
build-to-rent sector currently stands at around
£1.5 billion. We have around 3,000 homes
under construction or in planning, with sites
in Bristol, Birmingham, Manchester, Salford,
Glasgow, Bath, Brighton, Leeds and across
London. We aim to have 6,000 homes in
planning, development or operation by the
end of 2019.

Affordable homes
In 2018, we launched our affordable housing
arm to address the overwhelming need for
affordable housing across the UK, and we
recently achieved the milestone of becoming
a registered provider of social housing.

Modular homes
In 2018 we delivered our first precision-
engineered modular homes development in
Buckler’s Park in Crowthorne, near Bracknell.

Other direct investments
LGR has a range of investments such as clean
energy, transport and commercial property.

The Hornsea Project One financing will enable
the construction of what will become, once
operational, the world’s largest offshore
windfarm project, powering over one million
homes. It will be located 100 km off the
north-east coast of Britain, with 174 UK built
Siemens turbines. In 2018 we also entered into
a joint venture in Dudgeon Offshore Wind Ltd,
located off the east coast of England, producing
enough electricity to power 410,000 homes.

We have continued our investment in transport
in 2018, with financing for HS1 in the UK and
for Los Angeles Airport (LAX) in the US.

In 2018 we purchased four Government-leased
offices for £388 million, bringing LGR’s total
investment in these assets to over £1 billion.
HMRC continues as our main tenant. We
worked closely with developers and HMRC
to structure these leases.

This year we made a number of commercial
mortgage loans totalling nearly £600 million.
Highlights included the financing of the
new Amazon HQ in Shoreditch, London,
together with loans secured on the
Microsoft HQ in Reading and the Shell HQ
on London’s Southbank.

We continue our investments in other
sectors, focussing on secure returns and the
opportunity to have a positive impact on the
daily lives of people and their environment.

Legal & General Group Plc Annual Report and Accounts 2018Strategic report Strategic report

Housing ecosystem

We help customers with their
fundamental housing-related
needs at every stage of life.

Our core business areas combine strengths
to provide a broad, yet cohesive range of
housing options:

• Homebuilding: investing in the building of
properties across various housing sectors,
including build-to-sell, build-to-rent, modular
housing and affordable homes (LGC and LGIM)

• Buying: supporting home purchases through

our mortgage club and surveying services (LGI)

• Insurance: providing home insurance and
individual protection products (LGI and GI)

• Rightsizing: investing in building and providing

later living accommodation (LGC and LGIM)

• Retirement lending: helping to access property

assets through our Lifetime Mortgage
business (LGRR).

Our collaborative way of working allows us
to leverage our scale and synergies to deliver
much-needed solutions to our customers
and strong returns to our shareholders.

House
building

Retirement
lending

Buying
homes

Housing
ecosystem

Right-
sizing

Insurance

80,000+

New properties due
to be built in the next
five to ten years.

550,000 sq ft

Our modular home-building factory in
Yorkshire is the largest in Europe. At full
capacity the factory could produce up
to 3,500 homes per year, employing
several hundred local people.

650+

New homes to be built at
our largest build-to-rent (BTR)
site located in Woolwich,
south-east London.

3,000

In 2018 we launched Legal &
General Affordable Homes, which
will aim to be fully operational and
delivering 3,000 homes per year
within the next four years.

Legal & General Group Plc Annual Report and Accounts 2018

Housing ecosystem

1st

The first house builder in the UK
formally to incorporate social
value into its developments.
We were awarded ‘Best Business
Contribution to Social Value’
at the Social Value Awards 2018.

100%

In 2018 we acquired full
ownership of CALA Homes,
a leading UK provider of
high quality housing.

£1bn+

Invested in long-term financing
for the development of new
homes across the UK, including
Glasgow, Newcastle and Bath.

1 in 4

Housing transactions in the UK
dependent on ‘the Bank of Mum
and Dad’ – a report Legal & General
organised to show how young
people need affordable homes.

£73bn

In 2018 our mortgage club arranged
£73 billion in mortgage loans.

£470bn

We provide life cover of £470bn and
in 2018 paid out over £638m claims.

£1bn

We’re a leading provider of lifetime
mortgages, enabling people to stay
in their homes and improve their
finances in retirement, with total
loans of over £1 billion in 2018.

1,100

Our later living accommodation
through Inspired Villages Group
currently has around 1,100 homes.

Legal & General Group Plc Annual Report and Accounts 2018Strategic report Business area

Investment
Management

Our investment management
business is now nearly 50 years
old. Traditionally, we managed the
assets of UK DB pension schemes
and they remain a significant part of
our business. Now, however, we’re
an increasingly diversified business
with a wide range of clients across
institutional, retail, workplace and
direct markets in a growing number
of global locations. We champion
active ownership of our clients’
assets and the incorporation of
environmental, social and
governance (ESG) factors because
we believe responsibility in
business is good for investors.

2018 overview
In 2018 we continued to diversify our
business, building on our strengths in the UK
DB market to position the business to succeed
in the defined contribution (DC), retail,
direct-to-consumer and international markets,
especially the US. By diversifying across
channels, regions and investment capabilities,
we were able to benefit in 2018 from positive
fund flows from our DC, retail, DB solutions
and international businesses. Key highlights
included the successful integration of our ETF
business, following the completion of the
acquisition of Canvas in March, which has
extended our distribution capabilities in
Europe. We also continued to build out our
Personal Investing platform and experienced
continued strong growth in our workplace
pensions business, where we now have more
than three million people saving for retirement.
In the US, we are well-positioned for growth in
the DB de-risking market and have expanded
our investment capabilities, including in index
and multi-asset investments.

Strategic reportLegal & General Group Plc Annual Report and Accounts 2018Investment management

Strategy and
future plans

We benefit from cost efficiencies underpinned by our investments in
technology, while the increasing scale of our workplace, retail and direct
assets give us attractive growth opportunities. We’ve based our strategy
for success on three clear themes:

Broadening our
investment capabilities

Addressing the
savings gap

We’re continuing to invest in engaging with
pension scheme members and building
digital communications. We’ve enhanced
our personal investing digital platform and
are aiming to become a leading provider
of UK retail investments.

LGIM has continued to broaden its investment
capabilities to capture the structural shifts in
demand in the asset management industry.
We have a growing multi-asset business
across the institutional, DC and retail
markets. We are a leading active global
credit manager and have a significant real
assets capability. We’re also evolving our
factor-based investing and environmental,
social and governance (ESG) capabilities
to cater to evolving client needs and have
seen considerable progress in making
responsible investing mainstream.

Internationalising our core
institutional strengths

In the UK we’re maintaining momentum
in providing DB pension solutions, while
diversifying into other markets and client
channels. In the US we’re well positioned
for growth in the defined-benefit de-risking
market and we have rounded out our
investment capabilities to include index and
factor-based investments, multi-asset and
real assets. In Europe we are expanding our
distribution capabilities, building on the
integration of our ETF platform. In Asia and
the Gulf we are seeking to grow our client
base and AUM.

Legal & General Investment Management (LGIM)

13%

Increase in total net flows

£1tn

Assets under management

X
(£bn)

2
.
1
3

2
.
5
4

0
.
0
4

X
(£tn)

4
9
8
.
0

3
8
9
.
0

5
1
0
.
1

2016 2017 2018

Assets inflows/outflows
External net flows of £42.6bn were
once again strong, with continued
diversification across channels,
regions and product lines. UK net
flows of £22.9bn were significantly
higher than in 2017 (2017: £10.5bn),
with strong performances across
both DB and DC channels.
International net flows totalled
£19.6bn (2017: £33.0bn) driven
by the US and the Gulf.

Assets under management
AUM once again grew well,
increasing by 3% to over £1tn (2017:
£983bn) driven by strong external
net flows of £42.6bn, offset to some
extent by the impact of the adverse
market performance. International
AUM continued to perform well,
increasing to £258bn (2017: £228bn).

Legal & General Group Plc Annual Report and Accounts 2018Strategic report

Strategic report

Legal & General Investment Management (LGIM)

Growth in operating profit

X
(£m)

6
6
3

0
0
4

7
0
4

2016 2017 2018

Operating profit
Operating profit rose by 2%
despite difficult market conditions
and a weak market performance,
particularly in the second half of the
year. Asset management revenue
increased by 4%, in line with the
increase in average AUM. However,
the cost/income ratio increased
slightly to 52% reflecting lower
than expected revenue and the
investment in the operating
environment of the business to
manage risk and support future
growth. Workplace Savings
delivered an operating profit of £3m
compared to a break-even result in
2017 as the platform continues to
achieve scale benefits as it grows.

Broadening our investment capabilities
Defined benefit business
We are well positioned to succeed in the
changing DB market, where schemes need
to manage risk by using fixed-income and
liability-driven investment (LDI) strategies.
Within LDI we have supported our clients
throughout their journey, taking them from
traditional index strategies through to custom
hedging against liabilities. This journey leads to
deep, long-term partnerships and as a result
we are now the largest LDI manager in the UK.

Across the Legal & General group we have
the capabilities to help DB schemes through
the whole de-risking journey, including full or
partial schemes buyouts and buy-ins. Solutions
assets have almost tripled from £170 billion
in 2011 to £511 billion at the end of 2018,
representing over 50% of all group AUM.

Active strategies
Our active strategies demonstrate our
strengths in providing diverse client solutions.
We’re a market leader in both the UK and US
at providing liability-aware credit solutions.
We’ve reshaped our business to complement
our index equity expertise and are building
momentum in products like global high yield
and active equities.

Index
We’re the fifth largest index manager globally,
a leader in the UK and the largest European
institutional factor-based manager. We have
a strong heritage in managing insurance and
pension assets and work closely with Legal &
General Retirement’s teams in managing the
annuity portfolio.

Real assets
We hold £27.1 billion in real asset investments.
Our three main growth opportunities are firstly,
expanding into emerging sectors in real estate;
secondly, expanding private credit for our
clients; and thirdly, stepping into US real
assets. We create assets that serve the needs
of businesses and communities whilst at the
same time delivering the investment
outcomes that best serve the needs of our
clients. Our real assets team works closely
with LGC and LGR to provide investment
returns for the pension annuity book and the
group’s balance sheet.

An important focus in 2018 has been
renewable energy, which not only
demonstrates our focus on ESG themes, but
also meets our need to generate attractive
long-term secure income. We also aim to
make a real contribution to the housing supply
scarcity in UK cities, providing attractive levels
of return through creating and owning
build-to-rent properties.

It’s a fascinating time for
the asset management
industry in many ways.
We are becoming
increasingly important
in allocating capital and
there is much more
emphasis on stewardship
and engagement as we
try to establish a
capitalist model to work
more effectively for more
people. The shift to
individual responsibility
for retirement income
is also creating many
challenges, for which we
all must continue to strive
for better solutions.”

Mark Zinkula
Chief Executive Officer,
LGIM

Legal & General Group Plc Annual Report and Accounts 2018

Investment management

building societies. In Europe, we work with
private banks and stockbrokers to market ICAV
and SICAV funds. Last year, we added ETFs to
our product suite following the acquisition of
Canvas. We now have funds registered in 14
countries and plan to expand our presence
further, initially targeting Germany and Italy.

Our personal investing business is strategically
important to LGIM. We want to democratise
and popularise investment in the UK using our
competitive advantages of scale and price
through digital channels which can deliver
a frictionless customer experience. A key
component of our approach is to help
customers access investments that interest
them, so we focused on our Future World
fund range in 2018 and will continue to
diversify our offering.

Understanding the risks
We continue to invest in our
systems, business processes
and people to ensure that we
meet the expectations of our
clients, comply with
regulation and mitigate the
risks of loss or reputational
damage from operational
failure and external events.
Alongside ensuring robust
internal controls so that funds
are managed in line with
client mandates, delivering
fund performance and being
responsive to client needs
are key to attracting new
funds under management
and minimising fund
outflow risks.

Addressing the savings gap
Workplace pensions/DC pensions
In the UK our DC business offers investors
a choice of pension funds through a platform
that offers both bundled services (including
administration) and unbundled (investment
only). We’re a leading DC fund manager
with £71 billion of assets and over 3.1 million
members across our schemes. We also
have one of the largest and fastest growing
pensions MasterTrusts in the UK. In 2018
we continued to invest in technology to help
auto-enrolled pension members understand
more about their benefits and options at
retirement as well as helping them to
manage their fund choices.

Retail funds, personal investing and ETFs
Our retail business distributes our funds to
end clients through intermediaries. We have
delivered strong growth in recent years, building
on our diverse product range comprising index,
multi asset, real assets and active funds.
Through our competitive pricing and a strong
service model, we have established a
market-leading position in the UK, moving
from outside the top 20 to a regular top-three
provider. LGIM was second in both gross and
net retail sales in 2018. In the UK, we offer unit
trusts and ISAs through IFAs, and banks and

Legal & General Group Plc Annual Report and Accounts 2018

Financial wellbeing platform for DC pension members Our newly launched financial wellbeing platform can help people feel financially confident. We want to help people who are saving for retirement to keep their short-term money worries under control.The financial wellbeing hub has four key themes:1. Control day-to-day spending.2. Prepare for unexpected expenses.3. Maintain a regular disposable income. 4. Prepare for future life milestones – retirement, homebuying, having a family and savings.Strategic report Strategic report

We are also building on our competitive
advantages to deliver solutions in the DC and
the public DB channels, particularly in the
growing retirement income and ESG markets.
Public funds are increasingly focused on ESG
investment strategies and we believe we can
add significant long-term value in this area.

$80tn

Global asset management market

Internationalising our core
institutional strengths
We now have offices in seven locations and
clients in 29 countries. Europe is becoming an
increasingly important market and in 2018 we
received authorisation for our management
company to become operational in Dublin.
We will continue to expand our European
business, building on the demographic and
welfare trends that are driving the growth of
pensions. We are also well placed to support
the growing demand for ESG, credit and
index capabilities.

In the Gulf we manage index, credit and
some real assets for our clients, in a market
dominated by sovereign wealth funds. Our
specialist team is based in London and has
built assets with compound annual growth of
32% since 2011. Once again there is a growing
interest in ESG investments and we also see
opportunities as asset owners look to diversify
their investments.

Asian investment management
In Asia we now look after over £10.9 billion of
assets, with offices in Hong Kong and Tokyo,
giving us a manufacturing and distribution
capability in the region. In Asia our investment
base is spread across fixed income, index, real
assets and equities. We concentrate on the
larger institutional markets of north Asia. This
means sovereign wealth funds, pensions and
insurance in China, Hong Kong, Korea and
Taiwan and we have our first clients in
Singapore and Australia as well.

Our continued US expansion
We’re well positioned for future growth in this
$17 trillion market, building on our three
competitive advantages of a client-centric
culture, investment excellence in fixed income
and LDI and a true solutions orientation.

We now manage assets across the full
spectrum of fixed income and LDI solutions,
driven by strong and consistent flows from
corporate DB plans. We have also broadened
our investment capabilities to include index
and factor-based investments, multi-asset
and real assets. Our index and factor-based
proposition now has commercial traction
across all key US client channels.

Institutional pensions assets
of around $17 trillion in the US
represent a huge opportunity
for Legal & General.

Legal & General Group Plc Annual Report and Accounts 2018Business area

Insurance

Our Insurance businesses continue
to have the largest customer base
of all our business areas, looking
after nine million people. We started
offering life insurance cover in 1836
and now have around four million
UK retail life insurance customers,
two million people in group
protection schemes, one million US
life insurance customers and nearly
two million general insurance
customers.

14%

growth in LGI new
business premiums

81%

retail protection
customers benefitting
from straight-through
processing

Legal & General Group Plc Annual Report and Accounts 2018Strategic report Strategic report

Strategy and
future plans

Our strategy is to harness technology and drive innovation to transform
our chosen markets. We achieved our market leading position through
the effective use of technology. Now we’re continuing to invest in
technology to make sure our customers enjoy an excellent experience
and to build ever closer relationships with our distribution partners.

Investing
in digital

We have a relentless focus on using
technology to deliver better value,
improve customer experience and
enhance risk management.

Expanding our
US operations

We’re the largest provider in the US
term life assurance brokerage channel,
by number of policies. We’re investing in
digital transformation to position us for
further new business growth and to
increase profits.

Working with partners
to build our businesses

Embracing innovation means we can be at
the forefront of changes in the distribution
marketplace. Our vision is to be the best
company to partner with.

Legal & General Insurance (LGI)

Increase in gross written premiums*

£308m

Operating profit

X
(£m)

9
0
4
,
2

1
3
5
,
2

0
8
5
,
2

X
(£m)

3
0
3

8
0
3

2016 2017 2018

Operating profit
Operating profit increased by 2% versus
prior year.

UK profit benefitted from one off model
enhancement and assumption changes.
This was partially offset by lower new
business surplus due to higher strain
from the growth in Group Protection
new business and a competitive UK
Retail Protection market.

The US profit decreased due to higher
than expected claims in 2018 compared
to a favourable position in 2017.

Gross written premiums
Gross written premiums grew by 3%
versus 2017 on a constant currency
basis (2% using actual FX rates) to
£2,580m. In the US, GWP increased
by 4% (on a USD basis) led by strong
new business sales, particularly in
the broker channel. New business
increased by 12% year on year to
$114m. UK Retail Protection GWP
increased 4%. Group Protection GWP
grew by 1% as a result of 69% growth
in new business partially offset by
the non-renewal of specific schemes
with an adverse claims experience.

* UK and US Protection only

In 2018, our digital
advances meant that
one person could
process the same
level of new business
applications that it took
five people to complete
ten years ago.”

Bernie Hickman
CEO, Legal & General Insurance

Denotes a scale break.
Throughout this annual report,
all bar chart scales start from zero.
We use a scale break where charts
of a different magnitude, but the
same unit of measurement, are
presented alongside each other.

Legal & General Group Plc Annual Report and Accounts 2018

Insurance

UK retail life insurance
We provide over £470 billion in life
insurance cover and in 2018 paid out over
£638 million in life insurance and critical
illness cover claims, paying 96% of all
claims made.

In 2018, we remained the UK’s No 1 retail
life insurance provider, with a market share
of 24% in the first three quarters of the
year. We continue to benefit from being
a large scale provider operating a
multi-distribution strategy.

We continue to improve our product
proposition and distribution reach. In H2 we
expanded our partnership with Barclays,
launching a new non-advised proposition in
addition to renewing the existing advised
Mortgage Protection offering.

Our digital advances mean that one person
can now process the same amount of new
business applications that required five
people ten years ago. 81% of new business
applications are completed using ‘straight
through processing’.

UK group protection
Our group protection business provides
employers protection for their employees and
families, for both life and income protection.

2018 was a successful year for our group
protection business following the
management actions implemented in 2017.

New business premiums increased by
69% in 2018 to £83 million, with gross
written premiums up 1% to £329 million,
reflecting improvements in our customer
service partially offset by the specific
non-renewal of schemes with unfavourable
claims experience. The perception of our
business from employee benefit
consultants improved markedly, with
scores from the annual Opinion Research
Corporation (ORC) survey showing an
improvement from 38% to 50%.

US insurance
Our US business (LGIA) has remained a
successful provider of term insurance, largely
sold through brokers. We have 1.2 million
customers and are the largest term life
assurance provider in the US brokerage
channel by number of policies and No 2
by new business premiums.

In 2018, new business premiums increased
12% to $114 million. Operating profit however
reduced due to higher than expected claims
versus a favourable prior year position.

Despite our market leading position we see
substantial opportunities to diversify further
and grow in the US. We aim to accelerate the
pace of digital transformation and develop new
distribution channels.

Fintech
We have continued to grow our expertise
in the Fintech sector. We’re focusing on
transforming our current markets, developing
solutions for adjacent markets and making
targeted selective investments in start-up
and scale-up opportunities.

We’re transforming the housing ecosystem
through our unique understanding of the
industry as the UK’s leading mortgage
distributor and the first choice home survey
and valuation provider for eight of the top 10
UK mortgage lenders.

4%Number of employees working in UK firms who feel able to talk to their manager about depression.Not a Red CardOur Group Protection business is working with the ‘Not a Red Card’ organisation to remove the taboo of mental health and reduce the UK’s high suicide rates which have a direct bearing on our life insurance businesses. We are grateful for the support of renowned sporting personalities, business leaders and mental health experts. In 2018 we won two awards for our work and launched our inaugural ‘Not a Red Card’ mental health awards.Legal & General Group Plc Annual Report and Accounts 2018Strategic report Strategic report

Through Legal & General Surveying Services,
we have built innovative new products.
The traditional ‘homebuyer’s survey’ has
been rebuilt for the digital world and has
launched as ‘SmartrSurvey’, which is sold
through business partners and directly to
consumers. In 2018, our surveying business
arranged 539,000 valuations and surveys
for homebuyers.

New Fintech solutions have been applied
to Legal & General Mortgage Club with
the development of ‘SmartrCriteria’ and
‘ClubHub’ providing instant mortgage search
recommendations and online commission
assistance for brokers. Legal & General
Mortgage Club facilitated £73 billion of
mortgages in 2018, up 12% (2017: £65 billion),
through strong partnerships with top lenders
and mortgage brokers. As the largest
participant in the intermediated mortgage
market in the UK, we’re involved in one in
five of all UK mortgage transactions.

Additionally in July 2018 we invested in
Smartr365, a digital B2B mortgage broking
platform which supplies systems to the UK
mortgage intermediary market. Smartr365 has
a cutting-edge online fact find, which delivers
a great customer experience, market-leading
CRM and efficient customer verification
processes. The aim is to speed up the
collection of critical data to condense the
mortgage administration process from
weeks into hours. It includes a customer
portal which helps to build and cement
long-term engagement between advisers
and their customers.

Salary Finance, the award winning ‘Start-up
of the Year’, continues to grow rapidly. In the
UK, Salary Finance currently has more than
700,000 employees registered on the platform
with an additional 300,000 expected by the
second quarter of 2019.

In response to feedback from employers,
Salary Finance have launched Salary Advance
and, in partnership with HMRC, will launch a
‘Help To Save’ scheme in early 2019. During
the second half of 2018 Salary Finance
launched in the US and has a significant
active pipeline to build on its current clients.
Growth opportunities for the business remain
extremely positive and industry recognition of
this Fintech is high – for example, Salary
Finance won ‘Responsible Business of
the Year’ at the Prince Charles Business in
the Community Awards.

Our Fintech business also includes Investment
Discounts Online (IDOL) which continues to
grow its presence in the price comparison
market and is an excellent asset to deploy in
the financial technology market and product
platform space.

General Insurance (GI)

11%

Increase in gross written premiums

X
(£m)

6
2
3

0
1
4

9
6
3

2016 2017 2018

Gross written premiums
Gross written premiums performed
well, increasing by 11% to £410m in
2018. We achieved growth across both
direct and partnerships channels
driven by strong new business sales
following the launch of SmartQuote
and a number of new distribution
agreements which went live during
the year. The acquisition of Buddies
completed early in 2018, which
helped contribute to the 60%
increase in Pet GWP.

£0m

Operating profit

X
(£m)

2
5

7
3

2016 2017 2018

Operating profit
Operating profit decreased significantly
to £nil, with a combined operating ratio
of 104%. This was materially impacted
by a number of severe weather related
claims, notably the Q1 freeze and a rise
in subsidence claims in H2 following
the sustained hot and dry summer.
Excluding the increase in weather and
subsidence related claims, operating
profit was £26m and combined
operating ratio was 97%.

Legal & General Group Plc Annual Report and Accounts 2018Insurance

General Insurance
Gross premiums increased by 11% to
£410 million (2017: £369 million). This includes
£24 million from our pet insurance business, a
60% increase compared to 2017. The Buddies
business, which was acquired in January 2018,
is now operating as an integral part of the
General Insurance division.

Our direct business delivered gross premiums
of £148 million in 2018, representing 6%
growth on 2017 and now accounts for 36%
of gross premiums.

In line with market experience, adverse
weather experience caused by the February/
March 2018 freeze has had a negative impact
on operating profit.

Delivering on new distribution
agreements
A new distribution agreement with
The Co-operative Bank came into effect
in May 2018 and the agreement with Pen
Underwriting went into effect in April 2018.

In November we announced a new three-year
partnership agreement with Asda; our first pet
affinity. The new three-year commercial
agreement will mean we can offer our pet
insurance product range for dogs and cats to
Asda’s customers through several distribution
channels including, phone, online via the Asda
website, and price comparison websites.

We continue to attract significant interest
from potential distribution partners, who value
our market leading, digital SmartQuote and
SmartClaim propositions. We are actively
discussing a number of new opportunities
including the very latest in Insurtech.

Continuing digital innovation
Our SmartQuote solution, using technology
and big data for producing household
insurance quotes in approximately ninety
seconds after asking only five questions,
is being used in our direct and distribution
partner channels. This has created a strong
pipeline of opportunities, including the recent
win with The Co-operative Bank.

We expanded our award-winning SmartClaim
system which makes the claim filing process
easy and fast for customers, leading to an
Ease Score of around 80% in the most recent
analysis. SmartClaim has reduced claims
processing times resulting in increased
operational efficiency and improved fraud
detection. We’re delighted that Legal &
General’s SmartClaim was the winner of the
Insurance Times Claims Technology Solution
of the Year award in May 2018.

We were also awarded Home Insurance
Provider of the year at the 2018 Consumer
Moneyfacts Awards, a further endorsement
of our digital and customer led proposition.

Understanding the risks
In LGI, our exposure to
mortality and morbidity risk
mostly arises in our UK
Group Protection and US
Term Insurance businesses,
where the risks for us are
the epidemic and poor
underwriting. We seek to
reinsure our catastrophe
risks and closely manage our
underwriting processes to
minimise the risk of error. Our
UK Retail Protection business
is extensively reinsured,
such that we retain low levels
of exposure to mortality and
morbidity risks. In GI we are
exposed to the risk of
weather events causing
flooding, freezing or wind
storm damage. We manage
our exposure by maintaining
a geographic spread of
business and reinsurance
for more extreme events.

Building our pet insurance business
The UK pet insurance sector has
continued to grow and is now worth
over £1 billion in gross written
premiums. This gives us significant
opportunity for further growth by
combining specialist products and
distribution expertise with Legal &
General’s multi-channel distribution
and broad customer base. We have
acquired UK-based pet insurance
provider Buddies Enterprises
Limited, who specialise in working
with around 1,500 breeders and
their customers.

Legal & General Group Plc Annual Report and Accounts 2018Strategic report Creating a
responsible culture

Our values and principles define
our belief that businesses must
behave responsibly in order to
be successful.

Responsibility and financial
success go together and cannot
exist independently of each other.
Our approach to inclusive
capitalism takes our belief in
responsible behaviour and extends
it into investing in communities
and cities to change people’s
lives for the better.

Our purpose is to improve the lives
of our customers, build a better
society for the long term and create
value for our shareholders.

Corporate and Social
Responsibility
Please visit:
legalandgeneralgroup.com/CSR

Legal & General Group Plc Annual Report and Accounts 2018

Strategic reportCreating a responsible culture

We have three behaviours at the
heart of our culture which inspire
us to act responsibly towards our
customers and everyone whose
lives we touch.

Straightforward
How we communicate
Building trust by doing what we say and saying
what we mean. We are fair and transparent,
open to feedback and always seek to
communicate in a fair and genuine way.

Collaborative
How we work together
Working together constructively; seeking out
originality in ideas and valuing the diversity
in our teams. We engage our networks and
stakeholders to shape our ideas and manage
the impact of our decisions.

Purposeful
How we deliver
Balancing performance with principles to
do what’s right for the business and our
customers. We work with pace and energy,
always taking ownership and demonstrating
excellent execution.

Making society
more resilient

We support the UN’s Sustainable
Development Goals on alleviating poverty
and reducing inequality by providing financial
safety nets for millions of people. We are
committed to improving social mobility and
have a responsibility to ensure that we
market our products and services to the
widest set of social and economic groups
as possible.

Creating new investments

for the future economy
We take action to develop mainstream
sustainable investment solutions. It’s
important that customers and shareholders
clearly understand the areas where we invest
their money. Many key emerging areas need
to be funded over the long term in an
economically viable, socially useful and
environmentally impactful way.

Corporate and Social Responsibility
Our culture means that we place corporate
and social responsibility at the heart of
our business.

There are four key areas we focus on for
corporate and social responsibility. We have
linked these four areas to the United Nations’
Sustainable Development Goals.

Leading the transition

to a low-carbon economy
Projected global temperature increases will
profoundly impact people’s lives. In order to
minimise the most damaging consequences,
global leaders have agreed to take action to
limit temperature increases to 1.5°C to 2°C
above pre-industrial levels. Our strength as an
investor means we can influence companies
and people to adopt more sustainable
methods of generating and consuming
energy, in favour of low-carbon alternatives.

Running our business
to a higher standard

We focus on understanding and measuring our
culture, using a range of metrics and actively
managing a programme of initiatives in each
business area. This ensures we embed a positive
culture, based on our business principles and
behaviours which celebrates our successes
and recognises individual contributions. We can
also address areas for improvement, strengthen
corporate governance and sustainability
policies, and ensure our people embrace
diversity and inclusion.

Legal & General Group Plc Annual Report and Accounts 2018

Strategic report Strategic report

TCFD Recommendations

Governance

As a truly long-term investor, it’s essential for our business to monitor and respond to issues like climate
change. Supporting the transition to a low-carbon economy has been one of the group’s four strategic
priorities since 2017. Our Board reviews progress against this strategy and targets annually. Overall
responsibility for climate change and environmental performance is held by the Group CEO, Nigel Wilson.

Consideration of group market risk (including the risk of climate change) is the responsibility of the
Group CFO, Jeff Davies. Jeff is also the TCFD Sponsor on behalf of the Board. He has established the
Group Carbon Investment Steering Committee, bringing together members across three of our
governance committees. Reporting directly to the Group Board, Jeff ensures that TCFD activities are
co-ordinated across all group businesses.

Strategy

We strongly support the aim of the Paris Agreement of limiting global temperatures to well below 2°C
above pre-industrial levels.

Risk management

We support this objective, firstly, through the positioning of our own investments. We have set a
strategy for decarbonising our balance sheet traded assets, moving away from high-carbon
investments and into low carbon. We recognise the opportunity presented by the energy transition and
are funding developers of clean energy solutions with potential to be disruptive on a global scale.

Secondly, LGIM is a major global institutional investor and has established a climate engagement
programme aimed at some of the world’s largest companies: ‘the Climate Impact Pledge’, leading to
voting and investment decisions. Drawing on this expertise in working with companies, LGIM has also
been developing low-carbon investment products in the Future World range. Designed with
mainstream investors in mind, we believe the funds can help accelerate the low-carbon transition.
Covering different asset classes and strategies, the funds have already seen significant capital
committed from group level.

More details on these complementary approaches can be found in the two TCFD reports to be issued
alongside the 2018 accounts, one identifying group strategy and the other focussing on LGIM’s asset
management strategy.

Our formal framework for risk management policies sets out approaches to managing different types of
risks and defines the minimal control standard over the short, medium and long term. More specifically,
we see climate change as posing two types of risk.

First, physical risks, driven by extreme weather intensifying. Consideration of some issues such as the
exposure of real estate assets to flooding is already integrated into our investment process. However,
it is currently difficult to model physical risk for all our individual holdings, as uncertainty grows with
time. In line with improvements in climate science, we have been working with external consultants and
data providers to understand more about the implications of different scenarios of warming.

Second, transition risks, as changes in policy, technology and consumer preferences affect the value
of (high-carbon) investments. While its speed is uncertain, we recognise the transition is likely to be
far-reaching. The power sector is already witnessing disruptive change from clean energy. We want to be
able to anticipate how other sectors can meet the challenge of decarbonisation. For example, we have
been conducting modelling on what it means for our property portfolio to achieve carbon neutrality.

We’re expanding our risk management toolkit by integrating data on carbon emissions, fossil fuel
reserves and green revenues into ESG metrics, and by conducting long-term thematic analysis around
the energy transition.

On the flip side of risk, we recognise the opportunities of the energy transition. We have been making
direct investments into:

• clean energy generation (renewables, batteries and heat pumps, smart grids)

• transport and mobility (electric vehicles and supporting charge infrastructure)

• housing (moving towards zero carbon homes)

Metrics and Targets

There are four key areas where we capture information as a business to influence our strategy and
policies:

1. Energy usage and carbon emissions. By 2020 we want to ‘reduce carbon emissions per policy by

20% based on 2013 baseline’.

2. Use of natural resources within our commercial property portfolio. We set reduction targets and

monitor through our managing agents.

3. Our own balance sheet investments. We are committed as a long-term investor in UK renewables
and have a target to increase investments into UK energy infrastructure that support the transition
to a low-carbon economy over the next three years.

4. Our influence as an investor, working with companies and policymakers to drive the agenda and

provide sustainable investment solutions.

We have committed to develop ‘science based targets’ to ensure we reduce our carbon emissions
in line with a 2°C world.

Our mandatory carbon and headline data is included on page 236 of this report. Measuring our
commitment to society outlines our key carbon emission reduction targets and performance

Legal & General Group Plc Annual Report and Accounts 2018Creating a responsible culture

Leading the transition

to a low-carbon economy

Climate change action
We encourage public policies, investment
practices and corporate behaviour that address
the long-term risks associated with the impact
of climate change.

Task Force on Climate-related
Financial Disclosures
As a signatory to the Task Force on Climate-
related Financial Disclosures (TCFD) through
LGIM, we’re fully committed to disclosing our
approach to the risks and opportunities
presented by climate change.

We have produced two TCFD reports. Firstly
a consideration of climate change asset risk
to the group’s balance sheet and secondly
LGIM’s report on managing climate-related
risks for external customers.

Climate change-related activities
We were ranked 4th globally among the
world’s largest insurers for their approach to
climate risk and opportunity, by the Asset
Owners Disclosure Project (AODP).

• We utilised our carbon footprint data to

develop a strategy to shape our investments
below a 2°C pathway.

• LGIM continued to assess and engage with

organisations to encourage climate
resilience. Certain companies which failed to
meet minimum thresholds were placed on a
‘no investment’ list. In 2018, eight global
companies were removed.

• In 2018, our total greenhouse gas emissions
increased from approximately 45,000 tonnes
of CO2 emissions (tCO2e) to around 49,000
tCO2e, as a direct result of our growing
housing business; for example our newly
acquired CALA Homes business emissions
equal 6,600 tCO2e.

• LGIM’s Real Assets team continued with
their industry leading ESG performance.
For the sixth year in a row, all 14 applicable
property funds received GRESB Green
Stars, with three funds receiving the
highest accolade of five Green Stars.

The LGIM TCFD report can
be found on our website
lgim.com/uk/en/capabilities/
corporate-governance

Running our business
to a higher standard

Our vision for diversity and inclusion
An inclusive culture is key to attracting,
retaining and enabling all our people to thrive.
It’s important to us that our workforce reflects
our customers and the communities they live
in, so we’re committed to creating a more
diverse and gender-balanced organisation for
the benefit of our people, the businesses and
the communities we work with.

Our focus on gender diversity initiatives has
resulted in a positive impact on the recruitment
and promotion of women. In 2018, 44% of all
new starters in middle and senior management
were women. We’ll continue our efforts to
ensure women are represented at all levels in
our business and take a broader approach to
make Legal & General a place where talented
people can thrive, whatever their identity
or background.

When employees feel included and have
a sense of belonging, they perform better
for our customers. 59% of our people feel
that they belong; that’s a solid foundation on
which to improve. We will continue investing
in development and wellbeing to create an
inclusive culture, where we embrace and
leverage differences and all our people are
engaged and empowered to meet their goals.

We have focused on making changes to how
we recruit, raising awareness with debate and
dialogue, creating a gender diverse talent
pipeline and creating an agile and flexible
work environment.

We’ve made systemic changes to our
recruitment processes that will help us tap
into talent pools we may not have previously
reached. Focusing on recruitment and
ensuring that we have diverse shortlists for
senior roles has resulted in an increase in
women joiners. We have also invested in
more training for our managers to help them
build inclusive team environments.

We know that we must do more to retain
and engage our female talent. The proportion
of leavers who were women fell from 51%
in 2017 to 48% in 2018. Last year, we
developed our Career Returners framework,
a programme of enhanced development
support for employees coming back into the
workplace in permanent roles. We recruited
four career returners in 2018 and are
expanding the programme in 2019.

• We continued to invest in renewables such
as onshore windfarms, solar photovoltaics
and digital software solutions for the energy
grid. We have total commitments or direct
investments in clean energy of around
£260 million.

• We took a strong position on integrating

climate strategy into the investment process
and product range across all assets and
clients with a particular focus on company
engagement and voting. LGIM’s Corporate
Governance team received the 2018 ICSA
award for Best Investor Engagement for
the fourth year in a row.

• We took steps to measure our own
carbon footprint. In 2018 the carbon
emission intensity of the balance sheet
was 370.22 tonnes CO2e/£1m invested
(down 24% from the previous year). When
applied to the £69 billion of equity, bonds
and property components of the investment
portfolio to which shareholders are directly
exposed, this gives a carbon footprint of
26 million tonnes of CO2 emissions.

• We have deployed more than £1 billion
in renewable energy infrastructure.
We expect to continue deploying into
renewable energy and power grid
infrastructure as our infrastructure product
offering grows. We’re also developing an
ESG scorecard that would assess the
climate change impacts of all potential
infrastructure investments.

In 2019 we will:

• Increase our investment into new

technologies, including renewable energy.

• Roll out standardised and focused

carbon-related clauses in our Investment
Manager agreements, both with LGIM
and external managers.

• Agree a carbon trajectory and associated

carbon-related targets with the Group Board,
allocating to business divisions.

• Continue to engage with LGIM Future

World initiatives.

• Continue to consider climate risk within our

Solvency II-compliant Internal Model.

• Utilise the SBTi guidance, when available,
to set science based targets to help us to
bring our emissions in line with a 2°C world.

• Establish how homebuilding has changed

our carbon reduction strategy. We will now
work with our new and fledgling housing
businesses to set up governance and
reporting structures, with the aim to
minimise carbon from the housing stock.
We aim to provide further disclosure
around housing emissions.

Legal & General Group Plc Annual Report and Accounts 2018Strategic report Strategic report

We continue to work with leading diversity
campaigns to help us achieve our goals,
including the 30% Club, the Diversity Project
and the Women in Finance Charter. We have
some way to go to reach our Women in
Finance target of 40% female representation
in senior roles and our aspiration of gender
balance at all levels, but our actions are now
making a difference.

Beyond gender
We’ve taken steps to ensure that we are
creating a positive, flexible and inclusive work
environment for everyone, not just women.

We have introduced agile working, providing
many employees with more flexible working
arrangements. Improvements in technology
are enabling our employees to be more agile
in terms of where they work, with many no
longer fixed to one office location.

We have strong family-friendly policies
including a parental leave coaching programme
and emergency back-up care. Our people can
access nannies, childminders, nurseries,
holiday clubs, or eldercare specialists at short
notice – with two days a year paid for by us.

Our L&GBT network has successfully
partnered with LGBT Great to raise awareness
of LGBT+ inclusion in the investment
management industry. Their success has
resulted in awards for both the network chair
and its business sponsor.

In 2018 we provided mentoring and
sponsorship programmes to our female,
LGBT+ and ethnic minority talent, focusing
on career development needs. Over 25 of
our pipeline talent took part.

We responded to the BEIS Ethnicity Pay Gap
consultation, welcoming the greater
transparency on pay, recognition and
diversity this brings.

Our focus in 2019
We’re making progress, to move towards a
more inclusive environment. In 2019 we aim to
weave inclusion into everything we do, and all
our people processes, so that employees feel
included, engaged and valued at every step.

The actions we are taking to increase gender
diversity in our organisation will help us widen
the talent pool from which we recruit, remove
barriers to progression and create an inclusive
culture where anyone, whatever their
background or gender, can thrive.

We are pleased that the actions we outlined
above are having an impact and that our gender
pay gap has reduced over the last 12 months.
However, they are part of a long-term plan and
we acknowledge there is a long way to go and
we will continue to take action to close our
gender pay gap (for more information on our
action plan please see the full Gender Pay Gap
narrative on our website).

Gender Pay Gap

2018
Mean

2018
Median

2017
Mean

2017
Median

Hourly Pay

27.6% 29.0% 30.5% 31.6%

Bonus

61.0% 49.1% 65.6% 51.9%

These percentages show the differences
between pay and bonuses paid to men
and women.

Employee engagement
We have a positive culture that we’re proud of,
but we want to evolve into a more inclusive
organisation, where all our people can thrive.
We want to give our people a voice and ensure
they are heard. Advances in digital technology
provide us with a unique opportunity to
become healthier, smarter and more efficient
at responding to our people.

In 2018, we moved to a new methodology
for measuring employee engagement from
a traditional annual survey to more frequent
digital listening. It’s easier for our people to
use, and managers receive real-time
information and focused action plans through
an interactive personalised dashboard. They
can make the right decisions based on the
needs of their teams. It’s already delivered
some important strategic insights and we
believe it will create a better dialogue.

We will continue widening the talent pool from
which we recruit and challenging our hiring
managers to think differently about how they
bring talent into our business.

A priority in 2019 is to ensure leaders
understand what we expect of them and what
it means to lead inclusively. We will review our
leadership behaviours and our leadership
development programmes and interventions.
Ensuring leaders are equipped with the right
skills to create inclusive team environments
and get the benefits from diversity.

Gender diversity

Board Directors

Executive Committee

Managers

All employees1

Female

Male

1,102

3,867

1,861

4,114

1. Excludes employees of CALA Homes.

The above diversity figures are as at
31 December 2018.

Actions to close our gender pay gap
In 2018, we saw a 2.6% reduction in our
gender pay gap. Gender pay gap data helps us
highlight the problem, understand its causes
and take action to improve it across our UK
businesses. It is just one part of our efforts
to improve our culture and drive inclusion.

Like many organisations, our gender pay gap
is driven by having more men than women
in senior positions across our businesses.
Our organisation is evolving, but we face
some sector-specific challenges. We know
the direction we need to be moving in, and
we’ve developed a sustainable strategy to
help us get there. Our action plan to improve
gender diversity, and diversity and inclusion
more broadly, is focused on three areas:

• Attracting a more diverse pool of talented

people to join our organisation

• Focusing on our employee experience

so people feel like they belong

• Enabling our talent to realise their potential

whatever their role or background.

Gender Pay Gap report
Our complete report will appear
on our website

Please visit:
legalandgeneralgroup.com/
media-centre/reports

Legal & General Group Plc Annual Report and Accounts 2018
Creating a responsible culture

Employee wellbeing
It’s important that our employees are
emotionally and physically well to perform at
their best. We’re committed to our employees’
wellbeing and aim to provide the right support
to enable this. We measure engagement and
wellbeing on a regular basis, through tailored
local wellness activities and communications,
provision of a suite of support to employees
and their managers, including our Employee
Assistance Programme, and mental wellbeing
and resilience training. Our wide network of
mental health first aiders supports colleagues
across our locations and we now have 159
trained employees. Our successful ‘Not a Red
Card’ mental health campaign encourages
more conversations in the workplace about
mental health, and we continue to work closely
with Not Time to Change and City Health
Mental Alliance to drive good mental health
practices in the workplace.

Learning and development
To support our long-term strategy, we’re
identifying the skills and capabilities that we
need today, tomorrow and for years to come.
Our people can take responsibility for their
own career development, with relevant, easy
to access and tailored support from us. Many
of our training programmes are available online
allowing our people to learn anywhere and
anytime. In 2018, we delivered programmes
around digital skills to encourage new ways
of working for all of our people. We rolled
out comprehensive training ahead of the
implementation of the FCA’s Senior Managers
and Certification Regime. We also committed
to mental health first aid training and
unconscious bias sessions, helping us to
foster the behaviours that make Legal &
General a place where everyone can thrive.

Modern Slavery
We continue to increase the depth and
breadth of our knowledge and work on
addressing modern slavery risk in our supply
chain. Through deepening our understanding
of the potential risks, we now use indicators
as well as traditional supplier management
techniques to help ensure we have the most
effective responses to that risk. Key areas of
focus for 2019 are collaborations with other
organisations to do more to eradicate modern
slavery and focus on our indicators, scorecards
and supplier-provided data to better assess
business risk within supply chains. In 2019,
we will deploy new procurement and supplier
management tools which will also help provide
more transparent data on suppliers and provide
more holistic and faster insight into our wider
supply chains performance and risks.

44%

of new starters in middle
and senior management
were women

Human Rights
Our responsibility is to respect all human
rights. Our proactive approach reflects our
ethical commitment and helps to establish
and maintain successful relationships with
all stakeholders. Our actions encompass all
of our stakeholders in all group businesses.

Anti bribery and corruption
We will not tolerate any person acting on
behalf of the company participating in any
form of corrupt practice and we will not either
accept or offer bribes. Our financial crime risk
policy applies across the group and seeks to
ensure that controls are put in place to prevent
such activity including the control and approval
of giving and receiving gifts and hospitality.

The Bank of Mum and Dad
The need for the Bank of Mum and
Dad illustrates intergenerational
unfairness. It’s a major force in the
housing market, with 27% of buyers
receiving help from friends or
family, up 25% from 2017. The
volume of transactions depending
on BoMaD funding keeps on
growing, as parents find it harder
to provide money for a house
purchase deposit. This is neither a
positive trend, or a sustainable one.
We need to take action and open up
affordability for all. We’re making a
positive difference in the supply of
affordable residential housing as
well as the towns and cities in
which the homes are built.

Legal & General Group Plc Annual Report and Accounts 2018Strategic report Strategic report

Making society
more resilient

How we help our local communities
Our employees give their time to volunteering
and fundraising. By giving employees at all
levels a new purpose we are able to help
provide positive differences towards mental
health and wellbeing.

Employees and volunteering
We have a long history of supporting charities
and good causes. By listening to our
employees, we explore new and innovative
ways we can support communities and
charities close to their hearts. Employees
volunteered their time and donated to charities
through our payroll giving scheme.

In 2018, the cash contributions made by our
employees, together with the benefit of
cash-matching, volunteering and our operational
costs amounted to £3.45 million in the UK and
£0.97 million in the US, making a groupwide
total of £4.4 million.

Financial education
We have a long-term commitment to financial
education, with three different schemes:

• Every Day Money: provides real life choices
to 14-16 year-olds, getting them ready for
the world of work. We originally set out to
reach over 200 teachers and 3,000 pupils,
with an aim to train teachers and provide
resources for them to continue to educate
their pupils. We succeeded in reaching
nearly 4,000 pupils and over 130 teachers.

• RedSTART: a charity that provides financial
education training to children. We help host
and run educational training days for primary
school children at our London offices, with
a goal to train one million school children
in personal finance by 2025.

• KickStart Money: a ground-breaking financial
education programme for children delivered
by the MyBank charity. Over the next three
years the target is to provide around 18,000
primary school children between the ages
of seven and 11 with financial education.
The aim is to influence attitudes towards
managing money at an early age.

4,000

school students reached
by our financial
education programme.

Investing in small businesses
In addition to SME Finance provided by
Legal & General Capital, our SE-Assist fund
continues to grow in supporting early stage
social enterprises. We have over £800,000
out on loan in Wales, Croydon and Sussex
to social enterprises. This fund provided
nearly £172,000 in new loans to seven
social enterprises in 2018. We also invested
£50,000 into crowd funding in 2018.

Creating new investments

for the future economy

The UN’s Sustainable Development Goals
We have a responsibility to help achieve
the aims of the United Nations Sustainable
Development Goals (SDGs). We can help
end poverty, protect the planet and ensure
prosperity for all. The SDGs guide us, our
customers, our employees and society
towards a brighter, sustainable future. We
have analysed which SDGs we can focus on
that align closely with our strategic priorities.

We support all 17 of the Sustainable
Development Goals. These include specific
goals which help create better lives for people
in our communities by investing in
infrastructure and future cities.

Further details of our activities can be found
in the Investing and Annuities section on
pages 18 and 19.

UN’s sustainable
development goals
We have produced a film about our
activities which support the UN’s
sustainable development goals.

Please visit: youtube.com/
watch?v=qtpcUTQx4QI

Legal & General Group Plc Annual Report and Accounts 2018Creating a responsible culture

Our commitment
to action on
climate change

In the US in 2018,
LGIM opposed more
resolutions on
executive pay and
supported more
resolutions on climate
change disclosure
than any of the world’s
ten largest asset
managers.

As a responsible investor, the integration of
environmental, social and governance (ESG)
data into our investment process deepens.
In 2018, we have developed ESG metrics for
thousands of global companies. The new
Future World funds launched throughout the
year use the metrics to allocate capital across
different asset classes and strategies.

We also continue our public policy advocacy,
in order to have impact not just at individual
companies, but across entire markets. From
strengthening the fiduciary duty of investors
in the UK and EU, to upgrading corporate
governance and stewardship codes in Japan,
France and Germany, LGIM has been working
with policy-makers and regulators to raise the
bar. In 2018, we have participated in around
20 policy consultations around the world.
Our ESG metrics are aligned with our
engagement and voting across LGIM, in order
to speak with one clear voice in the market.
We minimise abstentions worldwide, so our
clients can be sure that we are working and
engaging on their behalf.

Focus on corporate governance –
active ownership
As one of the largest asset managers in the
world, we want the markets we invest in to do
as well as they can. This is why we are active
owners, using our size and influence to bring
about real, positive change.

In 2018, we have continued to engage with
regulators, companies and other investors
around the issues that matter to our clients.
Do companies have the right skills and the
diversity of thought needed to succeed in the
future? Do they have a strategy to prepare for
the low-carbon economy? As a long-term
investor, we will challenge companies
constructively to show they deliver value.

To view some significant outcomes that we
contributed to, please see LGIM’s annual
active ownership report:

• Oil major Shell, adopting industry-leading
emissions reductions targets linked to pay

• Consumer goods giant Unilever, abandoning

its plans to move headquarters

Our voting can be a powerful tool to hold
companies to account. An independent report
found that in the US in 2018, LGIM opposed
more resolutions on executive pay and
supported more resolutions on climate change
disclosure than any of the world’s ten largest
asset managers.

Legal & General Group Plc Annual Report and Accounts 2018Strategic report Group Chief Financial
Officer’s Q&A

Jeff Davies became Group Chief Financial Officer in
March 2017 and has already helped deliver financial success.

Watch the video
legalandgeneralgroup.com/
investors/reporting-centre

Jeff Davies
Group Chief Financial Officer

Guide to symbols used in
these financial results

Alternative performance
measure (APM)

Key measure in the
remuneration of
executives

Jeff talks about what’s driven our
performance in 2018 and explains
why he believes that the group’s
future prospects should continue
to be positive for investors.

You have delivered another set
of strong results despite volatile

market conditions. How sustainable
is this going forward?

2018 was a great year for us,
demonstrating our consistent success

in execution and the resilience of our business
model to market volatility. We grew operating
profit by 10% to £1.9bn, before a mortality
reserve release which brought the total figure
to £2.3bn, an increase of 14%. We also
delivered an IFRS return on equity of 22.7%
and Solvency II operational surplus generation
of £1.4bn.

Our success is the result of aligning our
business to long-term growth drivers,
which will persist regardless of short and
medium-term political and market climates.

Two interesting examples are:

(1) our focus on ageing populations has
enabled us to thrive in the fast growing
pension risk transfer (PRT) market. In 2018
we were the market leader in UK PRT, where
market volumes surpassed £20bn for the first
time, and industry experts estimate there
could be more than £30bn of premiums
written each year going forward. The US
market potential is even greater and we
are building our capabilities to capture
this opportunity.

(2) Welfare reform has meant that individuals
must do more to plan for their own retirements
and we are helping them save through
Personal Investing and defined contribution
(DC) pensions. The UK DC market represents

a £1 trillion opportunity over the coming
decade, and we are currently a market leader
with a share of approximately 18%.

The Pension Risk Transfer market
had a significant year in 2018. How

do you manage pressure on new business
margins and Solvency II capital whilst
maintaining your leading market share?

Our unique business model makes us
more resilient to margin compression
in UK PRT. By being a truly universal player,
operating in four geographies and across the
deal size spectrum in the UK, we are able to
allocate capital in those markets offering the
best margins. Additionally, by having a large
annuity portfolio and superior direct
investment sourcing capabilities, we have
the optionality to optimise returns on our
existing book when PRT pricing does not
meet our return targets.

High quality direct investments are a vital
ingredient to annuity pricing, and one where
competition is emerging for assets. Our ability
to self-manufacture these assets through LGC
is a unique component of our business model
and one that gives us a competitive edge for
these sought after direct investments.

What is operational surplus
generation and how does it

impact your business plans?

Solvency II operational surplus
generation is the surplus capital
emerging from the total business we have
written up to the start of the year.

Our operational surplus generation has
increased by 14%. In 2018, we generated
£1.4 billion of operational surplus and we
expect this to continue growing in line with
our business.

Our growing operational surplus generation
puts us in a strong position to continue
expanding the business and offers us
optionality for new business opportunities.

Can you please describe how your
asset portfolio has evolved over
time and the security these changes have
brought to policyholders and investors?

Our asset portfolio exists to serve two
very important purposes: firstly, to pay

policyholders and secondly to generate
additional returns for shareholders. We have
always been very focused on the quality of
our portfolio, however, our sophistication has
increased over time, bringing greater security
to policyholders and shareholders alike.

Since the financial crisis in 2008, we have
focused on diversifying our asset portfolio.
For instance, we have reduced our banks
exposure in the LGR bond portfolio from
around 20% to 5% and we are diversified
across sectors and geographies. We have
avoided more vulnerable asset classes, such
as retail stores and peripheral sovereigns.

We have further diversified our portfolio by
investing in direct investments. These assets
can provide longer dated cash flows, additional
security, and higher spreads than a similar
publically traded asset.

We have also mitigated market and spread risk
from our portfolio. By structuring our portfolio
such that we can hold assets to maturity we
do not need to take market risk by buying or
selling assets in the future. This means
we only lose money on assets if there is
an actual default.

These changes to our asset portfolio have
reduced volatility, improved credit quality,
and enhanced returns for shareholders.

Strategic reportLegal & General Group Plc Annual Report and Accounts 2018Group Chief Financial Officer Q&A

Adjusted profit before tax (PBT)
attributable to equity holders

£2,128m

(2017: £2,090m)

KPI purpose: adjusted PBT
attributable to equity holders
measures the actual distributable
earnings before tax attributable to
shareholders of the group, including
discontinued operations and
reflecting actual returns on
investments, net of investment in
future group wide capabilities and
new business ventures.

0
9
0
,
2

8
2
1
,
2

(£m)

2
8
5
,
1

5
5
3
,
1

8
3
2
,
1

2014 2015 2016 2017 2018

Return on equity (ROE)

(%)

22.7%

(2017: 25.6%)

KPI purpose: ROE provides a link
between performance and balance
sheet management and ensures an
appropriate balance is maintained
between the two.

6
.
5
72
.
2
2

8
.
8
1

9
.
6
1

3
.
7
1

2014 2015 2016 2017 2018

Earnings per share (EPS)

(pence)

30.8p

(2017: 31.9p)

KPI purpose: EPS demonstrates
the link between performance
and shareholder return.

Full year dividend

16.42p

(2017: 15.35p)

KPI purpose: Full year dividend
demonstrates the level of
distribution to shareholders.

9
.
1
3

8
.
0
3

2
.
1
2

2
.
8
1

7
.
6
1

2014 2015 2016 2017 2018

(pence)

5
3
.
4
1

0
4
.
3
1

5
2
.
1
1

2
4
.
6
1

5
3
.
5
1

2014 2015 2016 2017 2018

Adjusted profit before tax
attributable to equity holders
increased marginally by 2% over
2018. 2018 was a record year for
LGR new business, in particular
UK PRT, where we wrote £8.4 billion
in new deals and the backbook
performed strongly. In H2 2018
we reviewed our longevity
improvement assumptions and
adopted an adjusted version of the
CMI 2016 mortality tables for LGR’s
annuity book, resulting in a reserve
release of £433 million (2017:
£332 million). Profit before tax was
also impacted by equity market
performance resulting in losses in
the LGC traded assets portfolio.

The group continues to
demonstrate careful use of capital
across all divisions, with return on
equity of 22.7%. The decrease is
primarily driven by a reduction in
profit after tax from £1,902 million
in 2017 to £1,808 million in 2018,
mainly due to a one-off tax benefit
resulting from changes to the US
tax regime which benefitted 2017.

EPS decreased slightly by 3%
(1.1 pence), driven by a 5% decrease
in the group profit after tax (down
from £1,902 million in 2017 to
£1,808 million in 2018). Excluding
the impact of base mortality
reserve releases and a one-off tax
benefit in 2017, EPS increased from
23.1 pence to 24.7 pence.

In line with our progressive
dividend policy reflecting the
group’s expected medium-term
underlying business growth,
the Board has recommended an
increase of 7% in the full year to
16.42 pence (2017: 15.35 pence).
The cost of the full year dividend
is £978 million (2017: £914 million).
Our 2018 full year dividend was
covered by Net Release from
Operations 1.5 times and by
dividends remitted from
subsidiaries 1.3 times.

Legal & General Group Plc Annual Report and Accounts 2018Strategic report Strategic report

You have talked about the
importance of technology to the

insurance and asset management
industries. Can you outline your plans,
including expected benefits and costs?

Technology is absolutely essential
to the long-term success of our
business. Improvements in digital tools over
the past several years have improved our
speed to market, customer service and cost
management. We will rely on technology to
allow us to deliver our growth ambitions.

Across Legal & General, businesses have
looked to convert labour intensive
administrative tasks into efficient algorithms,
or ‘robots’. We have further relied on big data
to support our product pricing, design and
customer experience across the group.

We have had a number of wins I would like
to highlight:

1. 81% of our UK retail protection customers

get an immediate online point of sale decision,
with no human intervention in the process.

2. Digitisation and automation advancements in

LGIM are continuing as we explore
opportunities for innovative data-driven client
servicing and compliance support.

3. 10 robots are freeing up the capacity of 12.5
full time staff in LGIM and Group Finance for

Solvency II surplus and
coverage (shareholder basis)*

£6.9bn

(2017: £6.9bn)

188%

(2017: 189%)

KPI purpose: Solvency II surplus
and coverage are metrics used for
measuring and reporting of the risk
profile and capital adequacy of
the group.

Total shareholder return
(TSR)

(2017: 29%)

KPI purpose: TSR measures total
return to shareholders, including
dividends and share price
movements over time.

more value-add activity, with further
capability to be added throughout 2019.

This is the second year in a row you
have made a sizeable mortality
release. What has happened this year and
what can investors expect going forward?

In recent years we have seen a
continued slowing in the improvement in

longevity, so although people are living longer
overall, they are not living quite as long as we
had assumed.

This slowdown has persisted for several years
and while we maintain our cautious view of
longevity, we believe we should recognise
this trend in our assumptions.

We have increased our projection of the
number of deaths in each year, therefore
reducing the required mortality reserve and
resulting in a release of this reserve. In 2018,
we released £433 million of mortality reserves
by reducing the allowance for future
improvements in the medium term. This was
based on our analysis of 2016 UK population
mortality data. Looking forward, we see that
the data from 2017 and 2018 continue to show
the trend in a slowdown in longevity
improvements. This means further releases
may be expected when we implement the
impact of this data in 2019 and 2020.

Short-term influences
In addition to the six long-term growth
drivers discussed on pages 6 and 7, there
is a number of short-term influences
which affect our business:

Brexit
Our customer base is very largely in the
UK, US and Asia, which reduces our
exposure to any negative trading effects
of Brexit. However, we have established a
new business in Dublin to support LGIM’s
European institutional investment clients.

Geopolitical environment
The political landscape, both globally and
in the UK, remains relatively uncertain.
We believe our strategy based upon
global growth drivers is relevant across
the political spectrum and will remain
resilient to geopolitical events. However,
we will continue to monitor events closely.

Economic outlook
The global economic outlook is looking
less positive than in 2018. The start of this
year has seen weak economic growth in
both the UK and some major Eurozone
countries and the US/China trade dispute
has affected confidence. However, China’s
economic stimulus appears to be gaining
traction and a positive resolution of
political differences can boost confidence.

The group’s capital
position remains strong
with a £6.9 billion Solvency II
surplus (2017: £6.9 billion) and a
188% coverage ratio (2017: 189%)
on a ‘shareholder view’ basis.

When stated on a pro-forma basis
the group’s coverage ratio is 181%**
(2017: 181%).

* Represents Solvency II surplus and
coverage on a ‘shareholder view‘
basis. See page 192 for more details

** This includes the SCR attributable

to our with profit fund of £0.5 billion
and final salary pension schemes
of £0.3 billion, in both the group’s
Own Funds and the SCR

We delivered a TSR of 3%
over a three-year period (as at
31 December 2018), outperforming
the FTSE All-Share Life Insurance
Sector (TSR of -3%) in a relatively
volatile stock market during 2018.

(£bn)

7
.
5

9
.
6

171%

189%

188%

2016

2017

2018

(%)

4
8
1

4
1
1

9
2

2014 2015 2016 2017 2018

Legal & General Group Plc Annual Report and Accounts 2018Tax matters

2018 tax charge
Our total tax charge of £210m reduced in
2018 (2017: £377m), reflecting the impact of
falling equity and bond markets on the taxation
of our investment returns which also lead to
a reduction in our net deferred tax liabilities.
Our income tax paid for the year of £504m
(2017: £497m) reflects the continuing
underlying profitability of our businesses,
the timing of cash tax payments and the
impact of withholding taxes.

The group’s 2018 effective tax rate (ETR) for
our equity holders of 15% is below the 19%
UK standard rate of tax. Various things affect
our ETR including: the timing of when profits
are taxed and when they are booked in the
accounts (a lower 17% UK rate applies in some
cases); the way that certain investment returns
are taxed in the UK; changes to earlier years’
estimates of tax liabilities; and the different
tax rates applied to profits in the countries in
which we operate. The current rates are:
UK – 19%, US – 21%, and Bermuda – 0%.

2018 tax drivers
Our lower ETR in 2018 is mainly due to
adjustments made to our prior year tax
estimates and as a result of the low taxes
suffered by our Bermudan reinsurance hub.

During the year we concluded the analysis
of a number of technical issues and agreed
a number of matters with HMRC. As a result
we have made adjustments to prior years’ tax
estimates, including the release of some
provisions for uncertainty.

Bermuda is a significant reinsurance market
with a robust, Solvency II equivalent regulatory
framework and a well-established regulator.
Our global reinsurance hub was set up for
commercial reasons, predominantly regulatory
capital flexibility, enabling us to write more
pension risk transfer business in a capital
efficient way in the UK, US and new markets.
This in turn has allowed us to invest more
money in housing and other infrastructure
projects in the UK to support new business.

Our approach to tax
We aim for our tax affairs to be sustainable
in the long term, well governed, fair and
transparent. Our tax strategy and our approach
to tax risk management shape how we manage
our tax affairs, and guides what we will and
won’t do. Our tax strategy, which can be found
at legalandgeneralgroup.com/csr/data-centre/
tax-data/, applies to all of our group businesses
and shapes our approach to tax in our role as a
significant investor in the UK and in other
companies.

£1,265m

In 2018 our total tax contribution was
£1,265 million of which 94% arose in
our UK businesses and 6% in our
overseas businesses

Grace Stevens
Chief Tax Officer

Total tax contribution
Our total tax contribution is the amount of tax that Legal & General pays together with
the amount of tax that we collect on behalf of our employees, suppliers, customers and
policy holders.

Total taxes paid

Total taxes collected

Taxes paid
£700m

Taxes
collected
£565m

UK proﬁt taxes paid: £359m

UK PAYE deducted from policyholders: £389m

Withholding taxes suffered in the UK: £120m

UK property and other taxes collected: £9m

UK property and other taxes paid: £54m

UK VAT and premium tax collected: £1m

UK irrecoverable VAT and premium taxes: £69m

UK payroll taxes paid: £50m

Overseas proﬁt taxes paid: £25m

Other overseas taxes paid: £23m

UK payroll taxes collected: £139m

Overseas taxes collected: £27m

Reconciliation of total tax charge to tax paid
The group’s total tax charge disclosed in this annual report can be reconciled to the total
profit taxes paid by the group as follows:

(£m)
600

500

400

300

200

210

100

2018 total
tax charge

159

504

(52)

128

Add: deferred
tax credited
to income
statement and
other accounting
adjustments

Add: Net
corporate
taxes paid in
2018, charged
to income
statement in
earlier years

Less: Net
corporate
taxes charged
to income
statement in
2018, payable
in later years

Add:
Recoverable
witholding
treated as paid
in year

Total tax
paid per 2018
cash ﬂow
statement

Legal & General Group Plc Annual Report and Accounts 2018Strategic report Managing risk

Understanding the risks that we are exposed to and deploying
strategies to ensure residual exposures remain within
acceptable parameters is an integral part of our business.

Our risk management framework

Risk appetite

Risk taking
authorities

Risk policies

The group’s overall attitude to risk and the ranges and limits of acceptable
risk taking

The formal cascade of our risk appetite to managers, empowering them to
make decisions within clearly defined parameters

Our strategies for managing the risks in the environments in which we
operate, so as to ensure residual risk exposures are those within appetite

Risk identification
and assessment

Tools that help managers identify and evaluate the risks to which we may
be exposed so that they can be managed in line with our risk policies

Risk management
information

How we report and review ongoing and emerging risks, and assess actual
risk positions relative to the risk targets and limits that we set

Risk oversight

Review and challenge, by the group and divisional Chief Risk Officer teams,
of how we identify and manage risk

Risk committees

Our structure of group level committees oversees the management of risks
and challenges how the risk framework is working. The role of the Group
Risk Committee is set out on pages 70 and 71

Culture and reward

Performance measures that focus on the delivery of effective risk
management, business and customer strategy, and culture

Rewarding the right behaviours
The Group’s Remuneration Committee in
its consideration of directors’ remuneration
receives a comprehensive report by the
Group Chief Risk Officer, assessing whether
executive directors have achieved objectives
whilst at the same time operating within
agreed risk appetite.

The objectives of the directors include a
specific risk management component within
the overall annual variable bonus scheme. The
criteria, if successfully delivered, contribute
positively to the group’s overall risk position,
focusing on the more significant risk exposures
for the group, and reward the right behaviours
in managing risk exposures.

We operate a three lines of defence risk
governance model.

Our operating businesses are our first line
of defence, responsible for risk taking within
the parameters of our risk appetite and
accountable for managing risks in line with
risk policies. The skills to assess and price
for risk form part of our first line business
management activity. For example, in our
pension risk transfer and annuities businesses
we have a deep understanding of longevity
risk and the science of life expectancy. LGIM,
as one of the world’s largest asset managers,
has extensive business expertise in managing
credit risk; and within our Insurance business,
as the UK’s largest provider of individual life
cover, we have extensive knowledge of
mortality and morbidity risks.

Our second line of defence is our risk
oversight function under the direction of our
Group Chief Risk Officer. The team of 150 risk
professionals provides our businesses with
expert advice and guidance on risk and capital
management, alongside ensuring risk taking
remains within acceptable parameters.

Our Group Internal Audit function is our
third line of defence, providing independent
assurance on the effectiveness of business
risk management and the overall operation
of our risk framework.

Simon Gadd
Group Chief Risk Officer

Overview
Our risk management framework
supports informed risk taking by
our businesses, setting out those
rewarded risks that we are prepared
to be exposed to and the risks that
we want to avoid, together with risk
limits and required standards of
internal control to ensure exposures
remain within our overall
risk appetite.

We seek to deeply embed the
necessary capabilities to assess
and price for those risks that we
believe offer sustainable returns
within each of our operating
businesses, as well as ensuring the
skill sets to closely manage those
risk factors which could otherwise
lead to unexpected outcomes.

Our straightforward, collaborative
and purposeful behaviours
underpin the operation of our risk
framework, providing a culture of
openness and transparency in how
we make decisions and manage
risks, and balancing performance
with principles to do what’s right for
the business and our customers.

Finding what you need online
Detailed information can be
found in our risk management
supplement.

Please visit:
legalandgeneralgroup.com/
investors/reporting-centre

Strategic reportLegal & General Group Plc Annual Report and Accounts 2018Managing risk

Our risk landscape
The risks that we are exposed to fall into
the broad categories of:

• Longevity, mortality, morbidity and
household insurance risks that are
transferred to us by the customers of
our pension risk transfer and annuities,
protection and general insurance businesses.
The period that customers continue their
policies is also important for profitability.

• Investment, credit and counterparty risks

from holding portfolios of assets to meet our
obligations to our customers and to deliver
returns to shareholders; and liquidity risks
from contingent events.

• Operational risks in respect of our business

processes and IT systems, as well as broader
regulatory and legislative risks that can arise
in the environments in which we operate.

Where our businesses directly engage in house
building and commercial property development,
we are also exposed to risks associated with
the management of construction projects,
including health and safety risks.

Our largest risk exposures are
credit and longevity
Our exposure to credit risk largely
arises in our portfolio of corporate
bonds and, where we provide
long-term funding, within our direct
investment portfolio. As an investor for
the long term, assessing and managing
credit risk is a core competency, and
alongside setting a range of tolerances
to diversify our portfolios, we seek to
continuously track a variety of risk
factors that could adversely impact
credit markets. For direct investments,
as part of our underwriting decision,
we also evaluate the quality of the
security that we will take under the
transaction.

We are exposed to longevity risk
in our pension risk transfer and
annuities businesses. Over the years
we have built significant expertise
in understanding and pricing for

longevity. Our intellectual property
covers a range of disciplines including
actuarial, medical, public health,
statistical analysis and modelling.
We also work with the Longevity
Science Advisory Panel and University
College of London, enabling us to
access the most advanced data,
techniques and knowledge to
understand and inform our longevity
risk management strategies. Future
trends in mortality are generally slow
to emerge due to the pace of medical
and health development, and, whilst
we’re living longer, we have seen a
slowing in the rate of this improvement
compared to our assumptions. But we
remain vigilant to emerging trends and,
alongside continuous investigation into
causes of death, we consider a wide
range of scenarios when assessing
our capital requirements for the risk
including significant advances in
medical science.

Risk appetite
Our risk appetite sets the ranges and limits of
acceptable risk-taking for the group as a whole.
We express our overall attitude to risk using
the following statements and measures:

Customer We treat our customers with
integrity and act in a manner that protects or
enhances the group franchise. Monitoring
metric: customer and reputation risk
dashboard.

Strategy We manage a diversified portfolio in
which we accept risk in the normal course of
business and aim to deliver sustainable returns
on risk-based capital in excess of the cost of
capital. Monitoring metric: minimum return on
capital over the planning cycle.

Strategy We have an appetite for risks we
understand and are rewarded for, and which
are consistent with delivery of our strategic
objectives. Monitoring metric: maximum
risk-based capital to be deployed over the
planning cycle.

Capital We aim to maintain an appropriate
buffer of capital resources over the minimum
regulatory capital requirements. Monitoring
metric: minimum capital coverage ratios.

Earnings We have a low appetite for volatility
of earnings; in particular volatility arising from
risks where Legal & General has more
exposure than the wider market. Monitoring
metric: Maximum acceptable variance in
earnings compared to plan.

Liquidity We expect to be able to meet our
payment and collateral obligations under
extreme, but plausible, liquidity scenarios.
Monitoring metric: minimum liquidity
coverage ratio.

The metrics we use to assess acceptable risk
taking include Solvency II measures of capital
usage, return on capital, and surplus emerging.

We set further risk tolerances covering our
specific exposures to credit, market, insurance
and operational risks including, where
appropriate, limits on concentrations and
significant aggregation of risks.

Our risk appetite is used to govern the nature
and quantity of risks that we are exposed to.
Whether we are making a direct property
investment or pricing a pension risk transfer
deal, we use our risk appetite framework to
assess the risk profile and potential rewards to
ensure we continue to operate within the ranges
of acceptable risk taking that we have set.

Risk appetite is at the
heart of our decision
making, defining the risks
that we are prepared to
be exposed to, the
capital we wish to deploy
and the level of volatility
in earnings that we seek
to avoid.”

Simon Gadd
Group Chief Risk Officer

Risk management supplement
Further information on our appetite
for specific risks and our approach
to managing them can be found in
the ‘Risk management supplement’.

Please visit:
legalandgeneralgroup.com/
investors/reporting-centre

Legal & General Group Plc Annual Report and Accounts 2018Strategic report
Strategic report

Risk outlook
An assessment of principal risks and
uncertainties, together with current trends
and mitigating actions, is set out on pages
48 and 49. A more detailed review of the
group’s inherent risk exposures to market,
credit, liquidity, insurance and operational
risks, together with an overview of our
control processes, is included in notes 7 and
15 to 17 of the financial statements.

Whilst the global economy continues to see
positive, albeit subdued levels of growth,
political events look set to continue to
dominate, with potential for significant asset
price volatility as financial markets respond
to a range of factors, including global trade
tensions and the UK’s withdrawal from the
EU. Other external factors include continued
regulatory and legislative changes which
can lead to uncertainty in our operating
environments. Cyber threats also continue
to be a risk for the financial services sector
as a whole.

Own Risk and Solvency
Assessment (ORSA)
Our ORSA process is an ongoing analysis of
the group’s risk profile and the sufficiency
of capital resources to sustain our business
strategy over the plan horizon. The process,
which covers the whole group, considers how
the financial and broader business risks to
which we are exposed may evolve over the
planning cycle.

Stress and scenario testing is an essential
element of the ORSA process. It is used to
show us how our key risk exposures respond
to different risk factors, together with the
sensitivity and the resilience of capital and
earnings to a range of extreme but plausible
events. The stress testing component of our
framework assesses the effect of a move in
one, or a small number, of risk factors at a
point in time. The scenario element considers
group wide multi-year projections of capital
and earnings across a range of downside
conditions in financial markets, demographics
and the broader economy.

The ORSA process is integrated into our
business risk and capital management
activities and aligned with the strategic
planning process to inform forward looking
decision making. As such, it is a key business
management tool for the group.

Principal risks and uncertainties

Reserves and our assessment of capital requirements may require revision as a result
of changes in experience, regulation or legislation.

Investment market performance and conditions in the broader economy may adversely
impact earnings, profitability or surplus capital.

In dealing with issuers of debt and other types of counterparty the group is exposed
to the risk of financial loss.

Changes in regulation or legislation may have a detrimental effect on our strategy.

New entrants, or legislative change, may disrupt the markets in which we operate.

A material failure in our business processes or IT security may result in unanticipated
financial loss or reputation damage.

Brexit
As a predominantly UK and US
focused business, our operating model
is not materially impacted by the UK’s
withdrawal from the EU. We have,
however, established businesses in
Dublin to support LGIM’s EU based
investment clients and funds. We have
also taken steps to ensure the continuity
of the financial instruments on which
we rely, and assessed the contingency
planning activities of those EU based
financial counterparties with which
we deal.

At the time of writing, markets continue
to price for an orderly Brexit outcome,
although there have been periods of
volatility in equity and currency markets
in response to the negotiation process,
and there remains considerable
uncertainty as to the final withdrawal
terms and future trade agreement.

Reflecting the range of outcomes, we
have undertaken significant analysis
to ensure our capital position remains
resilient under a number of scenarios
including those described by the Bank
of England as being disorderly and
disruptive. We have also evaluated risk
factors that are idiosyncratic to the UK,
including the impacts for particular UK
business sectors and asset classes, to
determine the need for the re-structuring
our investment portfolios.

As much of the UK financial services
regulation is derived from EU law, over
the longer term it is likely that elements
will be re-written. We expect, however,
the overall Solvency II regulatory
regime to continue to apply for the
foreseeable future, with any EU derived
change being applicable during a
transition period.

Capital management
Our risk-based capital model seeks to
provide a quantitative assessment of the
group’s risk exposures. It forms part of the
suite of tools that we use to evaluate our
strategic plans, set risk appetite, allocate
capital and evaluate product pricing. We also
use our capital model to assess significant
transactions, including large pension risk
transfer deals. The key output from our
capital model is the generation of capital
requirements. We calibrate our model to a
99.5% value at risk confidence level over
one year, equivalent to ensuring that we
hold sufficient capital to survive our
assessment of a worse case 1-in-200 year
event. In terms of risk based capital, market
(credit) and insurance (longevity) risks
remain our most significant drivers.

Risk Based Capital

Insurance risk 45%
Market risk 48%
Operational risk 5%
Miscellaneous 2%

Legal & General Group Plc Annual Report and Accounts 2018Managing risk

Group Board viability statement
The group’s strategy is developed, and
economic decisions are made, around meeting
the long-term protection and savings needs of
its customers, and around creating long-term
value for customers and shareholders over a
period of many years. This reflects the group’s
business and investment models which
combine managing credit, longevity and
mortality risks over long-term relationships.

The group’s long-term prospects
The group’s prospects are primarily assessed
through our strategic and planning processes.
Our strategic planning process is a continuous
one, and underpins our business planning
model. We consider the sustainability and
resilience of our business model over the long
term (including strategic factors detailed on
pages 6 and 7, and longer-term trends in
areas such as technology and climate change),
as both our investment and insurance
products and customer relationships are
long-standing ones.

The group is also subject to continuous
regulation and supervision, which requires
us to manage and monitor solvency, liquidity
and longer-term risks, to ensure that we can
continue to meet our policyholder obligations.

This long-term prospect assessment is over a
longer period than that over which the Board
has assessed the group’s viability.

Period of viability assessment
While the Board has considered adopting a
longer period, it believes that five years is the
most appropriate time-frame over which we
should assess the long term viability of the
group, as required within provision C.2.2 of the
UK Corporate Governance Code. The following
factors have been taken into account in making
this decision:

• We have reasonable clarity over a five-year
period, allowing an appropriate assessment
of our principal risks to be made; and

• The assessment is underpinned by our

business planning process, and so aligns to
the period over which major strategic actions
are typically delivered, and takes account of
the uncertain economic environment and
changing political and regulatory landscape.

Our business planning process is an annual
process and culminates in the annual
production and review of the group’s business
plan. Our plan is built up from divisional
submissions, and considers the profitability,
liquidity, cash generation and capital position
of the group. This projection process involves
setting a number of key assumptions, which
are inherently volatile over a much longer
reporting period such as foreign exchange
rates, interest rates, economic growth rates,
the continued optimisation of capital
strategies for Solvency II, and the impact on
the business environment of changes in
regulation or similar events.

The Board carries out a detailed review of the
draft plan at the Group Board’s annual strategy
assessment, and amendments are made
accordingly. Part of the Board’s role is to
consider the appropriateness of any key
assumptions made. The latest annual plan was
approved in December 2018, resulting in our
current five-year business plan.

How we assessed our viability
The Board regularly considers the potential
financial and reputational impact of the group’s
principal risks (as set out on pages 48 and 49)
on our ability to deliver the business plan. We
regularly refresh our principal risks to reflect
current market conditions and changes in our
risk profile, for instance in 2018 we have seen
an increase in market risks as a result of Brexit
uncertainty.

Quantitative stress and scenario testing
considers the group’s ability to respond to a
number of plausible individual and combined
shocks, both financial and operational, which
could adversely impact the profits, capital
and liquidity projections in the group plan.
For example, the Board considered the
impacts of a plausible market stress which is
commensurate with a market shock in the late
cycle environment, as well as a severe market
event akin to the 2008 global financial crisis.
These stresses included a severe global shock
based on the Bank of England ‘Annually Cyclical
Scenario’, but assuming widespread credit
downgrades, and removing two elements of
the scenario which would (if included) benefit
Legal & General, being a sharp increase in
interest rates and the depreciation of sterling
against the US dollar.

The scenarios tested showed that the group
would continue to have sufficient headroom to
maintain viability over the five-year planning
period, after taking into account mitigating
actions to manage the impacts on capital and
liquidity. This includes maintaining the group’s
current dividend policy, but this and other
commitments would be reassessed if the
circumstances determined this to be
necessary over the longer term. Furthermore,
it is possible that shocks could be more
severe, occur sooner and/or last longer than
we have currently considered plausible.

Additionally, reverse stress testing and
contingency planning gives the Board a solid
understanding of the group’s resilience to
extremely severe scenarios which could
threaten the group’s business model and
viability. This analysis assists in identifying
any mitigating actions that could be taken
now, or triggers to put in place for future
actions. Potential scenarios that were explored
included severe capital market stresses,
adverse regulatory changes, reputational and
internal/external events causing falls in business
volumes, and severely adverse claims
experience. The results confirmed that the
group remains resilient to extreme stresses
as a result of the risk management system
in place and the diverse range of mitigating
actions available, such as the raising of capital
or reduction in the payment of dividends.

Our conclusion on viability
Following this assessment, taking into account
the group’s current position and principal risks,
the Board can confirm that they have a
reasonable expectation that the group will
continue in operation and meet its liabilities,
as they fall due, over a viability horizon of five
years. The Board’s five-year viability and
longer-term prospects assessment is based
upon information known today.

Legal & General Group Plc Annual Report and Accounts 2018Strategic report Principal risks
and uncertainties

The directors confirm that they have carried out a robust assessment of the principal risks facing
the group, including those that would threaten its business model, future performance, solvency or
liquidity. The principal risks are set out below including details of how they have been managed or
mitigated. Further details of the group’s inherent risk exposures are set out at Notes 7 and 15 to 17
of the financial statements.

Risks and uncertainties

Trend and outlook

Mitigation

Reserves and our assessment of capital
requirements may require revision as a result of
changes in experience, regulation or legislation
The pricing of long-term insurance business
requires the setting of assumptions for long-term
trends in factors such as mortality, lapse rates,
valuation interest rates, expenses and credit
defaults as well as the availability of assets with
appropriate returns. Actual experience may
require recalibration of these assumptions,
impacting profitability. Management estimates
are also required in the derivation of Solvency II
capital metrics. These include modelling
simplifications to reflect that it is not possible
to perfectly model the external environment,
with adjustment necessitated where new data
emerges. Forced changes in reserves can also
arise from regulatory or legislative intervention
impacting capital requirements and profitability.

We regularly appraise the assumptions
underpinning the business we write. We remain,
however, inherently exposed to certain extreme
events, that could require us to adjust our
reserves. For example, in our pensions risk
transfer and annuities business, while trend data
continues to suggest that the rate of longevity
improvement is slowing, a dramatic advance in
medical science beyond that anticipated may
lead to an unexpected change in life expectancy,
requiring adjustment to reserves. In our
protection businesses a widespread increase in
mortality or morbidity, for example as a result of
the emergence of new diseases or reductions in
immunology, may also require us to re-evaluate
reserves. We are also exposed to lapse risks if
our US term policies are not continued in line
with our renewal assumptions.

We undertake significant analysis of the
variables associated with writing long-term
insurance business to ensure that a suitable
premium is charged for the risks we take on, and
that reserves continue to remain appropriate for
factors including mortality, lapse rates, valuation
interest rates, expenses and credit defaults. We
also seek to pre-fund and warehouse appropriate
investment assets to support the pricing of
long-term business. In seeking a comprehensive
understanding of longevity science we aim to
anticipate long-term trends in mortality, and
continue to evolve and develop our underwriting
capabilities for our protection business. Our
selective use of reinsurance also acts to reduce
the impacts of significant variations in life
expectancy and mortality. The sensitivities of
our business to selected scenarios are set out
on page 174.

Investment market performance and conditions
in the broader economy may adversely impact
earnings, profitability or surplus capital
The performance and liquidity of investment
markets, interest rate movements and inflation
impact the value of investments we hold in
shareholders’ funds and those to meet the
obligations from insurance business, with the
movement in certain investments directly
impacting profitability. Interest rate movements
and inflation can also change the value of our
obligations. We use a range of techniques to
manage mismatches between assets and
liabilities, however, losses can still arise from
adverse markets. Interest rate expectations
leading to falls in the risk free yield curve can
also create a greater degree of inherent volatility
to be managed in the Solvency II balance sheet
than the underlying economic position would
dictate, potentially impacting capital
requirements and surplus capital. In addition,
significant falls in investment values can
reduce fee income to our investment
management business.

In dealing with issuers of debt and other
types of counterparty the group is exposed
to the risk of financial loss
Systemic corporate sector failures, or a major
sovereign debt event, could, in extreme
scenarios, trigger defaults impacting the value
of our bond portfolios. Under Solvency II,
a widespread widening of credit spreads and
downgrades can also result in a reduction in
our Solvency II balance sheet surplus, despite
already setting aside significant capital for
credit risk. We are also exposed to default
risks in dealing with banking, money market
and reinsurance counterparties, as well as
settlement, custody and other bespoke business
services. A default by a counterparty could
expose us to both financial loss and operational
disruption of business processes. Default risk
also arises where we undertake property
lending, with exposure to loss if an accrued
debt exceeds the value of security taken.

The outlook for the global economy is looking
less certain than a year ago, with forecasts
suggesting a general slowing in the rate of
growth in many advanced economies. Recent US
and China trade tensions, as well as impacting
growth prospects, have also weighed heavily on
market sentiment with potential for a broader
re-pricing of assets should relations further
deteriorate. Other factors adding to downside
risk include a deeper-than-envisaged slowdown
in China; in the euro-area, increasing political
uncertainty with the potential for a renewed
Italian debt crisis; and on-going geo-political
tensions in the Middle East and East Asia. The
possibility of a disruptive, ‘no-deal’ Brexit with
negative cross-border spillovers and increased
euro-scepticism affecting European
parliamentary election outcomes also has
potential to lead to greater risk aversion.

Although we cannot fully eliminate the downside
impacts from these and other risk factors on our
earnings, profitability or surplus capital, as part
of our strategic planning activity we seek to
model our business plans across a range of
economic scenarios to ensure they will be
resilient. Our ORSA process plays an integral
part in this process, ensuring a clear link between
capital sufficiency and the nature of risks to
which we may be exposed, and confirming that
exposures are within our risk appetite. As set out
within the Strategic Report on pages 8 to 31, we
have sought to ensure focus upon those market
segments that we expect to be resilient in
projected conditions. We cannot, however,
completely eliminate risk. Sensitivities to interest
rates, and exposures to worldwide equity
markets and currencies are set out on page 174,
page 156 and page 160, respectively.

Although the level of credit default increases
in periods of low economic growth, an event
leading to widespread default among the issuers
of investment grade debt is still considered to
be a more remote risk; however, we are closely
monitoring a number of factors that may lead
to a widening of credit spreads including the
outlook for global interest rates, the effects of a
global slowdown on emerging markets, and the
potential economic impacts of an unfavourable
Brexit outcome for specific industrial and service
sectors. The UK residential property market is
also showing signs of slowing confidence,
although weakness on the supply side continues
to ensure a degree of market resilience. Whilst
considered to be more extreme risk scenarios
in the current environment, factors that could
increase the level of default risk, if they were to
occur, include a material deterioration in global
economic conditions; a renewed banking crisis;
and default on debt linked to emerging markets.

We actively manage our exposure to default risks
within our bond portfolios, setting selection
criteria and exposure limits, and using the
capabilities of LGIM’s global credit team to
ensure the risks are effectively controlled, and if
appropriate trade out to improve credit quality.
Within our property lending businesses, our loan
criteria take account of both the default risk of
the borrower and the potential for adverse
movements in the value of security. In placing
reinsurance we set counterparty specific
exposure limits, where appropriate taking
collateral. We manage risks to our Solvency II
balance sheet through monitoring factors that
could give rise to a heightened level of default
risk. However, we can never completely eliminate
default risks or their impacts to our Solvency II
balance sheet, although we seek to hold a strong
balance sheet that we believe to be prudent for a
range of adverse scenarios. Details of our credit
portfolios are on pages 161 to 165.

Strategic reportLegal & General Group Plc Annual Report and Accounts 2018Principal risks and uncertainties

Risks and uncertainties

Trend and outlook

Mitigation

Changes in regulation or legislation may
have a detrimental effect on our strategy
Legislation and government fiscal policy
influence our product design, the period of
retention of products and required reserves for
future liabilities. Regulation defines the overall
framework for the design, marketing, taxation
and distribution of our products, and the
prudential capital that we hold. Significant
changes in legislation or regulation may increase
our cost base, reduce our future revenues and
impact profitability or require us to hold more
capital. The prominence of the risk increases
where change is implemented without prior
engagement with the sector. The nature of
long-term business can also result in some
changes in regulation, and the re-interpretation
of regulation over time, having a retrospective
effect on in-force books of business, impacting
future cash generation.

The regulatory regimes under which the group
operates continue to evolve. In the UK, Solvency II
is now well established and whilst we do not
envisage Brexit leading to immediate changes
to the current capital regime, we continue to see
refinement in rules by the PRA, for example in
the treatment of lifetime mortgages and other
illiquid assets, and the matching adjustment for
long-term business. The FCA also continues to
develop its approach to supervision, focusing on
consumer protection, market integrity and the
promotion of competition, and we are preparing
for the FCA’s transition in 2021 from LIBOR to
SONIA. There is also increasing regulatory
interest in utilising current supervisory
frameworks to influence the transition to a
lower-carbon economy. The approach to,
territory of and level of corporate taxation
also continues to be an area of political debate
internationally and in the specific jurisdictions
in which we operate.

New entrants, or legislative change,
may disrupt the markets in which we operate
There is already strong competition in
our markets, and although we have had
considerable past success at building scale
to offer low cost products, we recognise that
markets remain attractive to new entrants. In
particular, as has been seen in other business
sectors, it is possible that alternative digitally
enabled providers of financial services products
emerge with lower cost business models or
innovative service propositions and capital
structures, and disrupt the current competitive
landscape. Changes in regulation or legislation
can also influence the competitive landscape.

We closely monitor the factors that may impact
the markets in which we operate, including
governmental initiatives, developing industry
practices and competitor activity. Alongside
digital enabled changes to business operating
models that enhance the customer experience,
technology is being widely applied to achieve
cost savings and efficiencies for market
participants. The UK government is also
consulting on a new legislative framework for
defined benefit ‘superfund’ consolidation
schemes, that has potential to significantly
transform the operating environment for
our asset management and pension risk
transfer businesses.

A material failure in our business processes
or IT security may result in unanticipated
financial loss or reputation damage
We have constructed our framework of internal
controls to minimise the risk of unanticipated
financial loss or damage to our reputation.
However, no system of internal control can
completely eliminate the risk of error, financial
loss, fraudulent actions or reputational damage.
We are also inherently exposed to the risk that
third parties may seek to disrupt our online
business operations, steal customer data or
perpetrate acts of fraud using digital media.

Our plans for growth and the digitalisation
of our businesses, together with the regulatory
change agenda, inherently increase the profile of
operational risks across our businesses. We are
also exposed to property construction and safety
risks within our housing and future cities
businesses. We continue to invest in our system
capabilities and business processes to ensure
that we meet the expectations of our customers;
comply with regulatory, legal and financial
reporting requirements; and mitigate the risks
of loss or reputational damage from
operational risk events.

We are supportive of regulation in the markets
in which we operate where it ensures trust and
confidence and can be a positive force on
business. We seek to actively participate with
government and regulatory bodies in the UK and
Europe to assist in the evaluation of change so as
to develop outcomes that meet the needs of all
stakeholders. Internally, we evaluate change as
part of our formal risk assessment processes,
with material matters being considered at the
Group Risk Committee and the Group Board.
Our internal control framework seeks to ensure
ongoing compliance with relevant legislation
and regulation. We cannot, however, completely
eliminate the risk that controls may fail or
that historic financial services industry accepted
practices may be reappraised by regulators,
resulting in sanctions against the group.

We continue to build our digital businesses,
including My Account; our SmartQuote and
SmartClaim apps for household insurance; and
the use of technology to transform our insurance
product distribution reach in the US. In asset
management alongside positioning the business
to protect existing market share, we are
accessing new markets and sources of funds, in
particular overseas. In our pensions risk transfer
business, where pricing is an important factor in
trustee purchasing decisions, our capabilities to
assess risk and offer bespoke solutions enable
us to differentiate our offer from competitors,
and we believe that LGIM and LGRI are well
positioned for the next evolution of the defined
benefit pensions market.

Our risk governance model seeks to ensure that
business management are actively engaged in
maintaining an appropriate control environment,
supported by risk functions led by the Group
Chief Risk Officer, with independent assurance
from Group Internal Audit. The work of the Group
Audit Committee in the review of the internal
control system is set out on page 68. We
recognise, however, that residual risk will always
remain and have designed our risk governance
framework to ensure that when adverse events
occur we can deploy appropriate responses.

Legal & General Group Plc Annual Report and Accounts 2018Strategic report Governance

A first-rate experience for the
first Buckler’s Park residents
Ken and Tracy Perrett moved
to a two-bedroom, two-storey
semi-detached home in Buckler’s
Park, Crowthorne. They were the
very first residents to move to a
new development delivered by
Legal & General Homes. “We made
the decision to move in May, and
Buckler’s Park was the first place
we saw – it was perfect. We liked
the Legal & General Homes way of
doing things, we felt we could trust
this business – and it’s paid off. We
looked at the plans, put our name
down and got a call a week later
saying the house type we wanted
was available.” “Legal & General
Homes helped us with the sale of
our old place. They employed the
estate agents, we had all the
valuations and agreed a price with
them on the basis it would sell more
quickly.” Ken and Tracy’s priority
was for a simple move that would
give them time to concentrate on
the important things in life – and
that’s the hassle-free experience
they got. Tracy explained: “Ken
hates decorating, so being able to
move straight in and not have to do
anything really appealed to us”.

Legal & General Group Plc Annual Report and Accounts 2018

Governance

Board of directors

Letter from the Chairman

Governance report

Nominations Committee report

Audit Committee report

Group Risk Committee report

Directors’ report on remuneration

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Board of directors

Committee membership key

Audit

Nomination

Remuneration

Risk

Committee Chairman

Jeff Davies
Chief Financial Ofﬁcer
Appointed March 2017

Skills and experience:
Jeff was appointed Group Chief Financial
Officer in March 2017. He brings a wealth
of insurance experience, having
previously served as a senior partner
of Ernst & Young LLP (EY) and led its
European risk and actuarial insurance
services. Prior to joining EY in 2004,
he held a number of senior actuarial roles
at Swiss Re Life & Health. He is a Fellow
of the Institute of Actuaries.

Sir John Kingman
Chairman
Appointed October 2016

Skills and experience:
John had a long Whitehall career; as
second Permanent Secretary to HM
Treasury, he had responsibility for the
Treasury’s economics ministry functions,
for policy relating to business, financial
services and infrastructure. He was closely
involved in the UK response to the financial
crisis, handling the resolution of Northern
Rock and leading negotiations with RBS,
Lloyds and HBOS on their £37 billion
recapitalisation. He was the first Chief
Executive of UK Financial Investments
Ltd. From 2010 – 2012, John was Global
Co-Head of the Financial Institutions
Group at Rothschild.

John is non-executive Chair of UK Research
and Innovation and is a World Fellow of
Yale University. John led the independent
review for the Government of the work of
the Financial Reporting Council; the report
was published in December 2018.

John is also a director of Legal & General
Investment Management (Holdings) Limited.

External appointments:
• Royal Opera House Covent Garden

Foundation (Trustee)

• National Gallery (Trustee)
• Rothschild (Senior Adviser)

Nigel Wilson
Group Chief Executive Officer
Appointed September 2009 as CFO;
appointed CEO June 2012

Skills and experience:
Nigel was appointed as Chief Executive
Officer in 2012 following three years
serving as Group Chief Financial Officer.
Nigel brings strong leadership skills with
previous appointments including
McKinsey & Co; Group Commercial
Director of Dixons Group plc; Managing
Director of Stanhope Properties plc;
Chief Executive, Corporate of Guinness
Peat Aviation (GPA); Managing Director
of Viridian Capital; and Deputy Chief
Executive and Chief Financial Officer
at UBM.

Nigel was also Senior Independent
Director (SID) of The Capita Group Plc
from 2009 until 2012, and was SID/
Chairman of Halfords Group Plc from
2006 until 2011.

In 2016 and 2017 Nigel was Chairman
of the Investment Association’s review
of Executive Pay and the government’s
review of Mission Led Business. In 2017
and 2018 he was a member of the
government’s Patient Capital Review
Industry Panel and a Commissioner in
the Resolution Foundation’s
Intergenerational Commission.

Mark Zinkula
Chief Executive Ofﬁcer, LGIM
Appointed September 2012

Kerrigan Procter
Chief Executive Ofﬁcer, LGC
Appointed March 2017

Skills and experience:
Mark was appointed to the Board in
September 2012, having been appointed
Chief Executive Officer of LGIM in March
2011. Prior to that, he was CEO of Legal
& General Investment Management
America (LGIMA) and played an integral
part in the establishment and successful
expansion of LGIMA. Prior to joining
LGIMA, Mark was at Aegon Asset
Management where he was Global
Head of Fixed Income.

On 31 May 2018, Mark announced his
intention to retire from Legal & General
in August 2019.

External appointments:
• The Financial Reporting Council Limited

(Director)

Skills and experience:
Kerrigan was appointed to the Board
in March 2017, and was appointed as
CEO of LGC in January 2018. He has
group-wide experience with in-depth
knowledge of the workings of the
Group’s business divisions from his roles
as CEO of the LGR Business division
from 2013 to 2017, and head of solutions
at LGIM from 2006 to 2012, where he
was responsible for Liability Driven
Investment and fund solutions for defined
benefit and defined contribution pension
schemes across Europe and the US. Prior
to joining the Group, he worked at RBS in
the financial markets division where he
held several roles. Kerrigan started his
career in 1994 with EY Corporate Finance
before moving to Mercer. He is a Fellow
of the Institute of Actuaries and has a
PhD in number theory from King’s
College, London.

Legal & General Group Plc Annual Report and Accounts 2018Board of directors

Julia Wilson
Senior independent
Non-Executive Director
Appointed November 2011; Senior
Independent Director from May 2016

Skills and experience:
Julia was appointed to the Board in
November 2011 and became the Senior
Independent Director in May 2016. She
has significant corporate finance, tax and
accounting experience. She is the Group
Finance Director of 3i Group plc, which
includes responsibility for finance,
investment valuations and treasury. She
has been a member of its Board since
2008. Previously, she was the Group
Director of Corporate Finance at Cable &
Wireless plc, where she also held a
number of other finance-related roles.
Julia is a member of the Institute of
Chartered Accountants in England and
Wales (ACA) and the Chartered Institute
of Taxation.

External appointments:
• 3i Group plc (Director)

Henrietta Baldock
Independent Non-Executive Director
Appointed October 2018

Carolyn Bradley
Independent Non-Executive Director
Appointed December 2014

Philip Broadley
Independent Non-Executive Director
Appointed July 2016

Skills and experience:
Henrietta was appointed to the Board
on 4 October 2018. She has been Chair
of the Company’s principal operating
subsidiary, Legal and General Assurance
Society Limited (LGAS), since 6 March
2018. Henrietta has extensive knowledge
of the financial services and insurance
sectors through her 25 years’ experience
in investment banking, most recently as
Chairman of the European Financial
Institutions team at Bank of America
Merrill Lynch where she advised many
boards in the sector on some of their
most significant transactions.

Henrietta joined Bank of America Merrill
Lynch in 2000 and served as its Vice
President of Financial Institutions Group
(FIG), Managing Director and Head of
European Financial Institutions Investment
Banking. She started her career as a
generalist adviser and has focused on
financial institutions since 1995.

External appointments:
• The Leadership Trust
Foundation (Director)

• Hydro Industries (Director)

Skills and experience:
Carolyn was appointed to the Board in
December 2014. Carolyn has a strong
consumer-focused background having
worked at Tesco from 1986 until 2013.
During this time, Carolyn held a range of
senior positions in various roles including
Chief Operating Officer, Tesco.com,
Marketing Director, UK and as Group
Brand Director.

Carolyn stepped down from the Board on
31 December 2018.

External appointments:
• Marston’s PLC (Non-Executive Director)
• The Mentoring Foundation
(Non-Executive Director)

• Cancer Research UK (Trustee)
• Majid Al Futtaim Retail LLC
(Non-Executive Director)

• Cambridge Judge Business School

Advisory Board (Member)

• The Invicta Film Partnership No. 6

LLP (Member)

• B&M European Retail Value SA

(Non-Executive Director)

• SSP Group Plc (Non-Executive Director)

Skills and experience:
Philip was appointed to the Board in
July 2016. He has extensive insurance
experience having spent over 14 years
in senior roles in insurance including as
Group Finance Director at Old Mutual plc
and prior to that as Group Finance
Director of Prudential plc. Philip graduated
from St. Edmund Hall, Oxford, where he
is now a St. Edmund Fellow. He is a
Fellow of the Institute of Chartered
Accountants in England and Wales.

External appointments:
• AstraZeneca PLC

(Non-Executive Director)

• Stallergenes Greer plc

(Non-Executive Director)

• Eastbourne College (Director & Trustee)
• London Library (Treasurer)
• Oxford University Audit and Scrutiny

Committee (Member)

Lesley Knox
Independent Non-Executive Director
Appointed June 2016

George Lewis
Independent Non-Executive Director
Appointed November 2018

Toby Strauss
Independent Non-Executive Director
Appointed January 2017

Geoffrey Timms
Group General Counsel
and Company Secretary

Skills and experience:
Lesley was appointed to the Board in
June 2016. She brings a wealth of
international, strategic and financial
services experience having spent over 17
years in senior roles in financial services,
including with Kleinwort Benson, Bank of
Scotland and British Linen Advisors.
Lesley previously served as Chair on the
Board of Alliance Trust PLC and as Senior
Independent Director at Hays plc.

Lesley was appointed as designated
non-executive director for engagement
with the Company’s workforce, effective 4
October 2018, in line with the provisions of
the 2018 UK Corporate Governance Code.

External appointments:
• Thomas Cook Group plc
(Non-Executive Director)

• Design Dundee Limited (Chair)
• Genus Plc (Senior Independent

Director, Chair of the Remuneration
Committee)

Skills and experience:
George was appointed to the Board on
1 November 2018. He has significant
experience of asset management following
a 30-year career with the Royal Bank of
Canada (RBC). He has strong international
asset management experience in Canada,
the US and other international markets;
these skills are important as the Group
seeks to develop its LGIM business globally.

George’s career began in accountancy at
Arthur Andersen, Toronto. He joined RBC
in 1986 and served in various financial and
wealth management roles. George was a
member of RBC’s Group Executive board
from 2007 through 2015, with responsibility
for the wealth and asset management and
insurance businesses.

External appointments:
• Ontario Power Generation

(Non-Executive Director, Chair of Audit
and Risk Committee)

• AOG Group (Non-Executive Director)

Skills and experience:
Toby was appointed to the Board in
January 2017. Toby brings extensive
insurance experience to the Board
following an executive career in UK
financial services which included Group
Director of Insurance and Chief Executive
of Scottish Widows at Lloyds Banking
Group and, prior to that, Chief Executive
of Aviva UK Life.

External appointments:
• Macmillan Cancer Support (Trustee)
• Toric Limited (Director)
• Pacific Life Re Limited (Director)

Skills and experience:
Geoffrey has been the Group General
Counsel since 1999 and, in addition, the
Group Company Secretary since 2008.
Geoffrey is also a Director of CALA
(Group) Holdings Limited and the
Bracknell Regeneration Partnership
Limited. Prior to joining Legal & General,
Geoffrey was a solicitor with Clifford
Chance and then Clyde & Co.

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Executive Committee

Executive Directors

Other business unit
Chief Executive Officers (CEOs)

Nigel Wilson
Group Chief Executive Officer
See Board of directors pages 52 to 53.

Jeff Davies
Chief Financial Officer
See Board of directors pages 52 to 53.

Mark Zinkula
Chief Executive Officer, Legal &
General Investment Management
See Board of directors pages 52 to 53.

Kerrigan Procter
Chief Executive Officer, Legal &
General Capital
See Board of directors pages 52 to 53.

Cheryl Agius
Chief Executive Officer,
General Insurance

Bernie Hickman
Chief Executive Officer,
Legal & General Insurance

Cheryl is the Chief Executive Officer of
General Insurance. Cheryl was previously
Head of our UK Strategic Retirement
Pension Risk Transfer business where
she was responsible for large pension risk
transfer transactions and solutions for
defined benefit pension schemes and
back book transactions. Prior to this UK
role, Cheryl set up our US Retirement
business, securing our first landmark
transaction for $430m in 2015. Cheryl
joined Legal & General in 2011 having
previously worked for over 20 years in the
retirement and insurance industry. Cheryl
is a Fellow of the Institute of Actuaries.

Bernie is the Chief Executive Officer
of Legal & General Insurance. Bernie
joined Legal & General in 1998 from
Commercial Union (now Aviva). Between
2005 and 2010 he was the Managing
Director of Retail Protection during which
time he launched the UK Protection
digital platform, OLP Connect, which
provides market leading self-service
functionality and high levels of straight
through processing. Bernie became MD
of Individual Retirement in 2014 and the
CEO co-founder of Legal & General
Home Finance in 2015, when he led the
group’s entry into the Lifetime Mortgage
market, achieving a 25% market share
within 18 months of launching. He has
also held the positions of Group Financial
Controller, Investor Relations Director and
Solvency II Managing Director.

Chris Knight
Chief Executive Officer, Legal &
General Retirement, Retail

Chris is the Chief Executive Officer of
Legal & General’s Retail Retirement
business. Chris was previously the Chief
Financial Officer of Legal & General’s
Retirement Division where he was
responsible for driving the financial
results of the business. Prior to this he
was the Finance Director of the Group’s
UK Savings and Protection business.
Chris is a qualified actuary, and has had a
29-year career in the UK and international
financial services markets. He joined
Legal & General in 2009.

Laura Mason
Chief Executive Officer, Legal &
General Retirement, Institutional

Claire Singleton
Chief Executive Officer,
Mature Savings

Laura has been CEO of Legal & General’s
Institutional Retirement business since
January 2018. Laura joined Legal &
General in 2011 where she was initially
responsible for Annuity Investment
strategy. Laura was a part of the senior
management team responsible for
setting up Legal & General Capital (LGC),
where she served as Director of Direct
Investment. Laura is a qualified Actuary
and spent eight years at Towers Watson
as consultant to all the major UK Life
Insurers. Laura has a First Class Honours
Degree in Engineering Science from
University of Oxford, and a PhD in
Engineering Science (Neural Networks
and Signal Processing) also from the
University of Oxford.

Claire was appointed Chief Executive
Officer, Mature Savings in July 2018. She
oversees an area which looks after over
one million customers who have invested
£29 billion of assets across individual
pensions, bond or endowment products.

Claire joined Legal & General in 2011 from
US law firm Jones Day. A Cambridge law
graduate and qualified solicitor, she has
worked in a variety of legal roles within
the company, most recently as General
Counsel, Corporate and Legal & General
Capital. Claire has helped to build and
lead an outstanding legal team, delivering
significant value to our business.

Legal & General Group Plc Annual Report and Accounts 2018Executive Committee

Additional Executive
Committee members

Simon Gadd
Group Chief Risk Officer

John Godfrey
Group Corporate Affairs Director

Emma Hardaker-Jones
Group HR Director

Simon Gadd is the Group Chief Risk
Officer. Simon has had a varied career
with Legal & General since completing a
mathematics degree at Oxford University.
He qualified as an actuary in 1991 and
roles undertaken since have included
defined benefit pension valuation, various
pricing and marketing roles, general
management roles, and leadership of the
pensions review. Simon has led several
different businesses within Legal &
General, including the Retail Protection
business, Group Protection business and
as MD of Annuities from 2006-2012.

John has worked in the City for over
30 years, providing advice on corporate
affairs and communications to US,
European and Japanese financial
institutions. He joined Legal & General as
Group Communications Director in 2006,
becoming Corporate Affairs Director
following the global financial crisis. Since
then, his responsibilities have variously
included communications, public affairs
and policy, corporate social responsibility
and brand. In 2016 he left Legal & General
to work in government as head of the
Prime Minister’s Downing Street Policy
Unit, returning to the company in
September 2017.

Emma joined Legal & General as Group
HR Director in 2017. Emma’s previous
role was as Global HR Director and Board
Director at PA Consulting, co-leading the
successful sale of 51% of PA Consulting
to The Carlyle Group in 2015. Prior to PA
Consulting, Emma spent a number of
years as Group Head of Talent and
Resourcing at BP, driving change across
the 100 countries in which BP operates.
Emma has also held roles at Prudential
and the Bank of England and was the
co-founder of a dot com start-up,
Skillvest.com. Emma has significant
international experience having worked in
Europe, North America, Asia and Africa.

Geoffrey Timms
Group General Counsel &
Company Secretary

See Board of Directors pages 52 to 53.

Stephen Licence
Group Chief Internal Auditor

Paul Miller
Group Strategy and M&A Director

Stephen is the Group Chief Internal
Auditor. Stephen joined Legal & General
in 2014 having previously been Emerging
Markets Chief Internal Auditor at RSA
Insurance where he was responsible for
the Internal Audit activity in the Group’s
businesses across Latin America, Asia,
Middle East and Eastern Europe. His 20
years’ Internal Audit experience has
included Life, General and Healthcare
insurance in both Legal & General and
Lloyd’s of London markets. He was also
previously an audit consultant at the
London Stock Exchange Group. Stephen
is a Chartered Member of the Institute
of Internal Auditors.

Paul is Group Strategy and M&A Director.
Paul joined Legal & General in June 2017
from Goldman Sachs International where
he was Head of European Insurance
within the Investment Banking Division.
As an investment banker for nearly 20
years, Paul advised companies and
financial investors on strategy and
mergers and acquisitions in life insurance,
property and casualty insurance and
asset management. Whilst based in the
UK he worked with clients across EMEA
(Europe, Middle East and Africa), North
America, and Asia.

The role of the
Executive Committee

The Group Executive Committee (Exco),
chaired by the Group Chief Executive,
brings together the heads of Legal &
General’s business units with the
executive committee members shown
on these pages. ‘Exco’ is responsible for
the day-to-day implementation of
strategy agreed by the Board. ‘Exco’
meets regularly to ensure continued
cooperation between the business units
and the effective adoption of our culture,
a key focus for the group. ‘Exco’ also
monitors and manages risk, ensures
efficient operational management and
adherence to compliance and addresses
key issues such as health and safety,
diversity and environmental and corporate
social responsibility.

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Letter from
the Chairman

Sir John Kingman
Chairman

Board changes
Our Board has continued to evolve in 2018 with the appointments of
Henrietta Baldock and George Lewis on 4 October and 1 November,
respectively, providing the Board with further deepening of expertise.

Henrietta is Chair of the Company’s principal operating subsidiary,
Legal and General Assurance Society Limited (LGAS) and has continued
to chair LGAS following her appointment to the Group Board. Henrietta
has brought to the Board extensive knowledge of the financial services
and insurance sectors through her 25 years’ experience in investment
banking, most recently as Chairman of the European Financial
Institutions team at Bank of America Merrill Lynch.

George brings to the Board significant experience in international
financial services and in particular a focus on asset management
following a 30 year career with the Royal Bank of Canada (RBC).
George was a member of RBC’s Group Executive board from 2007
to 2015, with responsibility for RBC’s wealth and asset management
businesses and, from 2012, for insurance. His experience in growing
RBC’s global asset management businesses in the US, UK, Asia and
other international markets will be important as the group further
develops the LGIM business globally.

I should like to take this opportunity once again to thank Carolyn Bradley
who served on the Board and retired at the end of 2018. She has made
a strong contribution to the Board and I am very grateful to her.

Succession planning
Succession planning was an area of focus for the Board in 2018.
Both the Nominations Committee and the Board have continued to
consider the leadership needs of the group, together with the skills
and experience needed from its directors going forward. We need
to maintain a well-balanced Board, with diversity of expertise, skills,
experience, background and perspectives, in addition to independence
of thought and actions, informed by the perspectives of our customers,
employees and wider stakeholders.

These considerations go beyond Board level and the Board is strongly
committed to continuing to develop the pipeline of talent through
the business.

Welcome to my 2018 Corporate Governance report.
The Board is responsible for leading the company and overseeing the
governance of the group, and for setting the tone for the group’s culture,
values and ethical behaviours. As Chairman, it is my role to ensure that
the Board promotes the highest standards of governance and that these
standards cascade throughout the group.

Corporate governance underpins how we conduct ourselves as a Board,
our culture, values, behaviours and how we do business. For the year
ended 31 December 2018, the 2016 UK Corporate Governance Code
(‘the Code’) remained the standard against which we were required to
measure ourselves. I am pleased to report that we have complied with
all principles of the Code throughout the year.

In recent years, corporate governance best practice has continued to
evolve, most recently with the publication of the 2018 UK Corporate
Governance Code (‘the new Code’). We will endeavour, and have
already made steps, to apply the updated principles of the new Code
as soon as possible. We expect to be fully compliant with all principles
of the new Code in 2019. Further details on the new Code and on our
compliance against the 2016 Code can be found on pages 62 and 63.
We continue to strive to remain at the forefront of best practice and
consistent with the standards our investors, including LGIM which plays
a key role in setting the standards for investor stewardship, require.

Our approach to governance
Governance is at all times an important aspect of our Board
environment and our governance helps us test whether we are making
decisions in the right way. Our governance framework means we have
a robust decision making process and a clear framework within which
decisions can be made. Our delegated authority framework ensures
that decisions are taken by the right people at the right level with
accountability up to the Board, and enables an appropriate level of
debate, challenge and support in the decision making process.

Our business continues to evolve as we pursue our strategic objectives
and respond to the changing regulatory environment and market
uncertainty. In this ever-changing environment, it remains important for
us to ensure that our governance framework evolves with us, and as a
Board we work hard to ensure that this framework is always providing
the strong foundation needed for effective management of the group.

A strong framework alone is not enough to deliver our strategy.
This framework needs to be managed by an effective Board that
sets the tone for the group’s culture, values and ethical behaviours.

Legal & General Group Plc Annual Report and Accounts 2018Letter from the chairman

Subsidiary Boards
Guiding principles are in place for the relationship between the
Group Board and the Board of the group’s principal subsidiaries.
This framework promotes full and effective interaction across all levels
of the group to support the delivery of strategy and business objectives
within a framework of best corporate governance practice.

IT and cyber issues
It is vital that we do all we can as a business to mitigate potential risks,
especially with the continued rise in cyber crime. Technology is
increasingly fast-paced and we need to ensure we stay ahead of the
curve to ensure we are delivering the best service for our customers
and providing the best support for our employees. In order to ensure
sufficient focus on this critical area for the business, a Group Information
Technology Committee of the Board was established at the beginning
of 2018. The Committee enables the Board to have greater oversight
of the company’s IT programmes and the implementation of
improvements during 2018 to ensure the group is operating within
its targeted access management, information security and cyber
risk appetite.

This Committee has met regularly throughout the year and has proven
to be a successful forum in which progress on IT and cyber projects
and strategy can be properly tracked and management can be held
to account against tangible deliverables. Recognising the critical
importance of IT and cyber security on our business, we have made
this Committee a full committee of the Group Board, covering a broad
remit of IT and cyber security issues across the group.

Stakeholder engagement
We place great value on the close engagement we have with our
shareholders; the investor community continues to be a strong and
influential force in shaping corporate governance. I have met with a
range of our shareholders over the year providing investors with the
opportunity to discuss particular areas of interest or to raise any
concerns. The AGM is a particularly valuable opportunity for the
Board to meet our shareholders in person and hear their views. I look
forward to seeing as many shareholders at the 2019 AGM as we have
in previous years, and would encourage as many shareholders as
possible to attend the AGM on 23 May 2019.

As a Board we are conscious of the impact that our business and
decisions have on our employees, customers, and suppliers as well
as our wider societal impact.

In October 2018, we announced the appointment of Lesley Knox
as our designated non-executive director for engagement with the
company’s workforce, in line with the provisions of the 2018 UK
Corporate Governance Code. The Board welcomes the early adoption
of this governance model and Lesley’s appointment to this position.

Sir John Kingman
Chairman

As a Board we are conscious of the impact
that our business and decisions have on
our employees, customers, and suppliers
as well as our wider societal impact.”

Sir John Kingman
Chairman

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Governance report

The UK Corporate Governance Code – committed to
the highest standards
The updated 2018 UK Corporate Governance Code (‘new Code’) was
published in July 2018. This new Code emphasises the value of good
corporate governance to long-term sustainable success. The principles
of the UK Corporate Governance Code as published in 2016 (the ‘Code’)
are the standards against which we were required to measure ourselves
during the year, however we are endeavouring, and have already made
steps, to apply the updated principles of the new Code as soon as
possible. The information on the following pages demonstrates how
we apply the principles of the Code in practice. The information required
under Disclosure Guidance and Transparency Rule 7.2.6 can be found in
the directors’ report on pages 234 to 237. Each year, the Board reviews
the group’s corporate governance framework and compliance with the
Code and the table on pages 62 and 63 sets out at a high level how we
have complied with each of the principles.

Steps we have taken to implement the 2018 Code
• Annual Governance Review: As part of this year’s Group Board
annual corporate governance review, the Board and Committee
terms of reference, group policies, statements of responsibility
and other group documents were updated to ensure they were
in line with the provisions of the new Code.

• Designated non-executive director for engagement with the

Company’s workforce: Lesley Knox, non-executive director, was
appointed as Designated Workforce Director in October 2018
and a schedule of work in relation to Lesley’s new role is
underway. Further detail on the role is provided on page 61.

Shortly after the new Code was published Board members received
a presentation on the changes in the new Code and participated in
discussions around the approach and actions to be taken to ensure
full compliance with the new Code. We have already taken steps to
implement the new principles of the new Code with the appointment
of Lesley Knox as employee-designated non-executive director.
Page 61 provides further detail on this new role.

Governance is integral to both our Board environment and
organisational culture and is a key ingredient in the success of our
business. Our governance framework and policies support good
decision making thereby contributing to the success of the business
over the long term, supporting our day-to-day operations and
protecting the interests of our stakeholders.

The Board
The table below sets out the changes to the Board that have taken
place over the course of the year. Henrietta Baldock, currently the Chair
of LGAS, was appointed to the Board on 4 October 2018. George Lewis
was appointed to the Board on 1 November 2018. Their biographies are
detailed on pages 52 to 53 and show the strength and depth of skills
and experience they have brought to the Board. Carolyn Bradley
stepped down from the Board with effect from 31 December 2018
following four years of service. The Board continues to focus on
maintaining a well-balanced Board with the right mix of individuals who
can apply their wider business knowledge and experiences to the
oversight and guidance of delivery of the group’s strategy within the
environment in which the group operates.

Changes to the Board

• Board and Committee papers: It is now a requirement that all

Retirement

group and subsidiary board papers demonstrate that stakeholder
consideration has been taken into account as part of the Board
decision making process.

Carolyn Bradley

Appointments

Henrietta Baldock

George Lewis

• Customer Champion: Chris Knight, CEO Legal & General

Retirement Retail, was appointed Group Customer Champion
on 24 May 2018. This role was designed to ensure the voice of
the customer was at the heart of decision making across the
Group. The initial focus of the role has been to ensure that:

– We continue to listen to our customers when they tell us

what is important to them;

– We can evidence that we put customer interests at the heart

of our decision making and governance processes;

– Our MI demonstrates that the customer outcomes we deliver
match up to the high, market-leading standards we aspire to;
and

– We constantly improve how we treat vulnerable customers.

The Group Board will receive, annually, a Customer
Champion report.

• Employee Survey: A new employee survey format was

introduced this year. The new platform enables complete
visibility on the current state of engagement across the
workforce. The new survey will be undertaken four times
per year. This increased visibility, combined with improved
technology, enables senior managers to take faster action on
the insight received. The Board receives, periodically, detailed
metrics on the views and requirements of employees coming
out of the survey and plans for how actions will be implemented
to address issues raised by employees in the survey.

Changes to the Board since 31 December 2018
On 25 February 2019 the Company announced the appointment of
Michelle Scrimgeour as Chief Executive Officer of Legal & General
Investment Management (‘LGIM’) and executive director of Legal &
General Group Plc. Michelle will succeed Mark Zinkula as CEO of LGIM,
who on 31 May 2018 announced his intention to retire from the
Company in August 2019. Michelle will take up her post formally
following the completion of regulatory and other formalities and Mark
will be working closely with her to ensure a comprehensive handover.
Michelle will join the Board of Legal & General Group Plc on
appointment, at which point Mark will step down from the Legal &
General Group Plc Board. The specific retirement and appointment
dates will be confirmed in due course.

How the Board operates
The Board is led by the Chairman, Sir John Kingman. The day-to-day
management of the group is led by Nigel Wilson, the Group Chief
Executive. The Non-Executive Directors play a key role in contributing
to the delivery of strong governance and their role is not limited to the
Boardroom. Examples of some of the other activities they have
undertaken during the course of the year are set out on page 59.

The Board is accountable for the long-term success of the company by
setting the group’s strategic objectives and monitoring performance
against those objectives. The Board meets formally on a regular basis
and, at each meeting, considers business performance, strategic
proposals, acquisitions and material transactions. The group and its
subsidiaries operate within a clearly defined delegated authority
framework, which has been fully embedded across the group. The
delegated authority framework ensures that there is an appropriate
level of Board contribution to and oversight of key decisions and that
the day-to-day business is managed effectively. The Board delegated

Legal & General Group Plc Annual Report and Accounts 2018
Governance report

authority framework consists of a clearly defined schedule of matters
reserved for the Group Board. The types of matters reserved for the
Board include, amongst other things, matters relating to the group’s
strategic plan, material transactions, risk appetite, and oversight of
systems of internal control and corporate governance policies. Those
matters which are not reserved are delegated by the Board to group
level committees and to the Group Chief Executive, who then delegates
decision making onward to the Group Capital Committee, an executive
decision making forum, and his direct reports.

How the Board spent its time in 2018
The Board met formally 8 times during 2018 and Board sub-committees
were constituted on a number of occasions in order to deal with matters
arising in the ordinary course of business outside of the formal schedule
of meetings. The Board held one two-day and one full-day strategy
event during the year. A table of individual Board member attendance
at the formal Board and committee meetings is provided on page 63.

Key areas of focus

Discussion and actions arising

The Group Board agenda is set by the Chairman and consists of
the following broad discussion areas:

• an update from the Group Chief Executive, the Group Chief Financial
Officer and each of the key business division heads on business
performance and key business initiatives.

• discussions on strategic proposals, acquisitions, material

transactions and other group matters.

• risk and compliance matters.

• legal and governance matters.

Board members and, as appropriate, individuals from the relevant
business areas are invited to present on key items, allowing the Board
the opportunity to debate and challenge on initiatives directly with the
senior management team along with the Executives.

Strategy

• At each Board meeting, the Board considered corporate and material transactions to ensure that proposed transactions were

aligned with the group’s strategy. The Board had early sight of pipeline initiatives.

• The Board assessed the range of ongoing corporate and commercial transactions to provide Board members with full

opportunity to debate and feed back to the management team.

• The Board held a full day strategy event which covered, among other things, the group’s medium-term strategic opportunities,

which had been determined as a key issue for the Board to focus on by the 2017 Board evaluation.

• The Board held a two-day strategy event in Cardiff, a city of prominent business and investment interest for the group, to
discuss progress against the group’s strategic plan, the strategic direction of the group and optionality for certain of the
business divisions, and the risks and future opportunities for the group with a particular focus on strategic considerations
and capability of executing against the plan.

• At its December meeting, the Board considered and approved the group’s five-year business plan and 2019 budget.

This included a review of the divisional strategic objectives, initiatives and KPIs.

Solvency II

• The Board considered and approved Internal Model Major Change applications.

Governance

• An externally facilitated Board evaluation took place in Q4 2018 and the Board considered the findings at the January 2019

meeting. Detailed recommendations arising from the evaluation were developed and were subsequently approved by the Board.

• The Board is regularly updated by the Group General Counsel and Company Secretary on legal matters, emerging regulation

and governance changes.

• The Board is regularly updated by the Group General Chief Risk Officer on risk and compliance matters.

Stakeholders

• During the year, the Board regularly considered the group’s relationship with various stakeholder groups. It discussed

shareholder matters, employee engagement, customers, and the group’s impact on, and relationship with, wider society.

• Employee engagement was a focus of the Board in 2018 and a number of new initiatives, including the appointment of

Lesley Knox as Designated Workforce Director and the rollout of a new employee survey, were implemented throughout the year.

• Board members met throughout the year with its key regulators, the Prudential Regulation Authority and Financial

Conduct Authority.

Strategy away days
Strategy remained a key focus for the Board throughout the course
of the year. It held two separate strategy events outside the formal
Board meeting schedule in 2018 – one full day event in April and one
two-day event in September. These events provided the Board with an
opportunity to reﬂect on the progress the group’s strategy is making
against the backdrop of the macro trends identified as the drivers of
strategy, and also allow Board members to debate, scrutinise and
review performance against the strategic plan. The Board also focuses
on the future and the next phase of the company’s strategy. The
agendas for the strategy events included debate and discussion
on strategic options involving the heads of each of the group’s key
business divisions.

Ensuring our directors have the right skills and experience
to maintain an effective Board
The Board believes that continuous director training and development
is important to maximise the effectiveness of the Board. The Chairman
is assisted by the Group Company Secretary in providing all new
directors with a comprehensive induction programme on joining the
Board. This is individually tailored to the knowledge and experience
of each individual and includes a series of meetings with members of
the Board and with the group’s operational and functional leadership,
external advisers to the group and a programme of meetings with staff.
This ensures they obtain a detailed overview of the group, its business
and governance framework as well as the regulatory environment in
which it operates.

Both Henrietta Baldock and George Lewis were provided with a
formal, tailored induction programme when joining the Board in 2018.
An example of the induction programme tailored for each incoming
non-executive director is provided on the following page.

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Tailored induction programme
• An introduction to the group’s corporate structure, governance
framework and guiding principles; meeting with the Group
Company Secretary who provided detail on the roles and
responsibilities of the Board, listed company requirements
and the 2016 and 2018 UK Corporate Governance Codes.

• Meetings with the CEO of each business division to receive an
overview of each business unit including information around
strategic goals, risk overview and management, customers and
key financials.

• Meetings with members of the Board, the Executive

Committee and senior management, covering areas such as:

– Group risk management

– Risk and compliance

– Finance

– Remuneration

– Investor relations and corporate affairs

• Meeting with the Group Actuary focusing on regulatory capital

and the Group’s Internal Model.

• Meeting with the Chairs of the Risk, Remuneration and Audit

Committee and the external auditor.

Subsequently, all Board members receive continuing education and
development opportunities at regular intervals throughout the year.
Board and Committee meetings are used regularly to update the Board
on developments in the areas in which the group operates and specific
training sessions for directors are scheduled for key topical issues.
The Board received, for example, a specific training session on IFRS17
in May and a specific session to update Board members on the changes
to the UK Corporate Governance Code in August. Other development
activities undertaken throughout the year included deep dives into our
businesses and Board site visits to business operations including: the
General Insurance division in Birmingham and Home Finance division
in Solihull and the LGC and LGIM developments in Cardiff, including
Central Square. While in Birmingham and Cardiff, the Board attended

receptions with a broad group of employees as part of the continuing
engagement with employees across the group. Non-executive directors
also visited various business operations and attended one-to-one
briefing sessions with key members of the senior management team
on a regular basis over the year.

Group Information Technology Committee
A Group IT Committee of the Board was established in January 2018,
the primary purpose of which was to provide assurance to Board on
the delivery of the company’s programme to implement planned
enhancements during 2018 to ensure the group was operating within
its targeted access management, information security and cyber risk
appetite. In addition the Committee’s remit was set to cover further IT
matters across the group, including IT strategy and the technology
aspects of major change programmes. This reflects the significant
multi-year investment and change agenda that the organisation is
undertaking across its IT estate to ensure delivery of the group’s
strategic objectives.

For 2018, a specific additional purpose of the Committee was to provide
assurance to the Board on the delivery of the company’s programme to
be GDPR compliant by May 2018.

The Committee’s membership comprises the Chairman, the Senior
Independent Director, the Chair of the Audit Committee and the Chair
of the Group Risk Committee. The Group Chief Executive, Group Chief
Financial Officer, Chief Risk Officer and Group IT Director are all required
standing attendees. In light of the Committee’s broad remit and the
extent of change activity across the group, the Committee met 11 times
during the year. The initial meetings focused on establishing a framework
for reporting and addressing immediate concerns such as ensuring
compliance with GDPR by the implementation date. The later meetings
focused on refining the management information and metrics presented
to the Committee, reviewing ongoing work across all IT activities and
working towards an appropriate IT and cyber security risk appetite.

Throughout the year the Committee provided effective oversight of
the company’s cyber security, information security and access
management and GDPR programmes.

2018 Board and Committee evaluations

The Board undertakes a formal review of
its performance and that of its committees
each year. The 2018 review was conducted by
Lintstock, an external board review specialist.
Lintstock have no other connection to the
company. The aim of the review was to assess
the effectiveness of the Board, both as a
collective unitary board, and at individual
Board member level, in order to implement
any actions required to become a more
effective Board. The performance of each of
the Board Committees was also assessed.

Recommendations from 2018

The review focused in particular on the following areas:

• Board composition, expertise and dynamics

• Strategic and performance oversight

• Succession planning and human resource management

• Priorities for change

The review included a review of the Chairman and individual directors’ performance.

The results of the review were extremely positive. A summary of recommendations from the
review is set out below, together with an update on the progress made against the
recommendations from the 2017 internal review.

Continue to have regular oversight over and involvement in executive and senior management development and succession.

Continue to improve the Board’s understanding of the views and requirements of customers.

Enhance the Board’s understanding of digital and technological developments and major projects.

Continue to improve oversight of the group’s subsidiaries, including holding an annual event for Group Board and key subsidiary board
non-executive directors.

Legal & General Group Plc Annual Report and Accounts 2018Governance report

Recommendations from 2017 review

Progress against 2017 recommendations

Evolve the medium-term succession plans
for non-executive and executive directors and
senior management in line with the group’s
strategic ambitions.

Throughout the year the Nominations Committee held sessions on executive and senior management
succession planning and Board succession. In addition, the Group Board received two sessions on the
top talent at the levels below senior management. At the Group Board strategy event in September,
the Group HR Director presented a session on the capability of the group to implement the strategy
as set out in the group’s five-year plan.

Against the backdrop of the UK Stewardship
Code, assess how the group engages with
existing and potential shareholders.

The Chairman undertook a number of meetings with shareholders in 2018 and the executive meet
with shareholders on a regular basis.

Work is ongoing in this area and the Board received a detailed presentation from its brokers in
February 2019 on investor targeting.

Assess how the Board’s consideration of the
views and requirements of group employees
can be enhanced.

Lesley Knox was appointed as Designated Workforce Director in October 2018 and a schedule of
work in relation to Lesley’s new role is underway. Lesley reports back to the Board at each meeting
on employee-related matters.

A new employee survey tool was introduced in 2018. The Board receives periodically detailed metrics
on the views and requirements of employees coming out of the survey.

The Board has had opportunities throughout the year to meet group employees in various locations,
including in Birmingham and Cardiff.

Continue to maintain the group’s focus on
culture, including ensuring that the group’s
culture and core values are maintained as the
group grows.

The Board discussed the group’s culture in detail in the October Board meeting and specifically when
considering the formation of and recommendations coming out of the new employee survey tool
introduced by the group in 2018. When considering material acquisitions and strategic expansion
throughout the year, maintaining the group’s culture was a focus for the Board.

Under the new UK Corporate Governance Code the Board will have a specific duty to assess and
monitor culture. The Board is well positioned going forward to build on the work undertaken in this
area in 2018 to comply with this duty.

Assess the group’s brand and the strength and
opportunities of the brand.

The group appointed a new Group Brand Director at the beginning of 2018. The Board undertook a
detailed discussion on the group brand in December 2018 where the strength and opportunities of the
brand in the UK were fully explored.

Work continues on how to harness the strength and opportunities of the brand in the UK and on
properly understanding the value of the brand in the US and other international markets.

Stakeholder engagement
Each year the Chairman meets a number of the group’s major investors,
providing them with the opportunity to ask the Chairman questions and
to discuss a variety of topics relating to the group. In 2018 the Chairman
held 22 investor meetings. Some of the themes that emerged from
these meetings included culture; LGIM and group succession planning;
Board composition; the dividend; and pension risk transfer and direct
investments.

Designated Workforce Director
On 4 October 2018 Lesley Knox was appointed as Designated
Workforce Director for the group. This positions Lesley as the identified
director responsible for gathering the views of our employees and
representing the views of our workforce at Board level. Lesley’s new
role will facilitate effective engagement with our employees and
strengthen the link between workers and the boardroom.

Lesley is in the process of scoping the role and developing a work plan
to ensure that engagement is as effective as possible and her new role
satisfies the requirements of our employees. It is intended that some of
the key activities will include:

• Leading a programme of ‘workforce listening’ events across the UK

business, including formal meetings on specific subjects with targeted
cohorts, informal in-person listening sessions, and on-line discussions;

• Reviewing workforce metrics, feedback and engagement mechanisms;

• Meeting with elected workforce representatives, including Unite and

MCF, and other employee network groups;

• Reporting to the Board on key issues and themes, and representing

the workforce view in Board discussions and decision making.

Lesley has a standing item at every Board meeting to report back to the
Board on employee related matters.

Sir John Kingman
Chairman

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Committed to the
highest standards

Compliance with the 2016 UK Corporate Governance Code.
For the year ended 31 December 2018, we are pleased to
report that we have applied the principles and complied
with the provisions of the Code.

A. Leadership

B. Effectiveness

B1 The composition of the Board
The Nominations Committee is responsible for
reviewing the composition of the Board and, in
making recommendations for appointments to
the Board, the Committee considers the balance
of skills, experience and knowledge needed in
order to enhance the Board and support the
company in the execution of its strategy. Details
of the work undertaken by the Nominations
Committee are set out on pages 64 and 65.

B2 Appointments to the Board
The Nominations Committee is responsible for
leading the process of appointing new directors
to the Board. The Committee is committed to
ensuring that all appointments are made on
merit having evaluated the capabilities of all
potential candidates against the requirements of
the Board, with due regard for the beneﬁts of all
types of diversity, including diversity of gender,
social and ethnic backgrounds, cognitive and
personal strengths. Further details of the
appointments undertaken during the year can be
found on page 58 and a summary of the Board’s
policy on diversity can be found on page 65.

B3 Commitment
The Non-Executive Directors’ letters of
appointment set out the time commitment
expected from them. At times, this time
commitment may go beyond that set out in the
letter of appointment and is therefore reviewed
regularly. External commitments, which may
have an impact on existing time commitments,
must be agreed in advance with the Chairman.
In addition, the policy for the identification and
management of directors’ conflicts of interest
is reviewed on an annual basis. The signiﬁcant
commitments of each of the directors are
included in the Board biographies on pages 52
and 53. The Chairman’s commitments were
considered as part of his appointment and the
Board agreed that he had no commitments that
were expected to have a negative impact upon
his time commitment to the Company. This is
kept under review.

B4 Development
The Board places great value on the inductions
that are offered to new non-executives and the
ongoing training opportunities made available
to all Board members. Over the course of the
year directors have attended one-to-one
briefing sessions with members of the senior
management team as well as more formal
Board training sessions. Further details of the
development sessions which have taken place
during the year are set out on page 60.

B5 Information and support
Procedures are in place to ensure that
Board members receive accurate and timely
information via a secure electronic portal.
All directors have access to the advice of the
Group General Counsel and Company Secretary
as well as independent professional advice at
the expense of the company.

B6 Evaluation
An internal board effectiveness review was
undertaken this year. Sir John Kingman’s
performance was appraised as part of this
review. An externally facilitated evaluation was
undertaken by Oliver Ziehn of Lintstock in 2017.
Details of this year’s internal evaluation and an
update on the recommendations from the 2017
external evaluation are set out on page 61.

B7 Re-election
All directors were subject to shareholder
election or re-election at the 2018 AGM, with
the exception of those directors who were
retiring at the conclusion of the meeting. All
directors received over 98% votes in favour of
their re-election at the 2018 AGM. All directors
will be subject to shareholder election or
re-election at the 2019 AGM.

A1 The role of the Board
The Board held eight formal meetings
throughout the year, with additional ad hoc
meetings held in line with business need.
A number of sub-committee meetings took
place to deal with matters such as the final
approval of the full and half year results.
The Board’s agenda is set by the Chairman and
deals with those matters reserved to the Board,
including matters relating to the group’s
strategic plan, risk appetite, and systems of
internal control and corporate governance
policies. Matters delegated to the Group Chief
Executive include managing the group’s
business in line with the strategic plan and
approved risk appetite, and responsibility for
the operation of the internal control framework.
There is a formal schedule of matters reserved
for the Board which sets out the structure under
which the Board manages its responsibilities,
providing guidance on how it discharges its
authority and manages the Board’s activities.

A2 Division of responsibilities
The roles of the Chairman and Group Chief
Executive are clearly deﬁned and the role proﬁles
are reviewed as part of the annual governance
review undertaken by the Board. Sir John
Kingman, the Chairman, is responsible for
leading the Board while Nigel Wilson, Group
Chief Executive, is responsible for the day-to-day
management of the company within the strategy
set by the Board.

A3 The Chairman
The Chairman sets the agendas for meetings,
manages the meeting timetable and encourages
an open and constructive dialogue during
meetings. Sir John Kingman was identified
by the directors as being independent on
appointment, in accordance with the
independence criteria set out in provision
B.1.1 of the Code.

A4 Non-executive directors
The Chairman encourages an open and
constructive dialogue in the boardroom and
actively invites the views of all Board members.
The Chairman is available to the Non-Executive
Directors and the Non-Executive Directors
regularly meet in the absence of the Executive
Directors. In addition, the Chairman and Senior
Independent Director are both available to
shareholders should they have any concerns
they wish to raise.

UK Corporate Governance Code
A full version of the Code can be
found on the Financial Reporting
Council’s website

Please visit:
frc.org.uk

Legal & General Group Plc Annual Report and Accounts 2018Committed to the highest standards

C. Accountability

D. Remuneration

C1 Financial and business reporting
The Strategic report, located on pages 1 to 49,
sets out the performance of the company, the
business model, strategy, and the risks and
uncertainties relating to the company’s future
prospects. When taken as a whole, the directors
consider the annual report is fair, balanced and
understandable and provides information
necessary for shareholders to assess the company’s
performance, business model and strategy.

C2 Risk management and internal control
The Board sets the company’s risk appetite
and annually reviews the effectiveness of the
company’s risk management and internal control
systems. A description of the principal risks
facing the company is set out on pages 48 and
49. Page 47 sets out how the directors have
assessed the prospects of the company, over
what period they have done so and why they
consider that period to be appropriate (the
‘viability statement’). The activities of the Audit
and Group Risk Committees, which assist the
Board with its responsibilities in relation to
ﬁnancial reporting, audit matters, risk appetite
setting and risk management, are set out on
pages 66 to 71. A Group IT Committee was
established at the beginning of 2018. The
Committee enabled the Board to have greater
oversight of the company’s programme to
implement improvements during 2018 to ensure
the group is operating within its targeted access
management, information security and cyber risk
appetite. In Q4 2018 the remit of the committee
was expanded to cover a broader remit of IT
issues across the group. Further details are
set out on page 60.

C3 Audit Committee and auditors
The Audit Committee comprises six independent
Non-Executive Directors and the Board delegates a
number of responsibilities to the Audit Committee,
including oversight of the group’s ﬁnancial
reporting processes and internal control, and the
work undertaken by the external and internal
auditors. The Committee also supports the Board’s
consideration of the company’s viability
statement and its ability to operate as a going
concern. The Audit Committee chair provides
regular updates to the Board on key matters
discussed by the Committee. The Audit
Committee’s terms of reference are reviewed
annually and are available on the website,
legalandgeneralgroup.com.

D1 The level and components of remuneration
The company aims to reward employees fairly
and its remuneration policy is designed to
promote the long-term success of the company
whilst aligning the interests of both the directors
and shareholders. Shareholders approved the
remuneration policy at the 2017 AGM. The
Directors’ remuneration policy is set out on
pages 78 to 85.

D2 Procedure
The Remuneration Committee is responsible
for setting the remuneration for all executive
directors. Details of the composition and the
work of the Remuneration Committee are set
out in the Directors’ Remuneration Report on
pages 72 to 101.

E. Relations with shareholders

E1 Dialogue with shareholders
Board members take an active role in engaging
with both institutional and retail shareholders,
both in private meetings and in wider forums
such as the AGM. The Chairman and the Senior
Independent Director aim to meet the major
institutional investors at least once per year and
are available to meet other investors on request.
The Chairman shares feedback from these
meetings with the wider Board. A capital markets
event for investors was held in June 2018.

E2 Constructive use of the AGM
The Board values the AGM as an important
opportunity to engage with investors. Attendees
have the opportunity to ask questions of the
Board and are invited to meet the Board
following the formal business of the meeting.

Board and Committee meetings attendance during 20181

Director

Appointment
date

Committee
appointments

Board(8)

Audit
Committee(5)

Nominations
Committee(2)

Remuneration
Committee(5)

Group Risk
Committee(6)

Group IT
Committee(11)

Chairman and Executive directors

Sir John Kingman2

24 October 2016

N D Wilson

J Davies

K Procter

M Zinkula

Non-executive directors

J Wilson

H Baldock4

C Bradley

P Broadley

L Knox

G Lewis5

T Strauss

1 September 2009

9 March 2017

18 September 2012

9 November 2011

4 October 2018

8 December 2014

8 July 2016

1 June 2016

1 November 2018

1 January 2017

8/8

7/83

2/2

8/8

1/1

8/8

4/5

2/2

5/5

4/5

1/1

5/5

2/2

0/0

2/2

0/0

2/2

5/5

5/6

2/2

6/6

4/6

1/1

6/6

1. Attendance at meetings in accordance with the formal schedule of meetings.
2. Attends all Audit, Remuneration and Group Risk Committee meetings as an invitee.
3. Attended all scheduled Board meetings but was unable to join one ad hoc meeting dealing with a single item.
4. Appointed 4 October 2018.
5. Appointed 1 November 2018.

11/11

9/11

6/11

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Nominations
Committee report

Sir John Kingman
Chairman

The role of the Committee
The Committee has overall responsibility for leading the process for
new appointments to the Board and ensuring that these appointments
bring the required skills and experience to the Board to support the
Board’s role in development and oversight of the group’s strategy. As
part of this, the Committee reviews the structure, size and composition
of the Board to ensure the Board is made up of the right people with
the necessary skills and experience whilst striving to achieve a Board
composition that promotes diversity of thought and approach.

The Committee’s key responsibilities are:

• Regularly reassessing the structure, size and composition of the
Board and recommending any suggested changes to the Board.

• Reviewing the criteria for identifying and nominating candidates

based on the specification for a prospective appointment including
the required skills and capabilities.

• Considering succession planning for directors and other senior
executives, taking into account the promotion of diversity and
inclusion, the challenges and opportunities facing the company,
and what skills and expertise will be needed by the Board in future,
ensuring the continued ability of the company to compete effectively
in the market place.

• Reviewing the time commitment required from Non-Executive

Directors and assessing the Non-Executive Directors’ other significant
commitments to ensure that they continue to be able to fulfil their
duties effectively.

The Committee’s terms of
reference, which set out full details
of the Committee’s responsibilities,
can be viewed on our website:

Please visit:
legalandgeneralgroup.com/
about-us/corporate-governance/
group-board-committees/

The composition of the Committee
The Committee is composed of all the
independent Non-Executive Directors. The table
below sets out the Committee membership
during the year. The Group Chief Executive and
Group HR Director may be invited to attend
meetings where this may assist the Committee
in fulﬁlling its responsibilities and, most notably,
in relation to executive appointments and
succession planning.

Members:

Sir John Kingman (Chair)

Julia Wilson

Henrietta Baldock from 4 October 2018

Carolyn Bradley

Philip Broadley

Lesley Knox

George Lewis from 1 November 2018

Toby Strauss

In line with our conﬂicts of interest management
policy, directors are asked to absent themselves
from any discussions relating to his/her own
reappointment or succession.

How the Committee spent its time in 2018
During 2018 the Committee has focused in particular on the
recruitment of two new Non-Executive Directors, Henrietta Baldock
and George Lewis. Their biographies are detailed on pages 52 to 53
and show the strength and depth of skills and experience they have
brought to the Board.

The Committee identified that the Board’s skill set could be
strengthened with the addition of increased asset management and
insurance knowledge and US experience, reflecting feedback from
previous Board evaluations. The Committee produced a detailed
candidate brief and engaged external search consultants Heidrick &
Struggles, JCA Group, to undertake the search. On the basis of this
brief, a long list of candidates was produced including candidates from
a range of diverse backgrounds. Following rigorous interviews, the
Committee recommended the appointment of George Lewis to the
Board, which occurred in November 2018.

The Board’s skill set was further strengthened with the
recommendation of Henrietta Baldock’s appointment to the Board.
Henrietta was appointed as Chair of LGAS in March 2018 and is
continuing that role following her appointment to the Group Board
in October 2018. She has brought to the Board further extensive
knowledge of the financial services and insurance sectors through
her 25 years’ experience in investment banking.

The Committee has continued to focus on succession planning for the
executive and senior management, with particular focus on succession
for the LGIM CEO role following the announcement made in May
2018 regarding Mark Zinkula’s intention to retire from the Company
in August 2019.

Legal & General Group Plc Annual Report and Accounts 2018Nominations Committee report

The Committee only engages
executive search ﬁrms that are
signatories to the Voluntary Code
of Conduct for Executive Search
Firms, which promotes gender
diversity and best practice for
corporate board searches. In 2018,
the company engaged Heidrik &
Struggles, JCA Group and Korn
Ferry which are both signatories
to this Code and have no other
connection to the company.

The Committee briefs the search
ﬁrm to ensure that the pool of
candidates presented includes
candidates with an appropriate
range of experience, knowledge
and background, and who
demonstrate independence of
approach and thought. As detailed
on page 64, this process was
followed for the recruitment of
our new non-executive directors
appointed in 2018.

The Committee is responsible for evaluating the independence
of all non-executive directors and undertakes an annual review
of each non-executive director’s other interests. The Board,
on the recommendation of the Committee, is satisfied that each
non-executive director serving at the end of the year remains
independent and continues to have sufficient time to discharge
their responsibilities to the company. Julia Wilson has served
on the Board for seven years and, as a result, her continued
independence was subject to more rigorous review. Committee
members considered Julia’s external interests and other
relationships which could materially interfere with her ability to
exercise independent judgement. It was concluded that there
were no circumstances which would affect Julia’s ability to act
in the best interest of the company and that her length of tenure
had no detrimental impact on her level of independence.

Our approach to diversity
Our approach to diversity on the Board is set out in our Group Board
Diversity Policy, which is reviewed annually. We have continued to
recruit based on merit while remaining committed to diversity in
the widest sense including diversity of gender, social and ethnic
backgrounds, cognitive and personal strengths, when seeking to
fill vacant Board positions and for the company more generally.

We have maintained the diversity on our Board which comprises
33% females and 67% males, whilst our Executive Committee
comprises 27% females and 73% males. Three of our seven
business divisions are led by a female CEO. The Board continues to
support Lord Davies’ and the Hampton-Alexander voluntary targets,
namely for a third of all Board members in FTSE 350 companies and
FTSE 100 companies to be women by 2020. Further than this, the
Board supports the Legal & General 50/50 by 2020 Network which
aims to have a 50/50 balance of men and women right through the
organisation by 2020. More information can be found on pages 35 to 37.
The chart opposite demonstrates the Board’s current position.

The Board continues to support the delivery of the talent and
leadership programmes within the wider organisation which seek
to address diversity imbalance by removing barriers that prevent
people from realising their potential. Board members actively
participate in discussions relating to talent and leadership and a
number of Board members act as mentors to individual employees
who have been identified as future leaders.

We have published our Gender Pay Gap data, which can be found
online at: legalandgeneralgroup.com/media-centre/reports.
A summary is available on page 36 of this report.

Diversity

Gender

As at 31 December 2018
the Board comprised:

Females 33%
Males 67%

Sector experience

Board members come from
the following backgrounds:

Financial Services 92%
Customer and Retail 8%

Tenure (years)

Sir John Kingman
Chairman

The length of tenure of the
non-executives varies:

Over six years 12.5%
Between three and six years 12.5%
Between one and three years 50%
Less than one year 25%

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Audit Committee
report

Philip Broadley
Chairman of the Audit Committee

The composition of the Committee
The Committee is composed entirely of
independent non-executive directors. The table
below sets out its membership during the year.

Members:

Philip Broadley (Chair)

Henrietta Baldock from 4 October 2018

Lesley Knox

George Lewis from 1 November 2018

Toby Strauss

Julia Wilson

Other regular attendees at Committee meetings
include the following:

Group Chairman; Group Chief Executive; Group
Chief Financial Officer; Group Chief Risk Officer;
Director of Group Finance; Group Chief Internal
Auditor; Legal & General Retirement Finance
Director; LGIM Finance Director; Group Actuary;
Chief Tax Officer; Representatives of the external
auditor, KPMG LLP.

Letter from the Chairman
Dear Shareholder
I am pleased to present the Audit Committee Report for the year
ended 31 December 2018. The report explains the work of the Audit
Committee during the year, and meets the disclosure requirements
set out in the 2016 UK Corporate Governance Code (the ‘Code’).

The Code requires that the Audit Committee must operate effectively
and efficiently and that its members have a balance of skills and
experience to deliver its responsibilities. During the year under review,
Henrietta Baldock and George Lewis joined the Audit Committee on
4 October and 1 November 2018 respectively, and all members of the
Audit Committee have varied experience including: as executives in the
financial services and other sectors; as non-executive directors in other
sectors; and as Board members responsible for financial reporting.
The Board consider that I meet the requirements of the Code in having
recent and relevant financial experience, as do other members of the
Audit Committee.

It is worth highlighting that all members of the Audit Committee are
also members of the Group Risk Committee, ensuring the appropriate
identification and management of any issues that are relevant to
both Committees.

The Audit Committee meets regularly and privately with each of
the external auditor and the Chief Internal Auditor. These meetings
allow for regular and open dialogue of any issues relevant to the Audit
Committee’s work. Audit Committee members also meet regularly with
management outside of formal Committee meetings to discuss topical
issues and maintain their understanding of the group’s businesses.

Audit Committee focus for the 2018 year
During 2018, the Audit Committee met five times in accordance with
its annual plan and additional meetings were arranged as necessary.
In line with its purpose, the Audit Committee’s time over the course
of the year was spent in consideration of:

• The integrity of the Company’s financial statements and Solvency II
disclosures, including consideration of the viability statement and
going concern assessments

• Key accounting and actuarial areas of judgement

• The adequacy and effectiveness of our systems of internal control,

including whistleblowing

• The effectiveness, performance and objectivity of both the internal

and external audit functions

During September 2018, the Company received a letter from the
Corporate Reporting Review Team (‘CRRT’) of the Financial Reporting
Council (‘FRC’), as part of its regular review and assessment of the
quality of corporate reporting in the UK, requesting further information
in relation to the company’s 2017 Annual Report and Accounts. The
letter focused on the disclosure of Alternative Performance Measures
(‘APMs’) and Critical Accounting Judgements. In relation to APMs,
the CRRT raised questions regarding the labelling and reconciliation
of certain measures within the Annual Report and Accounts. On Critical
Accounting Judgements, the CRRT raised questions over the specific
nature of the judgements that are made and how they have been
concluded on. We have responded to the CRRT’s questions providing
clarifying information and proposing specific enhancements to the 2018
Annual Report and Accounts, all of which have been applied. The CRRT
subsequently confirmed in writing that it had closed its enquiries.

Legal & General Group Plc Annual Report and Accounts 2018Audit Committee report

Following the conclusion of the 2016 tender process, KPMG LLP
(‘KPMG’) were appointed as the group’s external auditors with effect
from the financial year commencing 1 January 2018. Shareholder
approval of the appointment was received at the Annual General
Meeting of the Company on 17 May 2018. KPMG were invited to
observe the audit of the financial year ended 31 December 2017 and
attended Audit Committee meetings in order to ensure an effective
and orderly transition. I believe that, following their appointment, the
transition period has run smoothly and we look forward to working with
KPMG over the coming years. However, given that KPMG has only just
completed its first full year audit, no external auditor effectiveness
review was carried out in 2018. A review will be conducted during
2019 of KPMG’s first year as auditors.

The information on the following pages sets out in detail the activities of
the Audit Committee during the year. I hope that you will find this report
useful in understanding our work and I welcome any comments from
shareholders on my report.

Philip Broadley
Chair of the Audit Committee

How the Audit Committee spent its time in 2018
The Audit Committee is a Board Committee with governance
responsibilities that include the oversight of financial disclosures and
corporate reporting. The Board has delegated to the Audit Committee
the following principal responsibilities to assist the Board in discharging
its responsibilities with regards to monitoring the integrity of the group’s
financial statements, monitoring the effectiveness of the internal control
(including financial internal control) framework and the independence
and objectivity of the internal and external auditors. The Audit
Committee is also responsible for advising the Board on whether
the Annual Report and Accounts, taken as a whole, are fair, balanced
and understandable and for reviewing the basis on which the Board
provides the viability statement and going concern assessment.
These considerations have been factored into our year-end processes.

Percentage of time allocated
to specific agenda items

Financial reporting,
including areas of judgement,
and reporting developments 48%
External audit 16%
Internal audit 9%
Internal controls 9%
Other (including governance) 18%

The Audit Committee’s terms of reference, which set out full
details of the its responsibilities, can be viewed on our website:
legalandgeneralgroup.com/about-us/corporate-governance/
group-board-committees/

The Audit Committee has an annual work plan aligned with the financial
reporting cycle of the Company. The Audit Committee’s activities fall
into three principal areas:

• Accounting and Financial Reporting

• Internal Control

• External Auditor

Accounting and financial reporting
The Audit Committee reviews the appropriateness of the half year and
annual financial statements, which it carries out with both management
and the external auditors. This review includes ensuring that the
Annual report and Accounts, taken as a whole, are fair, balanced and
understandable; that they comply with disclosure requirements; and
they reflect the material areas in which significant judgements have
been applied.

In collaboration with the Group Risk Committee, the Audit Committee
also reviews the disclosures to be made in relation to internal control
and risk management, and principal risks and uncertainties.

The significant accounting issues considered in relation to the 2018
financial statements are detailed on page 68.

Robust year-end governance processes are in place to support the
Audit Committee’s considerations which include:

• ensuring that all of those involved in the preparation of the company’s
annual report have been appropriately trained and fully briefed on the
‘fair, balanced and understandable’ requirements;

• internal legal verification of all factual statements, together with legal

verification of descriptions used within the narrative;

• regular engagement with and feedback from senior management on

proposed content and changes;

• feedback from external advisers (corporate reporting specialists,
remuneration and strategic reporting advisers, external auditor) to
enhance the quality of our reporting; and

• early opportunity for review and feedback on our annual report by

Audit Committee members.

The Audit Committee, having completed its review, recommended
to the Board that, when taken as a whole, the 2018 annual report is fair,
balanced and understandable, and provides the information necessary
for shareholders to assess the Company’s position and performance,
business model and strategy. The Audit Committee, together with
the Group Risk Committee, reviewed the key assumptions and
methodologies of the risk-based capital model as well as related
Solvency II disclosures and the proposed disclosures pertaining to
the group’s economic capital disclosure.

During the year, the Audit Committee has continued to keep abreast
of significant and emerging accounting developments, in particular
changes to IFRS relating to insurance accounting and financial
instruments. The Audit Committee regularly considers the progress of
the projects to implement new standards, in particular IFRS 17, and the
key judgements relating to their implementation, including the expected
impacts on results and the approach to transitional disclosures.

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Significant accounting issues considered by the Committee

Issue

Committee’s response

Valuation of non-participating insurance contract
liabilities – retirement:

The Committee evaluated the significant judgements that have an impact on the valuation of
non-participating insurance liabilities for retirement products. This included considering:

The non-participating insurance liabilities for
retirement products are significant in size and
their estimation is inherently judgemental.

Valuation of complex investments:

Mark to model investments can involve
significant judgement and can produce valuation
challenges for investments in new classes.

Mark to model valuations inherently include
assumptions that lead to the existence of a range
of plausible valuations for financial instruments
(known as valuation uncertainty). Certain assets
are subject to a higher degree of valuation
uncertainty particularly where valuations are
modelled using no-market inputs or the
valuations are affected by other factors such
as the illiquidity of the asset.

Valuation of non-participating insurance
liabilities – insurance:

The non-participating insurance liabilities for
protection contracts are an important driver
of the profitability for this line of business and
require judgements to be made regarding the
assumed rates of mortality and persistency.
The company makes extensive use of
reassurance to reduce mortality risk.

Valuation interest rates – which are used to discount the liabilities. These are sensitive to judgements
made, for example, on credit default of the backing assets, as well as the investment data used to
calculate the internal rate of return. The Committee focused on management’s proposed changes
to reserving assumptions, other modeling changes, and the determination of the credit default
assumption. This included analysis of internal historic data and external market experience,
including consideration of Brexit outcomes.

Longevity assumptions – which estimate how long policyholders receiving annuity payments will
live. The challenge around the setting of longevity assumptions was a particularly significant area
for review as the judgements could be expected to have a material impact on the group’s results.
The Committee considered the effectiveness of the controls over the accuracy and completeness of
the data used in determining the longevity assumption and the validity of independent industry data
supporting those assumptions. The Committee also reviewed available data illustrating recent trends
in mortality experience in the UK population and the mortality experience on different blocks of our
business.

The Committee concluded that the retirement insurance contract liabilities are appropriate for
including in the financial statements, reflecting the asset risks and the available data on policy
holder longevity.

The valuation of property assets, lifetime mortgages, private credit and certain unquoted equities
require the use of complex models and management judgement. The Committee seeks to ensure
that the valuation process for these investments is robust.

The Committee reviewed the processes and controls over investment valuations, in particular the
valuation uncertainty policies and governance which included management’s assessment of valuation
uncertainty by asset type. The Committee also reviewed available data illustrating recent trends in
relation to retail property assets in the UK, and obtained comfort that market conditions were being
reflected in the relevant asset valuations.

The Committee concluded that there are appropriate controls surrounding the valuation of complex
assets and that they are valued appropriately for inclusion in the financial statements.

The Committee has reviewed the methodology for calculating reserves including the allowance made
for payments to and from reassurance counterparties. The assumptions for the rate of future mortality
and morbidity (how many customers will die or become ill during the policy term) and persistency
(how many customers will discontinue cover) are based on the company’s internal experience and
use judgement about how experience may vary in the future.

The Committee reviewed the assumptions and the expected level of prudence taking into account
market benchmarking, internal experience studies and the reassurance structure. The Committee
also considered the internal control environment in place to control the valuation models.

The Committee concluded that the insurance liabilities of the Insurance division are appropriate for
inclusion in the financial statements.

Internal control
The Board has delegated responsibility for reviewing the effectiveness
of the group’s systems of internal control to the Audit Committee.

The Audit Committee has the primary responsibility for the oversight
of the group’s system of internal controls including financial control
and the work of the internal audit function. The Audit Committee,
in collaboration with the Group Risk Committee, seeks to ensure that
the group operates within a framework of prudent and effective
controls that allow risk to be identified, assessed and managed.

The Audit Committee has completed its review of the effectiveness of
the group’s system of internal control policies and procedures, during
the year and up to the date this report was approved, in accordance
with the requirements of the Guidance on Risk Management, Internal
Control and related Financial and Business Reporting published by the
FRC. During this review, the Audit Committee did not identify any
weaknesses which were determined to be significant to the preparation
of the financial statements. The Audit Committee also noted that there
were no significant changes to the control environment identified in the

current year, significant to the preparation of the financial statements.
Where areas for improvement were identified, processes are in place to
ensure that the necessary actions are taken and progress is monitored
by the Audit Committee.

The Audit Committee monitored and reviewed the scope, extent
and effectiveness of the activity of the Group Internal Audit function.
In particular, the Audit Committee evaluates the alignment of the
internal audit plan with the group’s key risks and strategy.

The Group Chief Internal Auditor has a standing agenda item at each
Audit Committee meeting to update the Audit Committee on audit
activities, progress of the audit plans, the results of any unsatisfactory
audits and the action plans to address these areas. In 2018, 107 audits
were completed in line with the Internal Audit Plan approved by the
Audit Committee. There was a particular focus on key themes
including cyber/data management and governance, digital business
and regulatory change, conduct risk, financial management and
control, model risk, outsourcing/vendor management and economic
and political volatility.

Legal & General Group Plc Annual Report and Accounts 2018Audit Committee report

The external auditor
The Audit Committee has the primary responsibility for overseeing the
relationship with, and performance of the external auditor. This includes
making recommendations for their appointment, re- appointment,
removal and remuneration.

The Audit Committee reviews and approves the terms of engagement
of the external auditor and monitors its independence. This includes
overseeing, and in certain circumstances approving, the engagement
of the external auditors for non-audit work. The non-audit services
policy prohibits the auditor from providing the following services:

Appointment
The Audit Committee is cognisant of the requirements governing the
appointment of an external auditor, notably the requirements of the
Competition and Markets Authority (‘CMA’) in relation to the mandatory
re-tendering of audit services every ten years, together with the
European Union’s requirements for mandatory audit firm rotation.
The Company confirms that it has complied with the CMA
requirements for the financial year under review.

Indeed, following the conclusion of the 2016 tender process,
KPMG were appointed as the Group’s external auditors with effect
from the financial year commencing 1 January 2018. Shareholder
approval of the appointment was received at the Annual General
Meeting of the Company on 17 May 2018. KPMG were invited to
observe the audit of the financial year ended 31 December 2017
and attended Audit Committee meetings in order to ensure an
effective and orderly transition.

Performance
The Audit Committee assesses the effectiveness of the external
auditor against some of the following criteria:

• Provision of timely and accurate industry specific and

technical knowledge

• Maintaining a professional and open dialogue with the Audit

Committee Chair and members at all times

• Tax advice and compliance

• Management or decision making

• Book-keeping and preparing accounting records or statements

• Design or implementation of internal controls

• Valuation

• Legal, internal audit or human resources

• Those linked to financing, capital structure or allocation, or

investment strategy

• Promoting, dealing in or underwriting share issues

• Payroll services

Remuneration
In 2018, the group spent £2.3 million on non-audit services provided by
KPMG. It spent a further £0.8 million on audit-related services required
by legislation, which is excluded from any calculation of the ratio of
non-audit to audit fees in accordance with the UK FRC Ethical Standard
for Auditors (June 2016). Further details can be found in Note 31 to the
consolidated financial statements. The non-audit fee represents 38%
of the total audit fee for 2018.

Analysis of current and prior-year spend on audit, other assurance
and non-assurance services:

• Delivery of an efficient audit and the ability to meet objectives

Audit

within the agreed timeframes

Audit-related required by legislation

• The quality of its audit findings, management’s response and

Other audit-related

2018

2017

2016

6.0

0.8

0.6

0.2

1.5

9.1

6.1

0.8

1.0

0.4

0.8

9.1

5.7

1.0

0.4

1.1

9.2

Other assurance

Non-assurance

Total

stakeholder feedback

The Audit Committee receives regular reports from the external auditor
on audit findings and significant accounting issues. In 2018, the Audit
Committee continued to focus on the external auditor’s assurance work
on the financial control environment, as well as their conclusions on the
significant accounting issues noted above.

In addition, during the year, the Financial Reporting Council’s Audit
Quality Review Team (‘AQRT’) reviewed PwC’s audit of the group’s
2017 financial statements as part of their annual inspection of audit
firms. The Audit Committee received and reviewed the final report
from the AQRT which indicated that there were no significant areas
of concern.

The Chair of the Audit Committee regularly meets the external auditor
throughout the course of the year. The Audit Committee also meets
the external auditor in private throughout the year.

Following the audit tender process, the policy was updated and
approved by the Audit Committee to address the requirements as set
out in the EU Audit regulation.

Our policy is to approach other firms for significant non-audit work.
The group’s policy requires that all services with an anticipated cost in
excess of a specified amount are subject to a full competitive tender
involving at least one other alternate party in addition to the external
auditor. If the external auditor is selected following the tender process,
the Audit Committee is responsible for approving the external auditor’s
fees on the engagement. For services with an anticipated cost below
the specified amount, the Group Chief Financial Officer has authority
to approve the engagement. The external auditor and management
are required to report regularly to the Audit Committee on the nature
and fees relating to non-audit services provided under this authority.

The Audit Committee remains satisfied that KPMG continued to be
independent. In addition, KPMG annually reports on whether and why
it deems itself to be independent.

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Group Risk
Committee report

The composition of the Committee
The Committee is composed entirely of
independent non-executive directors. The table
below sets out its membership during the year.

Members:

Toby Strauss (Chair)

Henrietta Baldock from 4 October 2018

Philip Broadley

Lesley Knox

George Lewis from 1 November 2018

Julia Wilson

Other attendees at Committee meetings include:
the Group Chairman; Group Chief Executive;
Group Chief Financial Officer; Group Chief Risk
Officer; Group Conduct Risk Director; Group
Chief Internal Auditor; Chief Executive Officer
LGC; and representatives of the external auditor,
KPMG LLP.

Toby Strauss
Chairman of the Group Risk Committee

The role of the Committee is to assist the Board in the oversight of the
risks to which the group may be exposed and to provide the Board with
strategic advice in relation to current and potential future risk exposures.
This includes reviewing the group’s risk profile and appetite for risk,
and assessing the effectiveness of the group’s risk management
framework. The group’s approach to the management of risk is set
out in more detail on pages 44 to 49.

Committee activities during 2018
The work of the Committee is supported by the Group Chief Risk
Officer and the Company Secretary, who assist the Committee
Chairman in planning the Committee’s work and ensuring that the
Committee receives accurate and timely information. The Committee
met six times during 2018.

Group Chief Risk Officer’s report
The Committee receives at each meeting a formal report from the
Group Chief Risk Officer. This report brings to the Committee’s
attention key factors in the operating environment of the group’s
businesses and an assessment of the potential risks that may emerge.
The review includes analysis of risks arising from the macro-economic
outlook and conditions in financial markets, together with geopolitical,
legislative and regulatory change risks that may impact the group’s
businesses, and risks associated with the implementation of the
group’s business strategy.

In addition to the Group Chief Risk Officer’s report, the Committee is
provided with management information on risk appetite, comparing
actual positions relative to the group’s risk appetite statement and
quantitative analysis of the group’s exposures to financial and
operational risks, including risk based capital requirements in relation
to the core risks implicit in the group’s businesses.

Group Conduct Risk Director’s report
At each meeting the Committee receives a report from the Group
Conduct Risk Director. This provides the Committee with an
assessment of the overall profile of conduct risks for the group; analysis
and trends in conduct risk indicators including complaints data and the
results of reviews undertaken by the group conduct risk monitoring
team; and evaluation of changes in the conduct risk landscape as
regulatory approaches evolve.

Focused business and risk reviews
Focused ‘deep dive’ reviews of particular risk areas are undertaken at
each Committee meeting. The purpose of these reviews is to enable
Committee members to examine the risk profile of the core business
lines and to consider the robustness of the frameworks in place to
manage the key risk exposures. Committee members are invited
to participate in setting the agenda for these deep dive reviews,
considering both the current operating environment and emerging risk
factors. Below are some examples of the key reviews that took place
during 2018, and the areas of focus by the Committee.

• ‘Value for Money’ reviews: assessment of the controls and monitoring

frameworks in our general insurance and investment products
businesses that ensure pricing reflects the risks implicit in products
whilst providing value for money to our customers

• Brexit Contingency Planning: understanding the key issues for the
group in the event of a ‘no deal’ Brexit scenario and the potential
actions to advance our contingency planning

• Property Risk Management: the approach within our property
manufacturing and construction businesses to managing legal,
regulatory and reputational risks including health and safety
risk management

Legal & General Group Plc Annual Report and Accounts 2018Group Risk Committee report

• Derivative and Collateral Management: the group’s framework for
managing collateral and liquidity requirements associated with
financial risk hedging activities

• Technology Risk: focus on the group’s technology risk landscape,
expressions of risk appetite, and areas for further development as
new technologies emerge

• Direct Investments Governance: review of the risk and control

framework in managing the risk arising from new and illiquid direct
investment assets

• LGIM Internal Control Framework: an annual review of the

management of the core operational risks implicit in LGIM’s
investment management activities

• Outsourcing and Supplier Management: an overview of the group’s
framework for managing third party supplier arrangements within
our UK businesses, and associated risks

• The regular management information received by the Committee

includes customer lifecycle metrics, analysing by business division
core measures of customer service delivery. The analysis provides
a focal point for discussion on the management and oversight of
customer and related reputation risks.

The Committee also takes an active role in the development and review
of the group’s recovery and resolution plans, which have been put in
place in line with the UK regulatory requirements relating to systemically
important insurers.

Risk appetite
At its August meeting the Committee undertook a detailed review
of the operation of the group’s risk appetite framework and the key
measures and tolerances used to determine acceptable risk taking,
recommending some refinements to the Board. In December, the
Committee considered the risk profile of the group’s strategic plan
and its alignment with the group’s overall risk appetite.

In addition to this aggregate view of acceptable risk taking, the
Committee may also consider, as part of the group’s overall transaction
approval process, the appetite for specific risks associated with
transactions, particularly where the transaction is material in the
quantum of risks being assumed or aspects of the transaction may
present risks that are relatively new to the group. The Committee is
also responsible for recommending to the Board risk appetite levels
for particular business lines.

Risk-based capital model
The group’s risk-based capital model is used to determine the capital
requirements for the group and forms the calculation engine for the
Solvency II internal model. As well as reviewing and using the output
of the model in its understanding of the group’s risk profile, the
Committee is the focal point for model governance with specific
consideration of the:

• key assumptions, methodologies and areas of expert judgement

used within the model

• activities undertaken to independently validate the outputs of

the model

• ongoing development of the model to ensure that it reflects the

business lines and risk profile of the group

• processes to ensure that changes applied in the model are
undertaken in a controlled manner, and in line with model
development plans

Own risk and solvency assessment (ORSA)
The ORSA is an ongoing assessment of the risks to which Legal &
General is exposed and an evaluation of the sufficiency of capital
resources to sustain the business strategy over the plan horizon. Over
the course of the year the Committee considered different aspects of
the group’s ORSA process. This included the review of proposed stress
tests and scenarios to be used in the evaluation of capital adequacy,
the profile of risks within the group’s strategic plan and how they may
change over the planning period, and the group’s overall capacity to
bear the risks identified.

A formal ORSA report is subject to annual review by the Committee
prior to formal approval by the Group Board.

Risk governance
Sound frameworks of risk management and internal control are
essential in the management of risks. During the year, the Committee
has received updates on the continued development of the risk
governance framework.

Risk based remuneration
The Committee advises the Remuneration Committee on risk matters
to be considered in reviewing bonus pools.

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Directors’ report on
remuneration introduction

Our remuneration report is organised into
the following sections

Letter from the Chairman of the
Remuneration Committee

At a glance

Remuneration policy

Annual report on remuneration

The directors’ remuneration policy was subject
to a binding vote at the 2017 AGM, and will apply
for three years from the 2017 AGM. The annual
report on remuneration together with the Chair’s
Statement will be subject to an advisory
shareholder vote. A new remuneration policy will
be presented for approval at the 2020 AGM.

Lesley Knox
Chairman of the Remuneration Committee

Letter from the Chairman
Dear Shareholder
I am pleased to present the Remuneration Committee’s report for 2018.

Our current remuneration policy was approved by shareholders at the
2017 AGM and I would again like to take this opportunity to thank you
for the strong support received at that time. A summary of the
remuneration policy is included on pages 78 to 85.

We will be presenting a new remuneration policy for approval at the
2020 AGM. However, following a review during the year, we have
proposed two modifications for 2019, which are within the bounds
of the approved policy, as detailed below.

Review of our remuneration policy
The Committee welcomed the publication of the new UK Corporate
Governance Code in July 2018, and undertook a review of the group’s
arrangements in the context of its provisions. The Committee reviewed
the rules of the various incentive plans to satisfy itself that it has
sufficient flexibility to exercise discretion to override formulaic
outcomes, as well as to recover and/or withhold sums or share
awards in appropriate circumstances.

However, the Committee concluded that our approach to executive
remuneration could be further strengthened by implementing, from
1 January 2019, a requirement for executive directors to maintain
a shareholding for at least two years after leaving employment and
aligning the pension provision for new executive directors with the
wider workforce (10% of salary). The post-employment shareholding
requirements have been set at the same level as the shareholding
guidelines applicable during employment, being 300% of base salary
for the Group Chief Executive and 200% of base salary for the other
executive directors.

During the coming year, the Committee will continue to monitor
developments in remuneration, with a view to presenting a new
remuneration policy for shareholder approval at the 2020 AGM.

Board changes and changes to the committee
Mark Zinkula
In May 2018 we announced that Mark Zinkula, Chief Executive Officer
LGIM, would be retiring in August 2019. Mark has led LGIM since 2011
and created a significant and successful business during that time.
In accordance with our remuneration policy, Mark will continue to
receive his current remuneration arrangements until he leaves in
August 2019 and will receive an annual variable pay (AVP) award for
performance in respect of 2018 as set out on pages 88 to 90. Mark will
remain eligible for an AVP award for 2019, subject to performance,
pro-rated for the period through to his leaving, with any award deferred
in accordance with our normal deferral policy (three years).

Mark will not receive a PSP award for 2019, but, consistent with the
remuneration policy set out on page 85, his outstanding unvested
PSP awards will be pro-rated by reference to the proportion of the
performance period that has elapsed upon leaving, and will vest based
on performance to the end of the performance period. This means that
Mark’s 2017 PSP will be released, subject to performance, in three
equal tranches following the third, fourth and fifth anniversaries of the
grant date, and his 2018 PSP will be released, subject to performance,
on the fifth anniversary of the grant date. His deferred AVP awards for
2018 and any award for 2019 will vest three years from the date of
grant. Malus and clawback provisions continue to apply to all AVP
and PSP awards.

Mark will continue to have a significant interest in the group’s shares as
a result of these continuing deferrals and outstanding PSP awards, but
as his leaving arrangements were determined before the introduction
of the new post-employment shareholding requirements, no fixed
post-employment shareholding requirement will apply.

Remuneration Committee
Carolyn Bradley retired from the Committee and the Group Board in
December 2018, and Henrietta Baldock has joined the Committee and
the Group Board. I would like to thank Carolyn for her invaluable
contribution, and welcome Henrietta to the Committee.

Legal & General Group Plc Annual Report and Accounts 2018Directors’ report on remuneration

Link between pay and performance for 2018
The group has continued to deliver a strong performance during 2018,
with an increase in operating profit of 13.6% and continued growth in
dividend per share of 7%. In this context, the Committee determined
the following outcomes for incentive awards during 2018.

Annual variable pay
The targets and outcomes relating to the AVP awards for the year ended
31 December 2018 are shown on pages 88 to 90.

As in 2017, the results of the group include the impact of the mortality
assumption changes, which were not factored into the original AVP
targets. Again this year, the Committee concluded that it would be
appropriate to exclude the impact of these assumption changes in the
determination of AVP outcomes for 2018, and therefore their impact
has been excluded.

Further details of the overall outcomes for each executive director,
including taking into account performance against divisional and
strategic measures, can be found on pages 88 and 89. These range
between 62% and 83% of maximum.

Performance Share Plan (PSP)
The outcome for the Performance Share Plan (PSP) awards granted
in 2016 were subject to performance for the three years ended
31 December 2018. Strong earnings per share (19.2%) and dividend
(7%) growth over the three year period would have resulted in
maximum vesting for the EPS and DPS component. However, the
exclusion of the impact of the mortality assumption changes reduces
the EPS growth over the period to 11.5%, which, in turn, reduced the
overall vesting to 97.3% of the maximum (50%) for this portion of the
award. TSR performance over the period of 11.2% per annum was
insufficient to trigger any vesting for this portion of the award.

For PSP awards granted from 2019, the performance measures remain
those of EPS and relative TSR, subject to an assessment of performance
against Solvency II objectives. There are no anticipated changes to the
TSR bespoke comparator group, but the EPS growth vesting range has
been adjusted from 5%-14% per annum to 5%-12% per annum, to
reflect a movement in these comparators.

Base salary increases in 2019
As highlighted in our 2016 report on remuneration, when Jeff Davies
and Kerrigan Procter were first appointed to the Group Board in 2017,
their base salaries were set to reflect that these were their first
appointments as executive directors. It was also stated that the
Committee may reposition their base salaries as they progressed in
their roles over time. Now, two years into their roles, the Committee
has reviewed their base salaries, and, with effect from 1 March 2019,
have their increased their base salaries to £555,000 (8.8%) and to
£525,000 (8.4%) for Jeff and Kerrigan respectively. The Committee
will continue to review base salary levels to ensure they reflect skills
and experience in role.

In determining base salary increases, the Committee considered
appropriate comparator data and the increases applied to the wider
workforce. The average base salary increase for all UK employees from
1 March 2019 is 3.2%, although again this year the spend is focused
on more junior employees receiving around 3.5%, with salary increases
for senior managers already paid at the appropriate benchmark generally
limited to 2%. The base salary increase for Nigel Wilson has been set
at 2%. Mark Zinkula will not receive any base salary increase for 2019.

Wider issues regarding remuneration
In accordance with its terms of reference, the Committee has regard to
remuneration across the wider workforce when determining executive
director remuneration policy and practices. In line with the 2016 and
2017 remuneration reports, we have disclosed the ratio of CEO pay
to the wider population, shown on page 98.

It remains a priority for the Committee to consider and embrace diversity
in the workforce. Details of our gender diversity across the group and
our gender pay gap are provided on page 36, which continue to improve,
reporting a further 2.6% reduction in our gender pay gap for 2017/18.

Looking forward
During 2019, the Committee will undertake a review of executive
remuneration policies and structures, including the consideration of
simplicity, risk and alignment to culture. I look forward to discussing and
sharing the outcomes of that review with shareholders during the year,
with a view to seeking approval for a new directors’ remuneration policy
at the 2020 AGM.

In the meantime, I hope that you find this report a clear account of the
Committee’s decisions and remuneration outcomes for the year.

Lesley Knox
Chairman of the Remuneration Committee

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

At a glance

How do the performance measures used for incentive arrangements align with the group’s key performance indicators?
The Committee considers it important that the performance measures used for the purpose of the incentive arrangements for management are
directly aligned to the group’s key performance indicators (KPIs). The following table sets out how the performance measures used for the purpose
of the AVP and PSP are directly linked to our KPIs.

Overarching drivers of the business

Group KPIs

Key measure in the remuneration of executives

Profitability

• Net release from operations (NRO)

• NRO – up to 20% of 2019 AVP awards

• Operating profit

• Earnings per share (EPS)

• Return on equity (ROE)

• Operating profit –

up to 25% of 2019 AVP awards

• Adjusted EPS –

up to 12.5% of 2019 AVP awards

• EPS growth –

up to 50% of 2019 PSP awards

• Adjusted ROE – up to 12.5% of 2019 AVP awards

Shareholder value creation

• Total shareholder return (TSR)

• Relative TSR –

50% of 2019 PSP awards

Strategic priorities and
non-financial goals

• Worldwide employee engagement index

• Solvency II key performance indicators,
including the Solvency II coverage ratio

• Diversity agenda

• Risk profile

• Divisional objectives

• Customer experience

• Divisional and personal strategic objectives
make up significant proportions of the AVP
scorecards for all executive directors

• Performance against Solvency II objectives
are considered when determining vesting
for the AVP and PSP awards

Legal & General Group Plc Annual Report and Accounts 2018Directors’ report on remuneration

How will the remuneration policy be implemented in 2019?
The tables below set out a high level summary of our Directors’ Remuneration Policy (the ‘policy’), as well as how that policy will
be implemented in 2019. The policy was approved by shareholders at our 2017 Annual General Meeting. Details of the approved policy
can be found on pages 78 to 85.

Time horizons of our remuneration structure

2019

2020

2021

2022

2023

Comment

Fixed pay

AVP

PSP

50% paid in cash in early 2020.

50% deferred into Legal & General shares –
released following the end of 2022.

100% of awards subject to a two-year holding period –
released following the end of 2023.

Paid during 2019

Performance period

Holding period

Overview of policy

Implementation for 2019

Fixed pay

• Consists of base salary, benefits and pension.

• Salaries normally reviewed annually

effective from 1 March.

Nigel Wilson

Jeff Davies

Mark Zinkula

Kerrigan Procter

Salary

945,500

555,000

638,000

525,000

Salary
increase

Pension – cash
allowance

Benefits

2.0%

8.8%

0.0%

8.4%

15.0% of salary

13.8% of salary

15.0% of salary

Provided
in line with
approved policy

AVP

Performance measures are weighted as follows:

• Maximum opportunities (no change from 2018):

– Nigel Wilson – 150% of salary

– Jeff Davies – 150% of salary

– Mark Zinkula – 175% of salary (pro-rated for time served)

– Kerrigan Procter – 175% of salary

• Performance will be based on a combination of group and/or divisional financial

performance targets as well as strategic (including customer, employee measures
and effective risk management) and personal measures.

Group
financial

Divisional
performance

Strategic
personal
objectives

Nigel Wilson

Jeff Davies

Mark Zinkula

Kerrigan Procter

70%

35%

–

35%

30%

• Performance measured over one financial year.

• 50% paid in cash, 50% deferred into

Legal & General shares for three years.

• Clawback and malus provisions apply.

PSP

• Three-year performance period, with shares

• All executive directors will have a maximum award opportunity of 250% of salary

held for a further two years following the
date of vesting.

• Performance will be measured based on
a combination of total shareholder return
(50% of award) and financial measures
(50% of award).

• 15% of the award vests for
threshold performance.

• Maximum award of 300% of salary.

(no change from 2018).

• For awards made in 2019, performance will be measured against:

– EPS growth (50% of award). Threshold vesting requires growth of 5% p.a.,

with maximum vesting requiring growth of 12% p.a.

– Relative TSR against the FTSE 100 (25% of award) and a bespoke group of
insurance companies (25% of award).* Threshold vesting at median TSR
performance. Maximum vesting occurs for upper quintile TSR performance
against the respective peer groups.

– Vesting of awards subject to an assessment of performance against

• Clawback and malus provisions apply.

Solvency II objectives.

• No award for Mark Zinkula given the announcement of his retirement.

* Bespoke TSR peer group comprises of the following companies: Aegon, Ageas, Allianz, Ameriprise Financial, Assicurazioni Generali, Aviva, AXA, CNP Assurances,
Gjensidige Forsikring, Hannover Ruck, ING Groep, Lincoln National, Mapfre, Metlife, Muenchener Ruck, Phoenix Group, Principal Financial, Prudential, Prudential
Financial, Sampo ‘A’, Standard Life Aberdeen, Swiss Re, Talanx Aktgsf and Zurich Insurance Group.

Legal & General Group Plc Annual Report and Accounts 2018Governance

Governance

Shareholdings against guidelines

Nigel Wilson

Jeff Davies – appointed 9 March 2017

Mark Zinkula

Kerrigan Procter – appointed 9 March 2017

Actual share
ownership as
% of 2018 base salary:
vested shares

Guidelines on
share ownership
as a % of
base salary

750%

450%

126%

300%

200%

Guideline met

Yes

On Target

Yes

On Target

How were the executives remunerated for 2018?
Our performance
Financial measures used for Annual Variable Pay (AVP)
The group performance measures below accounted for 35%–70% of AVP performance assessment for our executive directors for their 2018
AVP award. The remaining measures are set out on pages 89 and 90.

Performance measures

Net release from operations1

Operating profit1

Adjusted EPS1

Adjusted ROE1

Performance measure

Solvency II performance2

2018

£1,396m

£1,823m

24.1p

18.2%

Target

£1,388m

£1,681m

22.7p

16.4%

Maximum

£1,445m

£1,751m

23.8p

17.0%

% of target
achieved

% of maximum
achieved

100.6%

108.4%

106.2%

111.0%

96.6%

104.1%

101.3%

107.1%

2018

Underpin

Underpin
Met

Qualitative
assessment

1. Performance measures exclude the impact of mortality assumption changes and profits and separation costs relating to the Mature Savings business.
2. Solvency II performance assessed on a qualitative basis.

Vesting of 2016 Performance Share Plan awards
Vesting of 50% of the 2016 performance share plan (PSP) awards was
determined by reference to TSR of the FTSE 100 (25%) and the bespoke
comparator group (25%) over a three-year performance period.

The vesting of the other 50% of the awards was determined based
on a combination of EPS and DPS growth, and subject to a Return on
Equity (ROE) underpin. Further details of the targets are provided on
page 91. Based on the level of performance achieved the 2016 PSP
award vested at 48.65% in March 2019.

TSR performance as at 31 December 2018

Step 1: Achieved RoE underpin
(% p.a. 2016–18)

Step 2: EPS & DPS growth
(% p.a. 2016–18)

Actual
18.7

Threshold
12.0

EPS

11.5

Actual

<100%
100%

Actual

7.0

DPS

0% payout, below threshold

between 15% and 100% payout

100% payout, above maximum

2016

2017

2018

RoE

150

125

100

2015

Legal & General

FTSE 100 – median

Bespoke peer group – median

Legal & General Group Plc Annual Report and Accounts 2018

Directors’ report on remuneration

How much our executive directors earned in 2018

Nigel Wilson

Jeff Davies – appointed 9 March 2017

Kerrigan Procter – appointed 9 March 2017

Mark Zinkula

Fixed

1,085,432

599,499

595,037

946,547

3-year performance ended 31 December 2018

AVP

PSP – value at year end

1,118,011

638,037

619,887

695,571

1,085,647

–

367,600

747,454

The fixed element for Mark Zinkula includes an international allowance
relating to the US aspect of his role.

Nigel Wilson

1,085

1,118

1,086

Jeff Davies

599

638

Kerrigan Procter

595

620 368

Mark Zinkula

947

696

747

Fixed

AVP

PSP

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Directors’
remuneration policy

The following sections sets out relevant extracts of our directors’
remuneration policy (the ‘policy’) which was approved by shareholders
by way of a binding vote at the 2017 AGM on 25 May 2017. A full copy
of the policy can be found in the 2016 Annual Report.

Planned implementation for 2019
Content contained within a blue tinted box indicates that all the
information in the panel is planned for implementation for 2019.

Remuneration
element

Policy

Base Salary

Purpose and link
to strategy

To help recruit and retain executive directors of the calibre required to develop, lead and deliver the business strategy.

Operation

The Committee sets base salary taking into consideration:

• the individual’s skills, experience and performance;

• the scope of the role;

• pay and conditions elsewhere in the group;

• overall business performance; and

• external market benchmark data in other FTSE 100 companies and other relevant bespoke groupings of financial and

non-financial institutions.

Base salaries are normally reviewed annually, with increases effective 1 March.

Opportunity

Whilst there is no maximum base salary, any increases for executive directors will normally be in line with the range
of increases for other UK employees in the wider group.

In specific circumstances, the Committee may award increases above this level, for example:

• where the Committee has set the base salary for a newly appointed executive director with a view to allow the

individual to progress into the role over time; or

• where, in the Committee’s opinion, there has been a significant increase in the size or scope of an executive director’s

role or responsibilities; or

• where there is a significant change in the regulatory environment.

Performance

Personal performance will be taken into consideration in determining any salary increase.

Proposed changes for 2019: Base salary
No change in approach.

Legal & General Group Plc Annual Report and Accounts 2018Directors’ report on remuneration

Remuneration
element

Policy

Benefits

Purpose and link
to strategy

Benefits are provided to executive directors to attract and retain the best talent for the business and to ensure that the total package
is competitive in the market.

Operation

The Committee’s policy is to provide executive directors with a market competitive level of benefits, taking into consideration
benefits offered to other senior employees in the UK, the individual’s circumstances and market practice at similar companies.
Benefits provided to executive directors are normally in line with benefits provided to other senior employees in the UK.

Benefits currently provided to executive directors include: car allowance, private medical insurance, life assurance, group income
protection, and insured death in service arrangements. These are all in line with our general policy for other UK employees.

In line with other Legal & General employees, executive directors can choose to acquire Legal & General products, and are eligible
to participate in the company’s voluntary benefits which they fund themselves, sometimes through salary sacrifice. They are
eligible to participate in the UK all-employee share plans on the same terms as other employees. The two current all-employee
share plans are:

• the savings-related share option scheme (SAYE)

• the all-employee share incentive plan

Where an executive (new or current) is required to relocate, or perform duties outside their home country in order to fulfil their
duties, in line with our mobility policy and practice, additional benefits may be provided, for example: home country benefits such
as healthcare and additional support in relocating such as assistance for housing, school fees, travel home, relocation costs and
tax advice.

Opportunity

In line with other UK employees, there is no maximum level for the benefits as this is dependent on the individual’s circumstances
and the cost to the company.

The maximum opportunity for participation in the current all-employee share plans is in line with other employees and takes into
account the prevailing HMRC rules.

Relocation/international assignment benefits – the level of such benefits would be set taking into account the circumstances of the
individual and typical market practice.

Performance

There are no performance conditions.

Proposed changes for 2019: Benefits
Benefits – No change in approach.

The approach to benefit provision for executive directors is the same as that operated for senior managers in the rest of the UK organisation.

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Remuneration
element

Policy

Pension

Purpose and link
to strategy

The policy aims to provide competitive post-retirement benefits and therefore recognise sustained contribution.

Operation

Pension contributions are set at an appropriate level to attract and retain high performing people.

In line with other employees in the UK, executive directors currently participate in either a defined contribution pension plan,
a defined benefit pension plan or receive a cash allowance in lieu of pension, or have some combination thereof.

The defined benefit pension plan was closed to new joiners in 2000. From 2009, increases in pensionable salary for the defined
benefit pension plan for remaining active members have been limited to a maximum of 2.5% each year and in 2015 the scheme
was closed to future accruals. For executive directors who took enhanced protection in 2006, a cash allowance was provided in
lieu which may be reviewed or amended by the employer.

Non-UK national executives may be permitted to participate in home-country pension plans where relevant.

Base salary is the only element of pensionable remuneration. At the discretion of the Committee, executive directors may elect
to sacrifice all or part of their cash AVP into pension.

Opportunity

New executive directors receive 15% of base salary into the defined contribution pension plan (they contribute 5%). This
contribution level for executive directors is the same as that operated for senior managers in the rest of the UK organisation
in the defined contribution pension plan.

As for other employees, there is a cash alternative.

Mark Zinkula may also contribute part of any cash allowance into a US 401k pension plan. Mark is also a member of a cash
balance plan in the US.

Performance

There are no performance conditions.

Proposed changes for 2019: Pensions
Pensions – Change for new executive directors

The contribution level for executive directors is no more generous than that operated for senior managers in the rest of the UK organisation. For new
executive directors, the pension provision will be aligned to that available for the majority of the workforce (10% of salary).

Legal & General Group Plc Annual Report and Accounts 2018Directors’ report on remuneration

Remuneration
element

Policy

Annual variable pay (AVP)

Purpose and link
to strategy

Incentivise executive directors to achieve specific group and/or divisional, financial, strategic and personal predetermined goals,
within the group’s risk appetite and taking into consideration the company’s culture and values, on an annual basis.

The deferred proportion of AVP into shares reinforces retention and enhances alignment with shareholders by encouraging
a longer-term focus and risk alignment.

Operation

Performance targets and weightings are set annually by the Committee to ensure they are appropriately stretching.

Performance is normally assessed over a one-year period.

AVP outturns are determined by the Committee after the year end, taking into consideration performance against targets,
the underlying performance of the business and individual performance. The Committee may exceptionally adjust the outcome
of the AVP calculation if it believes there are underlying circumstances that justify such a change.

Normally, 50% of any AVP awarded is deferred. Deferred awards are normally awarded in the form of restricted shares or nil-cost
options or phantom equivalent if appropriate. However, awards may be deferred in other forms dependent upon business or
regulatory requirements.

Deferred awards will vest after a period set by the Committee. This period will normally be three years.

Dividends on deferred awards made in the form of shares accrue during the deferral period and normally are paid in the form
of shares to the executive directors upon vesting. Dividend equivalents may accrue on awards made in other forms.

Deferred awards are subject to malus. Clawback provisions also apply to both deferred awards and cash awards paid.

The Committee may adjust and amend the awards in accordance with the rules.

Opportunity

The maximum award opportunity in respect of any financial year is based on role as follows: For the Group Chief Executive
and CFO, the maximum potential is 150% of base salary. For the CEO LGIM and the CEO LGC the maximum potential is 175%
of base salary.

The award opportunity at threshold performance is 0% of minimum, with up to 50% of maximum bonus payable for target
performance for the Group Chief Executive, CFO and CEO LGC. Up to 60% of maximum bonus is payable for target performance
for the CEO LGIM.

Performance

Performance measures are selected by the Remuneration Committee on an annual basis to ensure that they are aligned with the
group’s strategic priorities and the delivery of sustainable shareholder value.

Performance is measured based on an appropriate mix of group and/or divisional financial performance targets as well as strategic
(including customer and employee measures) and personal measures.

Performance measures are weighted with normally up to 70% based on financial targets. The split between financial, strategic
and personal performance measures and the relative weighting of group and divisional performance targets will be kept under
review by the Committee on an annual basis.

Proposed changes for 2019: AVP
No change in approach.

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Remuneration
element

Policy

Performance Share Plan (PSP)

Purpose and link
to strategy

Awards under the PSP are reflective of the Committee’s desire that the remuneration of executives should be weighted towards
the delivery of sustainable returns to shareholders over the longer term.

In addition to deferred awards under the AVP, awards under the PSP enhance alignment with shareholders by focusing executives
on the longer-term performance of the business.

Operation

Award of shares or options which are subject to a performance period of normally no less than three years. Performance
is normally measured after the end of the three-year performance period. Subject to performance, awards for executive directors
are released on the fifth anniversaries of the grant date.

The Committee retains discretion to lengthen the performance period and holding period for future awards. The Remuneration
Committee may also amend the final level of vesting dependent on the underlying performance of the group. The Committee may
only exercise such discretion downwards and may not increase the level of vesting. The parameters which the Committee uses in
making this assessment will include, but are not limited to, market share, partnerships entered into and maintained, cost constraint,
shareholder perception, capital management and a range of risk measures to ensure that the company has operated within
appropriate risk thresholds.

Financial performance targets are set annually by the Committee to ensure they are relevant and sufficiently stretching.

PSP awards are normally awarded in the form of nil cost options or conditional shares or phantom equivalent where appropriate.
However, they may be awarded in other forms if the Committee considers it appropriate.

Dividends or dividend equivalents accrue in the period following the end of the performance period until vesting and release.
These will normally be paid in shares on a reinvested basis.

PSP awards are subject to malus and clawback provisions.

The Committee may adjust and amend the awards in accordance with the PSP rules.

Opportunity

The maximum award opportunity under the PSP is 300% of salary in respect of any financial year.

The Remuneration Committee’s current intention is that the normal award opportunity in respect of any financial year will
be 250% of base salary for all executive directors.

15% of the award normally vests for threshold performance increasing to 100% of the award for maximum performance.

Performance

Performance measures for the PSP are selected by the Remuneration Committee to be aligned with the group’s long-term strategic
priority of delivering sustainable returns to shareholders.

The Committee therefore intends to grant awards based on an appropriate mix of earnings, capital efficiency and shareholder
return measures.

The split between these measures, for each grant, is set annually by the Committee and will normally be 50% based on total
shareholder return and 50% on financial measures.

Proposed changes for 2019: PSP
No change in approach.

Legal & General Group Plc Annual Report and Accounts 2018Directors’ report on remuneration

Recruitment remuneration

General approach

The Committee aims to attract, motivate and retain executive directors with the required expertise to develop and deliver the
business strategy, while at the same time ensuring that the remuneration arrangements offered are in the best interests of both the
company and its shareholders and paying no more than considered necessary to attract the right calibre of candidate to the role.

In determining the appropriate remuneration arrangements on hiring a new executive director, the Committee will take into account
all relevant factors, including, but not limited to:

• the individual’s skills and relevant experience

• internal relativities

• local market practice in the jurisdiction from which candidate was recruited

• logistics and support if a relocation is required

• appropriate market data

• the individual’s existing remuneration package

Where possible the Committee endeavours to align the remuneration arrangements of new executive directors with the
remuneration outlined in the policy for other executive directors. Any such awards will be within the maximum level of variable
remuneration limit set out below.

Where an existing internal candidate is made an executive director, the Committee may continue to honour prior commitments
made before joining the Group Board.

Maximum variable
pay levels

The maximum level of annual variable pay and long-term incentives which may be awarded to a new executive director will be in
line with the policy table, that is 475% of base salary. This limit excludes buyout awards.

Buyout of
any existing
remuneration
components
or other
arrangements

The Committee recognises that, as a consequence of regulatory changes around the globe in the financial services sector,
long-serving executives are likely to have accrued significant levels of deferred remuneration which may be lost on a transfer
of employment. Accordingly, to aid the recruitment of a new executive director, the Committee may make awards to ‘buyout’
remuneration arrangements forfeited on leaving a previous employer, taking into consideration relevant factors including,
but not limited to:

• form of the award

• any performance conditions attached to those awards

• the vesting profile of the awards and likelihood of vesting

• relevant regulatory requirements and guidance in place in relation to ‘buyout’ awards

‘Buyout’ awards will typically reflect the terms and the value of the arrangements forgone. Where possible, the Committee will
use existing share-based plans to effect a buyout. However, in the event these are not an appropriate vehicle, the Committee
retains the discretion to use the Listing Rules exemption (LR 9.4.2) for the purpose of making an award to ‘buyout’ remuneration
terms forfeited on leaving a previous employer.

Relocation
and mobility

Where a new executive director has to relocate to take up the appointment, either within the UK or from overseas, practical and/or
financial support may be given in relation to relocation or mobility in line with our internal policies. This may include the cost of
any tax that is incurred.

For appointments from overseas, home country benefits may continue to apply.

Relocation and mobility support may also apply to the recruitment of a non-executive director (NED).

Shareholder
transparency

The Committee believes that remuneration arrangements should be as transparent as possible. Therefore, the Committee will
make every effort to explain the rationale for the recruitment arrangements in the Directors’ remuneration report following the
recruitment of a new executive director.

Recruitment of
non-executive
directors

The Committee will normally align the remuneration arrangements for new non-executive directors with those outlined within
the policy table.

Proposed changes for 2019: Recruitment remuneration
No change in approach.

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Service contracts and termination and payments for loss of office
When determining leaving arrangements for an executive director, the Committee takes into account any pre-established agreements, including
the provisions of any incentive plans, typical market practice, statutory and contractual obligations, the performance and conduct of the individual
and the commercial justification for any payments.

The following summarises our policy in relation to executive directors’ service contracts and payments in the event of loss of office:

Notice period
and Termination
Payments

Standard notice policy is:

• 12 months’ notice from the company

• 12 months’ notice from the executive director

• the current CFO’s service contract may be terminated on 6-months’ notice by the company or the executive director

Executive directors may be required to work during the notice period, take a period of ‘garden leave’ or may be provided with pay
in lieu of notice if not required to work the full notice period.

Payments in lieu of notice:
Our policy for new appointments is that termination payments in lieu of notice would consist solely of base salary and the cost
of providing benefits for the outstanding notice period.

Any statutory requirements will be observed.

Our standard practice is to include within executive directors’ contractual terms mitigation provisions as regards payments in
lieu of notice.

The CEO LGIM may be paid his contracted benefits for three months following his effective date of termination of employment
provided he is not dismissed for cause.

Expiry date

All executive directors are subject to annual re-election.

The contracts for our executive directors are rolling service contracts.

Treatment of
outstanding
incentive award

Rights to annual variable pay, deferred annual variable pay awards and performance share awards are governed by their respective
plan rules.

Annual variable pay
There is no automatic entitlement to an annual bonus in the year of cessation of employment. However, for a ‘good leaver’, the
Committee may determine that an executive director will receive a pro-rata bonus in respect of the period of employment during
the year of cessation based on an assessment of group and personal performance.

Deferred annual variable pay awards
In the event that a participant is a ‘good leaver’ any outstanding unvested deferred annual variable pay award will normally be
released at the normal time. Where it considers it appropriate, for example in the circumstances of terminal illness, the Committee
reserves the right to accelerate any payment due.

‘Good leaver’ circumstances are leaving due to circumstances such as death, disability, ill health or injury, redundancy, retirement
with company agreement, the individual’s employing company/business ceasing to be part of the group, or other circumstances at
the Committee’s discretion.

For all other leavers outstanding unvested awards lapse.

Awards will generally vest early on a takeover of the company, merger or other corporate reorganisation. Alternatively participants
may be allowed or required to exchange their awards for new awards. If there is a demerger, delisting or special dividend or other
transaction which may affect the share price, the Committee may allow awards to vest on the same basis as for a takeover.

Legal & General Group Plc Annual Report and Accounts 2018Directors’ report on remuneration

Service contracts and termination and payments for loss of office (continued)

Treatment of
outstanding
incentive award
(continued)

PSP awards
In the event that a participant is a ‘good leaver’, any outstanding, unvested PSP award will normally (unless the Committee
determines otherwise) be pro-rated by reference to the proportion of the performance period that has elapsed on cessation
and will vest based on performance to the end of the performance period. Awards will usually be released at the normal time.
Where it considers it appropriate, for example in the case of terminal illness, the Committee reserves the right to accelerate any
payment due.

‘Good leaver’ circumstances are leaving due to death, disability, ill health or injury, redundancy, retirement with company
agreement, the individual’s employing company/business ceasing to be part of the group or any other reason at the
discretion of the committee.

For all other leavers, outstanding unvested awards lapse.

Awards will generally vest early on a takeover of the company, merger or other corporate reorganisation. Alternatively, participants
may be allowed or required to exchange their awards for new awards. Where an award vests early in these circumstances, the
Committee will determine the level of vesting, having regard to the extent to which the performance condition has been satisfied
to the date of vesting (subject to downwards discretion based on underlying performance) and (unless the Committee determines
otherwise) to the fact that the award is vesting early. If there is a demerger, delisting or special dividend or other transaction
which may affect the share price, the Committee may allow awards to vest on the same basis as for a takeover.

Other information

The Committee reserves the right to make any other payments in connection with a director’s cessation of office/employment
where the payments are made in good faith in the discharge of an existing legal obligation (or by way of damages for breach of
such obligation) or by way of settlement of any claim arising in connection with the cessation of the director’s office/employment,
or for any fees for outplacement assistance and/or director’s legal and/or professional advice fees in connection with his cessation
of office/employment.

Proposed changes for 2019: Service contracts and termination and payments for loss of office
No change in approach.

Non-executive directors (NEDs)
The following table sets out the key elements of remuneration and policy for NEDs.

Approach to fees

Operation

Other items

Fees for the Chairman and NEDs are set at an
appropriate level to reflect:

• the time commitment required to fulfil

the role

• the responsibilities and duties of the

positions; and

• typical practice in the FTSE 100 and
amongst other financial institutions.

Fees for non-executive directors are reviewed
at regular intervals by the executive directors.
Fees for the Chairman are reviewed at regular
intervals by the Remuneration Committee.
No one is involved in the discussion of their
own fee.

Fees are subject to the aggregate limit in
the company’s Articles of Association. Any
changes in this limit would be subject to
shareholder approval.

Our NED fees policy is to pay:

• a base fee for membership of the Board

• a committee attendance fee if the non-
executive sits on two or more Board
committees (currently not including the
Nominations Committee); and

The Chairman and NEDs are not eligible to
participate in any benefit plans or the AVP
or the PSP.

Expenses incurred in carrying out NED duties
(and any associated tax liability) may be
reimbursed or paid for directly by the company.

• additional committee chairmanship and SID
fees to reflect the additional responsibilities
and time commitments of the role.

Additional benefits may be provided if the Board
feels this is justified such as tax advice if
recruited from overseas, work permits or similar.

The Chairman receives an inclusive fee
for the role.

Additional fees for membership of a committee
or chairmanship or membership of subsidiary
boards or other fixed fees (such as for a
particular project) may be introduced if justified
by time or commitment.

NEDs are expected to hold the equivalent of one
year’s base fee in Legal & General shares to be
retained until the end of office. NEDs generally
have a proportion of their fees (normally 50%)
paid in Legal & General shares until this level is
reached. Once this level is reached, they may
take all their fee in cash.

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Annual report
on remuneration

Audited information
Content contained within a green box highlighted with an ‘Audited’
tab indicates that all the information in the panel is audited.

Audited

Planned implementation for 2019
Content contained within a blue tinted box indicates that all the
information in the panel is planned for implementation for 2019.

‘Single figure’ of remuneration – Executive Directors
The following table shows a single total figure of remuneration for each executive director in respect of qualifying services for the 2018 financial
year, together with a comparative figure for 2017.

Single figure

Executive Director

2018

Nigel Wilson

Jeff Davies

Kerrigan Procter

Mark Zinkula1

2017

Nigel Wilson

Jeff Davies – appointed 9 March 2017

Kerrigan Procter – appointed 9 March 2017

Mark Zinkula1

Fixed

Variable

Salary
£’000

Benefits
£’000

Pensions
£’000

AVP
£’000

Face value
£’000

924

508

483

636

905

406

386

623

208

212

139

102

136

1,118

1,078

638

620

696

–

365

742

1,164

1,288

660

711

886

–

340

861

PSP2

Share price
appreciation
£’000

–

(93)

–

(25)

(62)

Total
£’000

1,085

–

368

747

1,1952

–

3152

7992

Audited

Total
£’000

3,289

1,237

1,583

2,389

3,439

1,137

1,510

2,619

1. 15% of Mark Zinkula’s salary and AVP are paid to him in the US. At the time of his appointment as CEO LGIM a US dollar to GB sterling exchange rate of £1 = $1.60 was
agreed. In 2018, Mark received £540,529 in salary in the UK and $152,566 in salary in the US. Based on the exchange rates at the time of payments the total value of
salary received by Mark in 2018 was £649,362.

2. The 2015 PSP figures reported in the 2017 single figure now reflect the actual vesting price of the shares, which vested on 8 March 2018, at £2.642 per share. The

values previously included in the 2017 report based on a three-month average share price to 31 December 2017 were £1,207k (Nigel Wilson), £318k (Kerrigan Procter)
and £807k (Mark Zinkula).

For 2018 we have made some amendments to how we report the single figure to reflect new reporting requirements set out by BEIS, which
require disclosure of the impact of share price appreciation on the single figure. These regulations have come into effect for financial years starting
1 January 2019. We have voluntarily complied with this requirement above.

Components of the single figure
Salary

Audited

Name

Nigel Wilson

Jeff Davies

Mark Zinkula

Kerrigan Procter

Annual base salary as at
1 January 2018

Annual base salary effective
1 March 2018

Total base salary
paid in 2018

Annual base salary effective
1 March 2019

%
Increase

£909,000

£500,000

£625,500

£475,000

£927,000

£510,000

£638,000

£484,500

£924,000

£508,333

£635,883

£482,917

£945,500

£555,000

£638,000

£525,000

2.0%

8.8%

0.0%

8.4%

Legal & General Group Plc Annual Report and Accounts 2018Directors’ report on remuneration

Benefits
Benefits include the elements shown in the table below.

Executive Director

2018

Nigel Wilson

Jeff Davies

Kerrigan Procter

Mark Zinkula

2017

Nigel Wilson

Jeff Davies

Kerrigan Procter

Mark Zinkula

Car, PMI and
taxable expenses
£’000

Dividends
£’000

Discount
SAYE and
matching shares
£’000

International
allowance
£’000

–

160

–

168

Audited

Total
benefits
£’000

208

212

The matching shares and dividends relate to the all-employee share purchase plan. No dividends are payable on outstanding share bonus plan (SBP)
or PSP awards. The SAYE discount is calculated based on the value of the discount on SAYE share options exercised in the year. No directors
exercised SAYE options during the year.

The international allowance for Mark Zinkula includes allowances for schooling, flights and associated tax advice resulting from his relocation to the UK.

Benefits for 2019
Benefits for 2019 to be in line with policy.

Pension
Nigel Wilson and Kerrigan Procter received a cash allowance of 15% of salary. Mark Zinkula received a cash allowance of 15% of base salary in lieu
of joining the UK pension plan. Mark also participates in the Legal & General America 401k plan and a US non-contributory cash balance plan, total
employer contributions to the 401k plan in 2018 were £6,907. Jeff Davies received a cash allowance of 13.8% of salary. All cash allowances are
subject to normal payroll deductions of income tax and national insurance.

Pension for 2019
Nigel Wilson and Kerrigan Procter receive a cash allowance of 15% of base salary, Mark Zinkula receives a cash contribution of 15% of salary in lieu
of joining the UK pension plan and Jeff Davies receives a cash allowance of 13.8% of salary.

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Audited

2018 annual variable pay (AVP) awards
This reflects the total AVP awards to be paid in 2019 based on performance for the year ended 31 December 2018. The value includes both
the cash element and the portion deferred into shares (50% of the award).

The executive directors’ AVP awards in relation to performance during 2018 were measured against a basket of metrics and objectives.
For Nigel Wilson and Jeff Davies, they were weighted between group financial objectives (70%) and other strategic personal objectives
including effective risk management (30%). For Mark Zinkula and Kerrigan Procter they were weighted between group financial objectives
(35%), divisional objectives (35%) and other strategic personal objectives including effective risk management (30%).

As with 2017, the AVP awards were subject to potential adjustment based on an assessment of overall financial performance, risk and any other
circumstances considered relevant by the remuneration committee as well as a Solvency II performance measure. For 2018, the Solvency II
performance measure was assessed by the Committee on a qualitative assessment of performance informed by input from the Chief Risk
Officer and the Risk Committee. Based on this assessment and consideration of all the circumstances, it was determined that no adjustment
was necessary to the formulaic outcome.

For 2018, AVP payouts as a percentage of the maximum were: Nigel Wilson 80%, Jeff Davies 83%, Mark Zinkula 62% and Kerrigan Procter
73%. The tables below illustrate performance against each of the measures.

Group financial – achievement

Performance measures

Weightings (as % of total AVP opportunity)

Nigel
Wilson

Jeff
Davies

Mark
Zinkula

Kerrigan
Procter

Threshold

Target

Maximum

Actual

Net release from operations1

20.00%

10.00%

£1,348m £1,388m

£1,445m £1,396m

Operating profit1

Adjusted EPS1

Adjusted ROE1

Performance measures

Solvency II performance2

25.00%

12.50%

£1,620m £1,681m

£1,751m £1,823m

12.50%

6.25%

21.3p

22.7p

15.7%

16.4%

23.8p

17.0%

24.1p

18.2%

Underpin

Payout
% of maximum

57%

100%

Based on the above results, the group element of AVP pays out at 88% of maximum. As set out in last year’s report and in the Remuneration
Committee Chair’s statement accompanying the report. In determining payouts the Committee considered the impact of mortality assumption
changes and separation costs relating to the Mature Savings business on performance measures. The Committee was of the view that it would
not be appropriate to include the impact of these items, in calculating the AVP outturn.

Legal & General Group Plc Annual Report and Accounts 2018Directors’ report on remuneration

Audited

Divisional performance – achievement
Divisional objectives represent a maximum of 35% of the total AVP opportunity for Mark Zinkula and Kerrigan Procter. For the LGIM division
Mark has five key measures – LGIM operating profit (including a separate specific target for the Workplace Savings business), cost income ratio,
annualised revenue for our LGIM international business and flagship fund performance. For the Legal & General Capital division, Kerrigan has
seven key measures – PBT (with specific targets for new direct investments, existing direct investments, modular housing and the traded
portfolio), return on new direct investments, operating profit on the traded portfolio and divisional expenses.

Divisional and personal strategic objectives are considered by the Group Board to be commercially sensitive. The actual targets are not formally
disclosed in the annual report and will not be disclosed in this year or in a future report as they relate to subsidiaries of the group. Performance
commentary is given in the table below.

Executive Director Divisional measures

Summary of performance

Mark Zinkula

Kerrigan Procter

LGIM key measures include operating
profit (with a separate specific target
for Workplace Savings), cost income
ratio, annualised net revenues non-UK
and flagship fund performance

Key measures include PBT (for new
and existing direct investments and
modular housing), return on new
direct investments, operating profit
and PBT on the traded portfolio and
divisional expenses

• Operating profit growth of 2% despite difficult market conditions

• Maintained a cost income ratio of 51.6% whilst investing in the operating environment

• Continued international expansion with net flows of £19.6bn, largely driven by the

US and Gulf.

• Progress across core areas of focus, with a 60% increase in the value of the

DI portfolio and a net return on new direct investments of 8.2%

• Continued PBT growth of the direct investment portfolio, although overall PBT

impacted by the negative market performance of the traded portfolio.

Payout
(% of maximum)

16%

21%

Strategic personal performance – achievement
Personal objectives represented a maximum 30% of the total AVP opportunity. For all of the directors, the objectives covered strategic implementation,
effective risk management, customer experience and company culture. A performance commentary is given in the table below.

Executive Director Overview

Summary of performance

Payout
(% of maximum)

Nigel Wilson

Jeff Davies

Mark Zinkula

Kerrigan Procter

For 2018, Nigel’s objectives focused
on articulating the company’s strategy
and brand, driving growth across all
businesses including pension
de-risking, international assets and
revenues and creation of real assets
and the continued development of
a truly digital organisation

Jeff’s objectives included ensuring
clear articulation of the company
strategy including working closely
on M&A activity, optimising capital
usage, playing a leading role in
development of talent and of the
Group IT structure and maintaining
good relationships with regulators
internationally

Mark’s objectives focused on the
continued development of the
defined contribution and defined
benefit businesses, growth of the
retail business, establishing a
personal investing capability for
the UK, international growth of the
LGIM business and continued
enhancement of capabilities and
services delivered to the Group

Kerrigan’s objectives focused on
development of the housing
strategy, including development of
plans and leadership for CALA
Homes, development of strategy
around other non-housing direct
investments and the traded portfolio,
development of people within the
division and further development
of the risk control environment

Nigel’s award reflects his delivery against all his strategic personal objectives including:

• Delivery of strong financial performance with continued diversified growth across

the Legal & General portfolio

• Strong articulation of the company’s strategy and the benefits of inclusive capitalism

• Continued focus on core strategies, including direct investments in housing, urban

19%

regeneration, clean energy and SME start-ups

• Level of progress on projects relating to the improvement of risk governance and

control environment.

Jeff’s award reflects his continued strong performance throughout the year and
against all objectives including:

• Ongoing focus on capital usage building on previous improvements and identifying

further options

• Driving delivery of key projects such as automation to ensure cost efficiency

• Key role in strategy development, including M&A opportunities to materially

grow earnings.

Mark’s award reflects his delivery against key objectives for the year including:

• Broadened investment capabilities to support structural shifts in the asset

management industry

• Development of a market leading position in the UK DC pensions market, second in

net and gross sales in the UK in 2018

• International growth in the US and through expansion in Europe, the Gulf and Asia

• Level of progress on projects relating to the improvement of risk governance and

control environment.

22%

15%

Kerrigan’s award reflects his strong performance in driving forward performance
across the core areas of strategic focus since taking on the role as CEO of Legal &
General Capital. Key achievements include:

• Successful development and integration of CALA Homes into the division

• Significant new direct investment across the core focus areas of Future Cities,

22%

Housing and SME Finance

• Continued development of the team and further enhancement of the risk

control environment.

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Audited

Risk consideration
The Committee reviewed a comprehensive report from the Chief Risk Officer to ascertain that the executive directors’ objectives had been
fulfilled within the risk appetite of the group. In addition, the Committee received feedback from the Group Regulatory Risk and Compliance
function that there were no issues to consider around regulatory breaches or customer outcomes of such materiality that they that would
prevent payment of any AVP award or trigger a recommendation that malus should be applied. The Committee was satisfied that the AVP
awards should be paid.

Deferral policy
In line with our policy, 50% of all 2018 AVP awards were deferred for three years into nil cost options, subject to continued employment and
clawback/malus provisions.

Executive Director

Nigel Wilson

Jeff Davies

Kerrigan Procter

Mark Zinkula

Cash bonus £

559,005.50

319,018.50

309,943.50

347,785.50

Deferred bonus £

Total bonus £

559,005.50

319,018.50

309,943.50

347,785.50

1,118,011

638,037

619,887

695,571

For 2017, AVP payouts as a percentage of the maximum were: Nigel Wilson 85%, Jeff Davies 88%, Kerrigan Procter 86% and Mark Zinkula 81%.

Outstanding share bonus plan (SBP) awards
The table below shows the shares held under the SBP and those that were awarded or vested during 2018. The shares awarded in 2018
relate to deferred AVP in relation to the 2017 performance year. The share price used to calculate the awards is the average of the three days
preceding grant.

Grant date

Nigel Wilson

Jeff Davies

Kerrigan Procter

Mark Zinkula

Awards
outstanding at
1 January 2018

657,793

–

295,621

489,280

Awards
granted
in 2018

216,428

122,767

132,202

164,818

Grant
price £

2.688

Face value
at grant
price £

581,758

330,000

355,359

443,031

Awards
vested
in 2018

228,9891

–

77,063

157,2951

Awards
outstanding at
31 December 2018

679,163

122,767

350,760

520,111

1. The awards vested in 2018 include 33,931 shares for Nigel Wilson and 23,308 shares for Mark Zinkula, accrued as dividends on deferred awards.

AVP potential 2019
In line with our policy, for 2019 the target and maximum AVP opportunities for our executive directors will be:

Nigel Wilson

Jeff Davies

Kerrigan Procter

Mark Zinkula*

Target opportunity (% of salary)

Maximum opportunity (% of salary)

87.5

105

150

175

Performance will be based on a combination of group and/or divisional financial performance targets as well as strategic (including customer,
employee measures and effective risk management) and personal measures. The percentage weightings will be the same as in 2018. Actual
targets have not been disclosed due to commercial sensitivity. Group financial targets will be disclosed in the 2019 annual report. Divisional and
strategic personal performance targets are considered confidential and will not be disclosed in any future report.

* Awards will be pro-rated for time served.

Legal & General Group Plc Annual Report and Accounts 2018
Directors’ report on remuneration

Details of how the 2016 PSP award vested
The 2016 PSP award vested at 48.65% in March 2019 based on a combination of TSR (50%) and financial performance (50%) over the three-year
performance period ended 31 December 2018.

In line with policy, the Committee carefully reviewed the company’s underlying performance over the performance period. The review included
considerations of capital management, risk, cost management and partnerships entered into and maintained. The Committee felt the company
performance had been strong over the period and saw no reason not to allow the PSP to vest in accordance with the TSR and financial
performance outturn.

The results are shown below:

Grant date

21 April 2016

Performance
period

1 Jan 2016 to
31 December
2018

Comparator
group

Legal & General’s
TSR

Comparator
group
median rank

47.5

FTSE 100

Bespoke
comparator
group

11.2%

13.5

Audited

Comparator
group
80th percentile
TSR performance

Legal & General’s
notional rank

% of award
vesting against
comparator
group

Percentage
of element vesting

50.3

22.9

Performance condition

EPS growth (% p.a.)

DPS growth (% p.a.)

ROE underpin (% p.a.)

Performance targets

Actual performance

Percentage of element vesting

subject to performance matrix

12% p.a. underpin

11.46%

7.00%

18.71%

97.3%

The figures reported for the 2016 PSP, with a performance period ended 31 December 2018, reflects the market value of the awards that will
vest in March 2019. The share price at the date of vesting was not known at the end of the financial year and as such the value included in the
‘single figure’ of remuneration is based on the number of shares that will vest multiplied by the average share price over the quarter ended
31 December 2018 (£2.44).

Executive Director

Nigel Wilson

Jeff Davies

Kerrigan Procter

Mark Zinkula

Shares granted in 2016

Shares vesting in March 2019

Estimated value of shares on vesting (£)

914,382

–

309,810

629,934

444,889

–

150,640

306,300

1,085,647

–

367,600

747,454

Financial performance condition (50% of the 2016 award)
Fifty percent of the award vested based on performance against the following matrix of earnings per share and dividends per share growth,
subject to achieving a return on equity underpin whereby return on equity must be at least 12% over the performance period.

Earnings per
share growth
(% p.a.)

100

The vesting levels between stated points on the matrix are calculated on a straight line basis.

Dividends per share growth (% p.a.)

100

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Other remuneration information
Total shareholder return (TSR)
The chart shows the value, as at 31 December 2018, of £100
investment in Legal & General shares on 31 December 2008, compared
to £100 invested in the FTSE 100 on the same date. The other points
plotted are the values at the intervening financial year-ends. The FTSE
100 Index was chosen as the company is a member of this index.

As at 31 December 2018

600

550

500

450

400

350

300

250

200

150

100

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

FTSE 100

Legal & General

Chief Executive – historic remuneration information
The table below shows the remuneration of the Group Chief Executive in place at the time over the same period.

Year

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

Name

Nigel Wilson

Nigel Wilson – appointed CEO 30 June 2012

Tim Breedon – retired 30 June 2012

Tim Breedon

Group Chief Executive
single figure of
total remuneration
(£’000)

Annual variable
element against
maximum
opportunity

PSP vesting rates
against
maximum
opportunity

3,289

3,4391

5,4172

5,4973

4,213

4,072

898

3,280

2,325

1,526

1,999

80.40%

85.33%

87.82%

86.25%

90.67%

93.10%

96.00%

84.80%

79.58%

89.98%

80.00%

48.7%

59.9%

76.6%

100%

0% – note 4

100% – note 5

16.6%

1. Restated from 2017 report to reflect the actual value of the 2015 PSP at vesting.
2. Restated from 2016 report to reflect the actual value of the 2014 PSP at vesting.
3. Restated from the 2015 report to include the value of the PSP award vesting in August 2015.
4. The 2009 PSP vested in full in 2012. However, no PSP is shown in the figure for Nigel Wilson as, while he received the PSP, it vested during the time he was CFO.
5. The 2009 PSP vested in full in 2012. The PSP figure that vested for Tim Breedon is shown in his figure as it vested during the time he was Group Chief Executive.

Scheme interests awarded during the financial year
The following table sets out details of PSP awards made in 2018.

Nigel Wilson

Jeff Davies

Mark Zinkula

Kerrigan Procter

Type of award

Nil-cost options

Basis of award
(% of salary
and face value)1

250% of salary
£2,317,500

250% of salary
£1,275,000

250% of salary
£1,595,000

250% of salary
£1,211,250

% of award
vesting for
threshold
performance

% of award
vesting for
maximum
performance

15%

100%

Audited

Performance/
holding period

1 January 2018 to
31 December 2020.
Awards are also subject
to a holding period,
such that the award
is not released
until year 5 from the
grant date.

1. The number of shares awarded is calculated based on the average share price for the five days preceding the grant which was £2.6708.

Awards were also made during the year under the share bonus plan (SBP) in respect of performance for 2017, in line with our policy 50% of all
2017 AVP awards were deferred into shares for three years, subject to malus and clawback provisions. The amounts deferred in respect of the
2018 AVP were also made in line with the above deferral policy.

Legal & General Group Plc Annual Report and Accounts 2018Directors’ report on remuneration

Performance conditions for PSP awards granted in 2018
Financial performance condition (50% of the 2018 award)
50% of the award will vest based on the EPS growth with vesting based on performance as set out in the table below:

Audited

EPS growth p.a.

<5%

14%

Between 5% and 14%

Proportion of shares vesting

15%

100%

Straight line basis between 15% and 100%

TSR performance condition (50% of the 2018 award)
25% of the award will be based on Legal & General’s TSR performance relative to the FTSE 100.

The remaining 25% of the award will be based on Legal & General’s TSR performance against a bespoke group of insurers.

The vesting schedule of the TSR performance conditions is as follows:

Below median

Median (threshold vesting)

80th percentile and above

Proportion of shares vesting

15%

100%

Between median and the 80th percentile

Straight line basis between 15% and 100%

At the end of the three-year performance period, the Committee will critically assess whether the formulaic vesting outcome is justified. To do
this, the Committee will look at a number of factors including: whether the result is reflective of underlying performance and has been achieved
within the company’s agreed risk appetite; the Solvency II coverage ratio, the quality of earnings and the nature of any changes in leverage or key
assumptions. If such considerations mean that the formulaic outcome of the vesting schedule is not felt to be justified, then the Committee can
exercise downwards discretion.

Performance Share Plan (PSP) 2019 awards: Nigel Wilson, Jeff Davies and Kerrigan Procter will each be granted an award over nil-cost options
with a face value of 250% of base salary.

As indicated previously, for the 2019 award, the following performance measures will be used:

• relative TSR performance against the FTSE 100 (25% of award) and a bespoke group of insurance companies (25% of award)

• EPS growth (50% of award)

Vesting of awards will be subject to an assessment of performance against Solvency II objectives.

Having considered the business plan over the coming three years and market expectations of performance and given the level of stretch within
the TSR performance conditions, the Committee considered it appropriate to continue to set threshold vesting (15% of the award) at median TSR
performance and maximum vesting at the upper quintile TSR performance.

For the EPS growth measure the Committee considered it appropriate for vesting to be based on performance as set out in the table below:

EPS growth p.a.

<5%

12%

Between 5% and 12%

Proportion of shares vesting

15%

100%

Straight line basis between 15% and 100%

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Information in relation to other outstanding awards
Performance share plan (PSP) 2017
For information, other outstanding PSP awards are shown below.

Grant date 18 April 2017

Nigel Wilson

Jeff Davies

Mark Zinkula

Kerrigan Procter

% of base
salary

Face value
£’000

Share price
at award £

250%

200%

2,273

1,250

1,564

1,188

2.482

Audited

Max no.
of shares

915,444

503,544

629,934

478,367

Payments for loss of office
As indicated earlier in the report, Mark Zinkula will be retiring from the Board on 31 August 2019. In accordance with our remuneration policy,
Mark will continue to receive his current remuneration arrangements, including salary, benefits and pension, through to this leaving in August
2019 and will receive an AVP award for performance in 2018. Mark will remain eligible for an AVP award in 2019 subject to performance for
the year, pro-rated for the period through to his leaving, with any award deferred in accordance with our normal deferral policy (three years).
Mark will not receive a PSP award for 2019.

Payments to past directors
As set out in the 2017 Annual Report and Accounts, Mark Gregory had a maximum of 448,650 shares available to vest from the 2015 PSP
award. As indicated in page 97 of the 2017 Annual Report and Accounts the 2015 PSP vested at 59.9% based on performance to the end
of the performance year.

Mark’s outstanding SBP awards vested or will vest at the normal time as set out in the table below:

AVP year

20141

2015

2016

Grant Date

Vesting Date

14/04/2015

14/04/2018

21/04/2016

21/04/2019

18/04/2017

18/04/2020

Awards

126,966

148,835

164,621

Grant price

£2.8587

£2.4310

£2.4950

1. On the vesting of this award Mark also received an additional 22,086 shares, accrued as dividends on the deferred award.

Statement of directors’ shareholding and share interests
Total shareholding of executive directors

Owned outright/
vested shares

Subject to deferral/
holding period

2,997,796

13,929

–

1,005

–

679,163

3,559

494,154

122,767

635

3,828

Total vested and
unvested shares
(excludes any
shares with
performance
conditions)

3,676,959

17,488

494,154

122,767

1,640

3,828

1,242,899

520,111

1,763,010

–

245,430

18,995

116,433

–

333,151

350,760

1,026

125,963

–

333,151

596,190

20,021

242,396

Type

ESP

Options

ESP

Options

ESP

Options

ESP

Options

Subject to
performance
conditions

–

2,697,543

–

980,929

–

1,856,673

–

1,241,492

Shares sold or acquired during the period
1 January 2019 and 6 March 2019

Own outright/
vested shares

Subject to deferral/
holding period

–

146

–

146

–

146

–

Nigel Wilson

Jeff Davies

Mark Zinkula

Kerrigan Procter

Legal & General Group Plc Annual Report and Accounts 2018Directors’ report on remuneration

Audited

Shareholding guidelines – Executive Directors
The Group Chief Executive is expected to build a shareholding of 300% of base salary and the other executive directors 200% of base salary.
The table below shows shareholding levels as at 31 December 2018.

Actual share
ownership as %
of 2018 base salary:
vested shares1

Guidelines on
share ownership
as a % of
base salary

Nigel Wilson

Jeff Davies –
appointed 9 March 2017

Mark Zinkula

Kerrigan Procter –
appointed 9 March 2017

750%

450%

126%

1. Closing share price as at 31 December 2018: £2.31.

300%

200%

Guideline met

Shares owned at
1 January 2018

Shares owned at
31 December 2018

Yes

4,136,048

3,011,725

On Target

433

Yes

1,033,749

1,005

1,242,899

On Target

113,089

264,425

Shares sold or acquired
during the period
1 January 2019 and
6 March 2019

228

–

228

Notes
Shares used for the above calculation exclude those with performance conditions, any unexercised options, those shares subject to a period of deferral and any
shares held in a private trust where the executive director is not a trustee. They include vested shares where the executive director has beneficial ownership,
shares independently acquired in the market and those held by a spouse or civil partner or dependent child under the age of 18 years.

Although the share ownership guidelines are not contractually binding, Executive Directors are normally expected to retain any after tax
vested share awards until the guideline is met. The Committee retains the discretion to withhold future grants under the PSP if executives
are not making satisfactory progress against the guidelines. Once shareholding requirements have been met, executive directors may sell
surplus shares if they wish. The Committee has discretion to allow executive directors to sell shares prior to the shareholding guidelines
being met if there are extenuating circumstances, for example, changes to personal circumstances.

Share options exercised during 2018
The following table shows all share options exercised by the executive directors during 2018.

Executive Director

Date of grant

Shares exercised

Exercise date

Nigel Wilson

Mark Zinkula

Kerrigan Procter

11/06/2014

14/04/2015

11/06/2014

14/04/2015

17/04/2013

203,760

150,763

139,153

100,800

206,843

13/04/2018

13/03/2018

16/04/2018

Share price at
date of exercise
£

2.711

2.567

2.680

Gain
£

552,393

408,718

357,206

258,754

554,339

Non-executive directors’ remuneration – 2018
Non-executive directors’ fees
The fees for the Chairman were reviewed during 2018 and with effect from 1 August 2018 the fee was increased from £450,000 to £490,000.
This is the first increase made to the Chairman’s fee since Sir John Kingman’s appointment to the role in October 2016. The table below sets out
the current fees.

The current limit for fees paid to non-executive directors is an aggregate of £1,500,000 p.a.

Annual fees

Chairman

Base fee

Additional fees:

Senior Independent Director

Committee Chairmanship fees (Audit, Remuneration and Group Risk Committees)

Attendance fee payable if the non-executive sits on two or more Board committees

Current fee
£

490,000

75,000

30,000

10,000

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

The table below shows the actual fees paid to our non-executive directors in 2018 and 2017.

Non-executive
director

Sir John Kingman

Chairman N CG

Henrietta Baldock1

A N R Ri – appointed 1 October 2018

Carolyn Bradley

N R

Philip Broadley

A CG N R Ri

Lesley Knox

A N R Ri

George Lewis

A N Ri – appointed 1 November 2018

Julia Wilson

Toby Strauss

A CG N Ri

Key:
NED committee membership:
A = Audit
N = Nominations
R = Remuneration
Ri = Risk
CG = Corporate Governance

Fees
for 2018

Benefits
for 2018

Total
remuneration
for 2018

Fees
for 2017

Benefits
for 2017

466,667

103,447

75,000

115,000

14,167

115,000

–

569

1,211

–

466,667

450,000

103,447

–

75,000

115,569

115,000

116,211

115,000

14,167

–

115,000

1,547

116,547

115,000

–

481

953

–

170

249

Audited

Total
remuneration
for 2017

450,000

–

75,098

115,481

115,953

–

115,170

115,249

1. Henrietta Baldock is also Chair of the Legal & General Assurance Society Board for which she receives a separate fee to that paid to her as a non-executive director

of the Group. The actual fees in the table above include her total fees for both roles.

Shareholding requirements – non-executive directors
Non-executive directors are required to build up a shareholding equivalent to one times base fee. The table below shows their shareholding
as at 2 January 2019, taking into account share purchases in relation to December 2018 fees, purchased on 2 January 2019.

Name

Sir John Kingman

Henrietta Baldock – appointed 1 October 2018

Carolyn Bradley

Philip Broadley

Lesley Knox

George Lewis – appointed 1 November 2018

Toby Strauss

Julia Wilson

Non-executive directors’ terms of employment

Shareholding as at
2 January 2019

Holding as a % of
base fee

Met criteria of 1 x
base fee

Shares purchased from
3 January 2019 to
6 March 2019

149,611

812

31,759

43,135

77,600

21,998

21,652

51,823

71%

98%

133%

239%

68%

67%

160%

On Target

Yes

On Target

Yes

6,610

2,386

–

3,233

–

Non-executive
director

Sir John Kingman

Julia Wilson

Henrietta Baldock

Carolyn Bradley

Philip Broadley

Lesley Knox

George Lewis

Toby Strauss

Current letter of
appointment start date

24 October 2016

09 December 2017

04 October 2018

08 December 2014

08 July 2016

01 June 2016

01 November 2018

01 January 2017

Current letter of
appointment end date

24 October 2021

09 December 2020

04 October 2021

08 December 2017

08 July 2019

01 June 2019

01 November 2021

01 January 2020

The standard term for non-executive directors is three years and for the Chairman is five years. All non-executive directors are subject to annual
re-election.

Legal & General Group Plc Annual Report and Accounts 2018Directors’ report on remuneration

Remuneration for employees below Board
General remuneration policy
The group’s remuneration policy is designed to reward, motivate and retain high performers in line with the risk appetite of the group.
Remuneration is considered within the overall context of the group’s sector and the markets in which the divisions operate. The policy for the
majority of employees continues to be to pay around the relevant mid-market range with a competitive package designed to align the interests
of employees with those of shareholders, and with an appropriate proportion of total remuneration dependent upon performance.

We define core remuneration as base salary, annual bonus and other benefits such as pension. Key employees are also eligible to participate
in the performance share plan (PSP).

Summary of the remuneration structure for employees below Board

Element

Policy

Base salary

We aim to attract and retain key employees by paying salaries which deliver competitive total remuneration. Factors taken into
account when determining salaries include:

• the nature, size and scope of the role

• the knowledge, skills and experience of the individual

• individual and overall business performance

• pay and conditions elsewhere in the group

• appropriate external market data

As a member of the Living Wage Foundation salaries are also set with reference to the Foundation’s UK and London living
wage levels.

For 2018, the average base salary increase was 3.2%; however, it was agreed that this spend would be focused on more junior
employees within the group with base salary increases for senior managers generally limited to around 2%.

Annual bonus

The majority of employees participate in a discretionary bonus plan, unless an alternative plan applies based on role.
An employee will be considered for a discretionary bonus award based on achievement against objectives, conduct and behaviours,
the role performed during that year and internal relativities.

The group operates bespoke bonus plans where business appropriate. However, the Remuneration Committee has ultimate
discretion over all bonus plans.

Bonuses above a certain threshold are subject to deferral with the deferral amount increasing with the size of the bonus.
Deferred awards are normally held in shares for three years.

The company reserves the right to adjust deferral levels for code staff as deemed appropriate.

Performance
share plan (PSP)

Participation in the PSP is offered to a small number of senior executives each year in recognition of the strategic and influential role
that they hold in terms of driving company performance, as well as their individual contribution. This includes employees in LGIM
whose roles span different business divisions and whose participation encourages synergy and teamwork across the group.
Participation in the plan for one year does not guarantee participation in future years.

PSP awards will be made to around 80 employees during 2019.

Where appropriate, grants under the PSP may also be made for new employees who join the company during the year in key roles.

Other share plans
and long-term
incentives

The company operates a Share Bonus Plan (SBP) which provides the vehicle for deferral of annual bonuses in the majority of cases
and also allows for a limited number of awards of shares to high potential individuals and those with critical skills.

In addition, the company operates a cash based long-term incentive plan for LGIM (LGIM LTIP) based on the financial performance
of the division. Participation in the LGIM LTIP is limited to senior managers within the division.

Pension

All employees are given the opportunity to participate in a Group Pension Scheme. The pension opportunity offered to the majority
of the workforce is 10% of salary.

Employee
share plans

All employees are given the opportunity to participate in a Save As You Earn (SAYE) plan and an Employee Share Purchase plan.
These are both HMRC approved plans which offer all employees the opportunity to share in the success of the business.

Annual equal pay audit
The group seeks to ensure that our pay policies and practices are free from unfair bias. Part of the pay review process is an annual equal pay audit
that reviews pay and bonus decisions by gender, ethnicity, age and full-time versus part-time working. In addition, it considers the application of the
pay policy more widely, in particular looking at decisions made in the annual pay review across grades, functions and divisions.

Gender pay reporting
The group has published its gender pay report for 2018. Further details can be found on page 36 of the report.

Legal & General Group Plc Annual Report and Accounts 2018GovernanceGovernance

Pay ratio in relation to the Group CEO
As in 2016 and 2017 we are voluntarily disclosing details of the pay ratio in relation to the Group CEO and the wider UK employee population.
For 2018 we have made some amendments to how we report the information in order to align with the reporting requirements set out by BEIS
which will come into effect for financial years starting 1 January 2019.

The tables below provide the ratio between the CEO single figure total remuneration and total remuneration for all UK employees and the details
of the salary and total remuneration for UK employees in 2018.

Total Remuneration

Year

2018

2017

Salary

Year

2018

2017

Pay ratio

All employee £

Method

75th percentile

Median

25th percentile

75th percentile

130

133

86,082

67,475

Median

42,906

38,055

25th percentile

25,381

25,891

Pay ratio

All employee £

Method

75th percentile

Median

25th percentile

75th percentile

71,583

51,550

Median

35,493

33,706

25th percentile

22,570

21,765

Pay ratio commentary
From 2017 to 2018 the ratio between the total remuneration of the Group CEO and the total remuneration of the employees and the median, upper
and lower quartiles has reduced. This reduction is due to a combination of a fall in the level of short and long term variable remuneration for the
Group CEO from 2017 to 2018 and a significant increase in the total remuneration paid to employees, particularly at the median and upper quartile.

Methodology
We have chosen option B as our method for calculating the pay ratio for this report, consistent with the methodology for reporting of the gender pay
gap. Bonus amounts for 2018 are not determined for some eligible employees until after publication of this report, and therefore it is not possible to
determine the exact 2018 total remuneration for all UK employees within this timescale. It is unlikely that the pay ratios will change significantly
once these bonus amounts are determined, but for completeness and transparency, the ratio using the full actual 2018 total remuneration for all
employees (option A) will be disclosed retrospectively in the 2019 report.

Percentage change in remuneration of director undertaking the role of Group Chief Executive
2018 over 2017

Group Chief Executive

Comparator group

Change to base salary %

Change to benefits %

Change in AVP %

2.08%

0.88%

-41.52%

0.88%

-3.91%

17.72%

As with last year we have chosen the whole UK employee population as the comparator group. This group has been chosen because it includes a
wider cross section of the group’s employees. The increase in benefits for the employee comparator group relates to the impact of salary increases.

Legal & General Group Plc Annual Report and Accounts 2018Directors’ report on remuneration

Relative importance of spend on pay
The chart opposite shows the relative importance of spend on
pay compared to shareholder dividends and profit for the year.
Retained profit has been shown because it is a KPI of the
business. No share buybacks were made in 2017 or 2018.

Remuneration Committee
The table below shows the members and attendees of the
Remuneration Committee during 2018.

Committee members, attendees and advice
Meetings in 2018
During 2018, the Committee met five times and in addition had
ongoing dialogue via email and telephone discussion.

5% decrease

(£m)
2,000

1,800

1,600

1,400

1,200

1,000

7% increase

800

600

400

200

17% increase

70% increase

Dividends

Retained proﬁt

Tax

Expenditure on pay

2017

2018

An outline of the Committee undertakings during 2018 is shown in the table below.

Members: during 2018 the Remuneration Committee comprised the following non-executive directors:

Name

Lesley Knox

Carolyn Bradley

Philip Broadley

Henrietta Baldock – appointed on 1 October 2018

Committee undertakings

Quarter

Governance

Performance

Implementation of
remuneration policy

Regulatory

Number of Remuneration
Committee meetings
attended during 2018

5/5

2/2

First

• Review of report on the

• Reviewed findings of the

activities of the Group Reward
Steering Committee

CRO report

• Approved the 2018 AVP
performance measures

• Approved remuneration policy

statement for the PRA

• Approved the 2017/18 annual
pay review and executive
pay awards

• Approved 2018 long term

incentive awards

• Approved 2018 SAYE

• Approved vesting of the 2015

invitation

PSP, LGIM LTIP and LGC Direct
Investment Share Awards

Third

• Reviewed outcomes of

• Financial update and indicative

• Review of code staff lists

AGM season

• Review of Group Reward

Steering Committee terms
of reference

variable pay update for
executive teams

Fourth

• Review and approval of

• Review of the salary and

committee terms of reference

variable pay budget proposals
for the 2018/19 review

• Consideration of incentive
out-turns in respect of 2018

• Reviewed remuneration policy
statements for FCA and PRA

At the invitation of the Remuneration Committee, the Group Chairman attends Committee meetings. Where appropriate, the Group Chief
Executive, Nigel Wilson; and the Group HR Director, Group Reward Director, Head of Executive Compensation, Director of Group Finance
and Group Chief Risk Officer also attend meetings. No person is present during any discussion relating to his or her own remuneration.

Legal & General Group Plc Annual Report and Accounts 2018Governance
Governance

At the invitation of the Remuneration Committee, a representative from Deloitte LLP also attends Committee meetings. During 2018, Deloitte
principally advised the Committee on external developments affecting remuneration as well as specific matters raised by the Remuneration
Committee. Deloitte were appointed by the Committee. The Committee reflects on the quality of advice provided and whether it properly
addresses the issues under consideration as part of its normal deliberations. The Committee is satisfied that the advice received from Deloitte
LLP engagement team is objective and independent. Deloitte are signatories to the remuneration consultants’ group code of conduct in relation
to executive remuneration consulting in the UK. The total fees paid to Deloitte in relation to Remuneration Committee work during 2018 were
£92,800 (excluding VAT). While fee estimates are required for bespoke pieces of work, fees are generally charged based on time with hourly rates
in line with the level of expertise and seniority of the adviser concerned. During the year, Deloitte also provided the company with tax advice,
consulting services, internal audit support and financial advisory services.

Terms of reference
The Committee’s terms of reference are available on our website. The remit of the Committee includes the remuneration strategy and policy
framework for the whole company as well as the executive directors.

The Committee particularly focuses on:

• determining the individual remuneration for executive directors and for other designated individuals or for those who are discharging a head

of control function role

• undertaking direct oversight on the remuneration of other high earners in the group

• oversight of the remuneration of Code staff and employees in the control and oversight functions

• oversight of remuneration policies and structures for all employees

Considering risk
The Reward Steering Committee (RSC) and the Group Regulatory Risk and Compliance Function make a key contribution to the process of
designing reward structures and evaluating whether achievement of objectives and any payment from plans have taken into account the overall risk
profile of the company.

Reward Steering Committee (RSC)
Reporting to the Remuneration Committee, the RSC helps set the framework within which our incentive arrangements are normally reviewed and
implemented, with a view to supporting business strategy, whilst acting within the group’s risk appetite. The members of the RSC include the
Group HR Director, Group Chief Risk Officer, Group Conduct Risk Director, Regulatory Risk Director, LGIM Chief Compliance Officer and the
Director of Group Finance.

Where a business unit tables a proposal for consideration, the relevant business manager is required to attend the RSC meeting
to explain the background and to answer all questions and challenges from the RSC.

Group regulatory risk and compliance function
The Remuneration Committee also works closely with the group regulatory risk and compliance function with respect to remuneration proposals.

In particular, the function reports to the Committee on an annual basis on whether any risks have been taken outside of pre-agreed parameters,
there have been regulatory breaches, or they are aware of any other considerations that may lead the Committee to consider whether it should
impact the payment of bonuses to staff (including in particular the executive directors and code staff).

The CRO also specifically looks at the overall risk profile of the company and whether executive directors have achieved objectives within the
company’s accepted risk appetite. The CRO also reviews the executive directors’ objectives for the forthcoming year to ensure they are in line
with the risk parameters.

Since the implementation of a new Solvency II remuneration policy in 2016, the scope of the CRO report has been extended to consider
whether there are any risk considerations which may warrant adjustments to the overall level of corporate annual variable pay awards.

100

Legal & General Group Plc Annual Report and Accounts 2018Directors’ report on remuneration

Engagement with shareholders
The Committee seeks to maintain an active and productive dialogue with investors on developments in the remuneration aspects of corporate
governance and any changes to the company’s executive pay arrangements.

During the course of 2017 the Committee undertook a detailed review of the policy to ensure it remains appropriate to the company. The result of the
review was that the policy was considered appropriate to drive group performance; however, some changes were considered appropriate: firstly to
extend the time horizons of long-term incentive awards and secondly to replace the previous EPS/DPS matrix which determined 50% of PSP awards
with a sole measure of EPS. In late 2017 and early 2018, the Committee consulted with the group’s largest shareholders on these changes.

During the course of 2019, the Committee intends to undertake a detailed review of the remuneration policy, and will consult with the group’s
largest shareholders on any changes, prior to presenting a new policy for shareholder approval at the 2020 AGM.

Statement of voting at the annual general meeting (AGM) 2018
The table below shows the voting outcomes on the Directors’ Remuneration Policy at the AGM May 2017 in and the Directors’ Remuneration
Report at the last AGM in May 2018.

Item

Remuneration policy

2017 remuneration report

For

91.23%

3,851,461,140

98.17%

4,169,081,055

Against

8.77%

370,032,785

1.83%

77,681,315

Abstain Number

–

15,093,723

–

4,760,192

Dilution limits
The company’s all-employee plans and the now-closed ESOS operate within the Investment Association’s dilution limit of 5% of issued capital in
10 years for executive schemes and all its plans will operate within the 10% of issued capital in 10 years limit for all schemes.

As at 31 December 2018, the company had 4.93% of share capital available under the 5% in 10 years limit and 9.72% of share capital under the
10% in 10 years limit.

As at 31 December 2018, 25,225,114 shares were held by the Employee Benefit Trust to hedge outstanding awards of 52,054,902 shares for the
PSP and SBP.

Other information relating to directors’ remuneration
External appointments
The company considers that certain external appointments can help to broaden the experience and contribution to the Board of the executive
directors. Any such appointments are subject to annual agreement by the group and must not be with competing companies. Subject to the
group’s agreement, any fees may be retained by the individual. However, they received no fees for the below appointments.

External appointments held in 2018 are shown below:

Nigel Wilson

Jeff Davies

Mark Zinkula

Role and organisation

n/a

Currently on the board of the Financial Reporting Council

Kerrigan Procter

n/a

Fees

Nil

101

Legal & General Group Plc Annual Report and Accounts 2018GovernanceFinancial Statements

Bringing financial education
to schools across the country
In 2018, we toured schools around
the country bringing our finance
workshops to nearly 4,000 school
students and over 130 teachers.
Young people often see money
and finance as deadly dull and
confusing, so we pulled out all
the stops to make the workshops
enjoyable and fun. Financial
literacy is now part of the national
curriculum for state schools for
11-16 year-olds and is included in the
maths syllabus for 5-14 year-olds.
Our aim is to help teachers and
children alike to understand
the basics of finance: how to earn,
spend and save money. This is
closely linked to our aim to help
make society more resilient
financially as we know that
millions of people are excluded
from the benefits of personal
financial services.

102

Legal & General Group Plc Annual Report and Accounts 2018

Financial
statements

Contents

Group consolidated

financial statements

Primary statements

and performance

Balance sheet management

Additional financial information

Company financial statements

104

112

131

196

227

103

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsFinancial Statements

Group consolidated financial statements

Consolidated financial statements
The group consolidated financial statements are divided into three sections:

• The Primary statements and performance section, which includes the group primary statements and other notes which we believe

are integral to understanding our financial performance.

• The Balance sheet management section, which provides further details on our financial position and approach to risk management.

• The Additional financial information section, which includes disclosures required to be compliant with accounting standards or the

Companies Act. We view this information as important, but less significant in understanding our business and performance.

Additional financial information
28. Segmental analysis
29. Investment return
30. Tax
31. Auditor’s remuneration
32. Employee information
33. Share-based payments
34. Share capital, share premium and employee

scheme treasury shares
35. Non-controlling interests
36. Other liabilities
37. Reconciliation of Assets under management to

Consolidated Balance Sheet financial investments,
investment property and cash and cash equivalents

38. Related party transactions
39. Contingent liabilities, guarantees and indemnities
40. Commitments
41. Post balance sheet events
42. Subsidiaries
43. Associates and joint ventures
44. Interests in structured entities

Company financial statements

196
200
201
205
206
206

208
209
209

210
210
211
211
212
212
223
225

227

105

112
113
114
115
117
118
125
129
129
130

131
135
138

140
142
143
151
155
156
156
161
166
168
174
176
179
180
186
191
192
194
195

Contents

Group consolidated financial statements
Independent auditor’s report to the members
of Legal & General Group Plc

Primary statements and performance
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Balance Sheet
Consolidated Statement of Changes in Equity
Consolidated Cash Flow Statement
1. Basis of preparation
2. Supplementary operating profit information
3. Other expenses
4. Dividends
5. Earnings per share

Balance sheet management
6. Principal products
7. Asset risk
8. Assets analysis
9.

Purchased interest in long term businesses
(PILTB) and other intangible assets

10. Deferred acquisition costs
11. Financial investments and investment property
12. Derivative assets and liabilities
13. Receivables and other assets
14. Cash and cash equivalents
15. Market risk
16. Credit risk
17. Insurance risk
18. Long term insurance valuation assumptions
19. IFRS sensitivity analysis
20. Insurance contract liabilities
21. Investment contract liabilities
22. Borrowings
23. Provisions
24. Payables and other financial liabilities
25. Management of capital resources
26. Acquisitions
27. Held for sale and discontinued operations

104

Legal & General Group Plc Annual Report and Accounts 2018

Independent auditor’s report to the members of Legal & General Group Plc
1 Our opinion is unmodified
We have audited the financial statements of Legal & General Group Plc (“the Company”) for the year ended 31 December 2018 which comprise
the Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Balance Sheet, Consolidated Statement
of Changes in Equity, Consolidated Cash Flow Statement, Company Balance Sheet, Company Statement of Changes in Equity and the related
notes, including the accounting policies.

In our opinion:

• the financial statements give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2018

and of the Group’s profit for the year then ended;

• the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by

the European Union;

• the parent company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101

Reduced Disclosure Framework; and

• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group

financial statements, Article 4 of the IAS Regulation.

Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are
described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is
consistent with our report to the audit committee.

We were first appointed as auditor by the shareholders on 17 May 2018. The period of total uninterrupted engagement is for the one financial
year ended 31 December 2018. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in accordance with,
UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit services prohibited by that
standard were provided.

Overview

Materiality: group financial
statements as a whole

Coverage

Key audit matters

Event driven

Recurring risks

£92.5m

4.1% of normalised profit before tax from continuing operations

91% of group profit before tax

The impact of uncertainties due to the UK exiting the European Union on our audit

Valuation of non-participating insurance contract liabilities

Valuation of hard to value (Level 3) investments

Parent company risk: Recoverability of parent company’s investment in subsidiaries

105

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsGroup consolidated financial statementsIndependent auditor’s report to the members of Legal & General Group Plc (continued)
2 Key audit matters: including our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements and include
the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest
effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below
the key audit matters in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for
public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in
the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently
are incidental to that opinion, and we do not provide a separate opinion on these matters.

The impact of uncertainties due to the UK exiting the European Union on our audit (“Brexit”)
Refer to page 48 (principal risks), page 47 (viability statement), page 68 (Audit Committee Report).

The risk

Our response

Unprecedented levels of uncertainty
All audits assess and challenge the reasonableness of estimates, in particular
as described in ‘Valuation of insurance contract liabilities’ and ‘Valuation of
hard to value (Level 3) investments’ below, and related disclosures and the
appropriateness of the going concern basis of preparation of the financial
statements. All of these depend on assessments of the future economic
environment and the Group’s future prospects and performance.

In addition, we are required to consider the other information presented in the
Annual Report including the principal risks disclosure and the viability statement
and to consider the directors’ statement that the annual report and financial
statements taken as a whole is fair, balanced and understandable and provides
the information necessary for shareholders to assess the Group’s position and
performance, business model and strategy.

Brexit is one of the most significant economic events for the UK and at the date
of this report its effects are subject to unprecedented levels of uncertainty of
outcomes, with the full range of possible effects unknown.

We developed a standardised firm-wide approach to the consideration of the
uncertainties arising from Brexit in planning and performing our audits. Our
procedures included:

– Our Brexit knowledge: We considered the directors’ assessment of Brexit-

related sources of risk for the Group’s business and financial resources compared
with our own understanding of the risks. We considered the directors’ plans to
take action to mitigate the risks;

– Sensitivity analysis: When addressing ‘Valuation of insurance contract liabilities’
and ‘Valuation of hard to value (Level 3) investments’ below and other areas that
depend on forecasts, we compared the directors’ analysis to our assessment of
the full range of reasonably possible scenarios resulting from Brexit uncertainty
and, where forecast cash flows are required to be discounted, considered
adjustments to discount rates for the level of remaining uncertainty; and

– Assessing transparency: As well as assessing individual disclosures as part
of our procedures on ‘Valuation of insurance contract liabilities’ and ‘Valuation
of hard to value (Level 3) investments’ below we considered all of the Brexit
related disclosures together, including those in the strategic report,
comparing the overall picture against our understanding of the risks.

Our results
– As reported under ‘Valuation of insurance contract liabilities’ and ‘Valuation of hard
to value (Level 3) investments’ below we found the resulting estimates and related
disclosures of these matters and disclosures in relation to going concern to be
acceptable. However, no audit should be expected to predict the unknowable
factors or all possible future implications for a company and this is particularly
the case in relation to Brexit.

106

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsValuation of non-participating insurance contract liabilities
(Annuity liabilities within non-participating insurance contract liabilities of £64,707 million; 2017: £61,308 million)
Refer to page 68 (Audit Committee Report), page 123 (accounting policy) and page 176 (financial disclosures).

The risk

Subjective valuation:
The valuation of non-participating insurance contract liabilities is an
inherently subjective area, requiring management judgement in the
setting of key assumptions. In particular there is a significant level of
judgement required in determining liabilities associated with the annuity
business. The annuity business consists of individual annuities and bulk
purchase annuity (BPA) schemes. A small change in assumptions
can have a significant impact on the liabilities.

The longevity and credit risk assumptions involve the greatest level
of subjectivity.

Longevity assumptions
Longevity assumptions have two main components which include mortality
base assumptions and the rate of mortality improvements. Certain of these
assumptions are tailored to individual bulk annuity schemes. Changing trends
in longevity and emerging medical trends means there is a high level of
uncertainty in the assumptions.

Credit assumptions
The valuation discount rate is derived from the yield on the assets backing the
annuity liabilities. In setting the valuation discount rate, an explicit allowance for
credit risk is included by making a deduction, representing part of the yield on
debt and other fixed income securities. The assumptions surrounding this
deduction require significant judgement and there is a risk that changes in
investment yields, market spreads, current actual default experience and
anticipated trends are not appropriately reflected.

Estimation uncertainty
The effect of these matters is that, as part of our risk assessment, we
determined that the valuation of insurance contract liabilities has a high degree
of estimation uncertainty, with a potential range of reasonable outcomes greater
than our materiality for the financial statements as a whole, and possibly many
times that amount. The financial statements (Note 19) disclose the sensitivity
estimated by the Group.

Calculation error and data capture:
Management uses actuarial models to calculate policyholder liabilities.
There is a risk that incomplete data is used in the calculation because data
does not transfer appropriately from the policyholder system to the actuarial
models. There is also a risk that unauthorised or erroneous changes to the
models may occur.

Our response

Our procedures included:

– Control design: testing controls over the quarterly review and approval of
central assumptions adopted over the valuation of annuity liabilities, and
reconciliation controls to ensure completeness and accuracy of data used in both
the experience analyses that informs the assumption setting process and the
data flows from policy administration systems to the actuarial valuation models.

– Methodology choice: using actuarial specialists to assess the appropriateness
of the methodology for selecting assumptions by applying our understanding of
developments in the business and expectations derived from market experience.

– Benchmarking assumptions and sector experience: assessing mortality

improvement assumptions against industry data on expected future mortality rate
improvements and industry historic mortality improvement rates; and assessing
the appropriateness of the credit risk assumptions by comparing to industry
practice and our expectations derived from market experience.

– Historical comparisons: evaluating the mortality base assumptions used in the
valuation of the annuity liabilities by comparing to the Group’s historic mortality
experience, and assessing the credit default assumptions by comparing to the
historical performance of the asset portfolio.

– Test of detail: testing the completeness of data used in the valuation of annuity
liabilities by reconciling the data from the policy administration system to the data
used in the actuarial models.

– Independent re-performance: using our own valuation models to estimate the
annuity liability for a sample of policies and comparing to the balances estimated
by the Group to assess the accuracy of the calculations performed by the actuarial
models, in particular whether they were in line with internally approved
methodologies and assumptions.

– Assessing transparency: assessing whether the disclosures in relation to
the valuation of non-participating insurance contract liabilities are compliant
with the relevant financial reporting requirements.

Our results
– We found the resulting estimate of the valuation of insurance contract

liabilities to be acceptable.

107

Valuation of hard to value (Level 3) investments
(Lifetime mortgages: £3,227 million; Private credit: £8,001 million; 2017: Lifetime mortgages: £2,023 million; Private credit: £6,265 million)
Refer to page 68 (Audit Committee Report), page 123 (accounting policy) and page 149 (financial disclosures).

The risk

Subjective valuation:
5% of the investment portfolio is classified as Level 3 assets, of which we
consider the valuation of lifetime mortgages and private credit involve the
greatest level of subjectivity.

Lifetime mortgages
The loans are measured at fair value determined through projecting future
discounted cash flows using internally developed models. There is significant
judgement involved in setting the assumptions that drive the valuation.

The key assumptions include property price inflation, property price volatility,
mortality (determined by reference to the Group’s own experience and
expected levels of future mortality) and the illiquidity premium added to
the risk free rate.

A small change in these assumptions can have a significant impact on
the overall valuation.

Private credit
Given the limited nature of the secondary market for private credit, an
inherent mispricing risk exists for these investments owing to a lack of price
transparency in the market, and the adoption of assumptions which require
significant judgement in mark-to-model valuations.

The fair value of private credit investments is based on an internally generated
credit rating which is derived from the application of suitable credit rating
models. This credit rating in turn forms the basis of identifying comparator
securities. The selection of a suitable model, the inputs into the model and
the selection of comparator securities require management judgement.
Inappropriate judgements can lead to a material misstatement in the
valuation of private credit investments.

Estimation uncertainty
The effect of these matters is that, as part of our risk assessment, we
determined that the valuation of hard to value (Level 3) investments has a high
degree of estimation uncertainty, with a potential range of reasonable
outcomes greater than our materiality for the financial statements as a whole,
and possibly many times that amount. The financial statements (Note 11)
disclose the sensitivity estimated by the Group.

Our response

Lifetime mortgages
Our procedures included:

– Control design: testing controls over the review and approval of assumptions

used in the valuation of lifetime mortgages.

– Our valuation expertise: using valuation specialists to challenge the valuation

methodology adopted for suitability and appropriate application.

– Benchmarking assumptions and historic comparisons: using specialists
in comparing: property price inflation to market data and industry practice;
property price volatility to industry benchmarks; mortality assumptions to the
Group’s mortality experience analysis; and the liquidity premium applied to the
risk-free rate to industry practice and our expectations from market experience.

– Independent re-performance: using our own valuation models to value the
loans secured by residential mortgages balance for a sample of policies and
comparing to the balances recorded by the Group.

– Assessing transparency: assessing whether the disclosures in relation to

the valuation of lifetime mortgage investments are compliant with the relevant
financial reporting requirements and appropriately present the sensitivities
of the valuation to alternative assumptions.

Private credit
Our procedures included:

– Control design, observation, and operation: testing key controls over

the approval and monitoring of credit ratings, including the Company’s Credit
Committee, and controls designed to assure the completeness and accuracy
of information presented to the Committee; and the approval of comparator
securities by the Company’s external expert, IHS Markit.

– Assessing valuers’ credentials: assessing the independence and

competence of IHS Markit, and obtaining evidence of IHS Markit’s approval
of comparator securities for a sample of private credit investments.

– Our valuation expertise: using valuation specialists to challenge the

suitability of the valuation methodology adopted and assess its application.

– Independent re-performance: with assistance of valuation specialists,

we independently assessed comparator securities and re-priced a sample
of private credit investments.

– Assessing transparency: assessing whether the disclosures in relation

to the valuation of private credit investments are compliant with the relevant
financial reporting requirements and appropriately present the sensitivities
of the valuation to alternative assumptions.

Our results
– We found the resulting estimate of the valuation of hard to value (Level 3)

investments to be acceptable.

Parent company risk: Recoverability of parent company’s investment in subsidiaries
(£8,465 million; 2017: £7,717 million)
Refer to page 230 (accounting policy) and page 232 (financial disclosures).

The risk

Low risk, high value:
The carrying amount of the parent company’s investments in subsidiaries
represents 79% of the company’s total assets. Their recoverability is not
at a high risk of significant misstatement or subject to significant judgement.
However, due to their materiality in the context of the parent company
financial statements, this is considered to be the area that had the greatest
effect on our overall parent company audit.

Our response

Our procedures included:

– Independent re-performance: comparing the carrying amount of a

sample of the highest value investments, with the relevant subsidiaries’
financial information to identify whether their net assets, being an approximation
of their minimum recoverable amount, were in excess of their carrying amount
and assessing whether those subsidiaries have historically been profit-making.

Our results
– We found the Group’s assessment of the recoverability of the investment

in subsidiaries to be acceptable.

108

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements3 Our application of materiality and an overview of the scope
of our audit
Materiality for the financial statements as a whole was set at £92.5 million,
determined by reference to a benchmark of profit before tax from
continuing operations (PBTCO), normalised to exclude this year’s
investment and other variances and gains on non-controlling interests as
disclosed in Note 2 of the financial statements, of which it represents 4.1%.

Materiality for the parent company financial statements as a whole was
set at £46.0 million, determined with reference to a benchmark of total
assets and chosen to be lower than materiality for the group financial
statements as a whole. It represents 0.4% of the stated benchmark.
We consider total assets to be the most appropriate benchmark as the
Company principally holds investments in other entities.

We agreed to report to the Audit Committee any corrected or uncorrected
identified misstatements exceeding £4.6 million, in addition to other
identified misstatements that warranted reporting on qualitative grounds.

In addition, we applied materiality of £3.8 billion to the classification of
unit-linked assets and liabilities in the consolidated balance sheet and
related notes, determined with reference to a benchmark of total
unit-linked investment contracts, of which it represents 1.1%. This
materiality was applied solely for our work on matters for which a
misstatement is likely only to lead to a reclassification between line
items within assets and liabilities, in accordance with FRC Practice
Note 20 The Audit of Insurers in the United Kingdom.

We agreed to report to the Audit Committee any corrected or
uncorrected classification misstatements in unit-linked assets and
liabilities exceeding £190 million.

Of the Group’s 19 reporting components, we subjected 18 to full scope
audits for group purposes and one to specified risk-focused audit
procedures over financial investments and investment return. The latter
was not individually financially significant enough to require a full scope
audit for group purposes, but did present specific individual risks that
needed to be addressed.

The components within the scope of our work accounted for the
percentages illustrated to the right. For the residual components,
we performed analysis at an aggregated group level to re-examine
our assessment that there were no significant risks of material
misstatement within these.

PBTCO
(normalised) £2,256m

Group Materiality
Whole financial statements
materiality £92.5m

£72.0m
Range of materiality at
19 components (£9m-£72m)

£4.6m
Misstatements reported
to the audit committee

0.5%

91%

90.9%

PBTCO
Materiality

94%

94.4%

Group revenue

Group proﬁt before tax

0.8%

92%

90.9%

Group total assets

Full scope for group audit purposes 2018
Specified risk-focused audit procedures 2018
Residual components

The Group team instructed component auditors as to the significant
areas to be covered, including the relevant risks detailed above and
the information to be reported back. The Group team approved the
component materialities, which ranged from £9 million to £72 million, having regard to the mix of size and risk profile of the Group across the
components. The work on 15 of the 19 components was performed by component auditors and the rest, including the audit of the parent company,
was performed by the Group team. The Group team performed procedures on the items excluded from normalised group profit before tax.

The Group team visited 17 component locations in the United Kingdom and the United States to assess the audit risk and strategy. Telephone conference
meetings were also held with these component auditors and others that were not physically visited. At these visits and meetings, the findings reported
to the Group team were discussed in more detail, and any further work required by the Group team was then performed by the component auditor.

4 We have nothing to report on going concern
The Directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or the
Group or to cease their operations, and as they have concluded that the Company’s and the Group’s financial position means that this is
realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over their ability to continue
as a going concern for at least a year from the date of approval of the financial statements (“the going concern period”).

Our responsibility is to conclude on the appropriateness of the Directors’ conclusions and, had there been a material uncertainty related to going
concern, to make reference to that in this audit report. However, as we cannot predict all future events or conditions and as subsequent events
may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the absence of reference to a
material uncertainty in this auditor’s report is not a guarantee that the Group and the Company will continue in operation.

In our evaluation of the Directors’ conclusions, we considered the inherent risks to the Group’s and Company’s business model, including the impact
of Brexit, and analysed how those risks might affect the Group’s and Company’s financial resources or ability to continue operations over the going
concern period. We evaluated those risks and concluded that they were not significant enough to require us to perform additional audit procedures.

109

• we have anything material to add or draw attention to in relation to the directors’ statement on page 237 to the financial statements on the
use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s
use of that basis for a period of at least twelve months from the date of approval of the financial statements; or

• the related statement under the Listing Rules set out on page 235 is materially inconsistent with our audit knowledge.

We have nothing to report in these respects, and we did not identify going concern as a key audit matter.

5 We have nothing to report on the other information in the Annual Report
The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the
financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below,
any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the information
therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work we have not identified
material misstatements in the other information.

Strategic report and directors’ report
Based solely on our work on the other information:

• we have not identified material misstatements in the strategic report and the directors’ report;

• in our opinion the information given in those reports for the financial year is consistent with the financial statements; and

• in our opinion those reports have been prepared in accordance with the Companies Act 2006.

Directors’ remuneration report
In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.

Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation to:

• the directors’ confirmation within the Group Board viability statement on page 47 that they have carried out a robust assessment of the principal

risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity;

• the Principal Risks disclosures describing these risks and explaining how they are being managed and mitigated; and

• the directors’ explanation in the Group Board viability statement of how they have assessed the prospects of the Group, over what period they have

done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the
Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications or assumptions.

Under the Listing Rules we are required to review the Group Board viability statement. We have nothing to report in this respect.

Our work is limited to assessing these matters in the context of only the knowledge acquired during our financial statements audit. As we cannot predict
all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgments that were reasonable at the time
they were made, the absence of anything to report on these statements is not a guarantee as to the Group’s and Company’s longer-term viability.

Corporate governance disclosures
We are required to report to you if:

• we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the directors’ statement

that they consider that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or

• the section of the annual report describing the work of the Audit Committee does not appropriately address matters communicated by us

to the Audit Committee; or

• a corporate governance statement has not been prepared by the company

We are required to report to you if the Governance report does not properly disclose a departure from the eleven provisions of
the UK Corporate Governance Code specified by the Listing Rules for our review.

We have nothing to report in these respects.

Based solely on our work on the other information described above:

• with respect to the Governance report disclosures about internal control and risk management systems in relation to financial reporting

processes and about share capital structures:

• we have not identified material misstatements therein; and

• the information therein is consistent with the financial statements; and

• in our opinion, the Governance report has been prepared in accordance with relevant rules of the Disclosure Guidance and Transparency

Rules of the Financial Conduct Authority.

110

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements6 We have nothing to report on the other matters on which we are required to report by exception
Under the Companies Act 2006, we are required to report to you if, in our opinion:

• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from

branches not visited by us; or

• the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with

the accounting records and returns; or

• certain disclosures of directors’ remuneration specified by law are not made; or

• we have not received all the information and explanations we require for our audit.

We have nothing to report in these respects.

7 Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 236, the directors are responsible for: the preparation of the financial statements including
being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent company’s ability to continue as
a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend
to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether
due to fraud or other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of
assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably
be expected to influence the economic decisions of users taken on the basis of the financial statements.

A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.

Irregularities – ability to detect
We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general
commercial and sector experience, through discussion with the directors and other management (as required by auditing standards), and from
inspection of the Group’s regulatory and legal correspondence and discussed with the directors and other management the policies and procedures
regarding compliance with laws and regulations. We communicated identified laws and regulations throughout our team and remained alert to any
indications of non-compliance throughout the audit. This included communication from the Group team to component audit teams of relevant laws
and regulations identified at the group level.

The potential effect of these laws and regulations on the financial statements varies considerably.

Firstly, the Group is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including
related companies legislation), distributable profits legislation, taxation legislation, and pension legislation and we assessed the extent of compliance
with these laws and regulations as part of our procedures on the related financial statement items.

Secondly, the Group is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on
amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation or the loss of the Group’s licence to
operate. We identified the following areas as those most likely to have such an effect: Listing Rules and regulatory capital and liquidity recognising the
financial and regulated nature of certain of the Group’s activities and certain regulated subsidiaries. Auditing standards limit the required audit
procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of
regulatory and legal correspondence, if any. These limited procedures did not identify actual or suspected non-compliance.

Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial
statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed
non-compliance with laws and regulations (irregularities) is from the events and transactions reflected in the financial statements, the less likely the
inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-
detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. We
are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations.

8 The purpose of our audit work and to whom we owe our responsibilities
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit
work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report
and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and
the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.

Rees Aronson (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
KPMG LLP
15 Canada Square,
London, E14 5GL
5th March 2019

111

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsGroup consolidated financial statementsPrimary statements and performance

Consolidated Income Statement

For the year ended 31 December 2018

Income

Gross written premiums

Outward reinsurance premiums

Net change in provision for unearned premiums

Net premiums earned

Fees from fund management and investment contracts

Investment return

Other operational income

Total income

Expenses

Claims and change in insurance contract liabilities

Reinsurance recoveries

Net claims and change in insurance contract liabilities

Change in investment contract liabilities

Acquisition costs

Finance costs

Other expenses

Total expenses

Profit before tax

Tax expense attributable to policyholder returns

Profit before tax attributable to equity holders

Total tax expense

Tax expense attributable to policyholder returns

Tax expense attributable to equity holders

Profit after tax from continuing operations

Profit after tax from discontinued operations1

Profit for the year

Attributable to:

Non-controlling interests

Equity holders

Dividend distributions to equity holders during the year

Dividend distributions to equity holders proposed after the year end

Total basic earnings per share2

Total diluted earnings per share2

Basic earnings per share derived from continuing operations2

Diluted earnings per share derived from continuing operations2

1. Detailed disclosure of discontinued operations is included in Note 27.
2. All earnings per share calculations are based on profit attributable to equity holders of the company.

112

Notes

2018
£m

2017
£m

13,253

(2,131)

(19)

11,103

802

7,932

(1,858)

(23)

6,051

771

(11,847)

33,457

1,206

1,264

212

40,491

8,612

(1,053)

7,559

8,326

(1,776)

6,550

(11,304)

29,848

893

238

1,776

(838)

2,102

(53)

2,049

(358)

(305)

1,744

1,808

(19)

1,827

932

704

30.79

30.64

29.72

29.57

734

212

1,086

38,430

2,061

(70)

1,991

(239)

(169)

1,822

1,902

1,891

872

658

31.87

31.73

30.52

30.38

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsPrimary statements and performance

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2018

Profit for the year

Items that will not be reclassified subsequently to profit or loss

Actuarial gains/(losses) on defined benefit pension schemes

Tax on actuarial gains/(losses) on defined benefit pension schemes

Total items that will not be reclassified subsequently to profit or loss

Items that may be reclassified subsequently to profit or loss

Exchange differences on translation of overseas operations

Movement in cross-currency hedge

Tax on movement in cross-currency hedge

Movement in financial investments designated as available-for-sale

Tax on movement in financial investments designated as available-for-sale

Total items that may be reclassified subsequently to profit or loss

Other comprehensive income/(expense) after tax

Total comprehensive income for the year

Total comprehensive income for the year attributable to:

Continuing operations

Discontinued operations

Total comprehensive income for the year attributable to:

Non-controlling interests

Equity holders

2018
£m

1,808

2017
£m

1,902

117

(22)

(5)

(36)

155

(55)

(45)

(99)

(12)

(4)

(86)

(131)

1,963

1,771

1,899

(19)

1,982

1,691

1,760

113

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsConsolidated Balance Sheet

As at 31 December 2018

Assets

Goodwill

Purchased interest in long term businesses and other intangible assets

Deferred acquisition costs

Investment in associates and joint ventures accounted for using the equity method

Property, plant and equipment

Investment property

Financial investments

Reinsurers’ share of contract liabilities

Deferred tax assets

Current tax assets

Receivables and other assets

Assets of operations classified as held for sale

Cash and cash equivalents

Total assets

Equity

Share capital

Share premium

Employee scheme treasury shares

Capital redemption and other reserves

Retained earnings

Attributable to owners of the parent

Non-controlling interests

Total equity

Liabilities

Non-participating insurance contract liabilities

Non-participating investment contract liabilities

Core borrowings

Operational borrowings

Provisions

UK deferred tax liabilities

Overseas deferred tax liabilities

Current tax liabilities

Payables and other financial liabilities

Other liabilities

Net asset value attributable to unit holders

Liabilities of operations classified as held for sale

Total liabilities

Total equity and liabilities

Notes

2018
£m

223

140

259

20171
£m

138

140

252

6,965

7,110

430,498

443,162

4,737

5,545

418

5,593

26,234

17,321

342

6,083

22,584

18,919

492,517

504,352

149

992

(52)

230

7,261

8,580

8,652

149

988

(40)

168

6,251

7,516

7,592

64,707

61,308

293,080

315,651

3,922

1,026

1,140

144

185

171

3,459

538

1,335

221

223

62,548

52,246

619

26,481

29,842

491

27,317

33,958

483,865

496,760

492,517

504,352

1. Following a change in accounting policy for LGIA term assurance reserves, a number of balance sheet items have been restated, notably deferred acquisition costs,
reinsurers’ share of contract liabilities, non-participating insurance contract liabilities, overseas deferred tax liabilities and other liabilities. The overall net impact
on the group’s retained earnings as at 31 December 2017 is a reduction of £327m. Further details on the change in accounting policy are provided in Note 1.

The notes on pages 118 to 226 form an integral part of these financial statements.

The financial statements on pages 112 to 226 were approved by the board of directors on 5 March 2019 and were signed on their behalf by:

Sir John Kingman
Chairman

114

Nigel Wilson
Group Chief Executive

Stuart Jeffrey Davies
Group Chief Financial Officer

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsPrimary statements and performance

Consolidated Statement of Changes in Equity

For the year ended 31 December 2018

As at 1 January 2018

Profit for the year

Exchange differences on translation
of overseas operations

Net movement in cross-currency hedge

Net actuarial gains on defined benefit pension
schemes

Net movement in financial investments designated
as available-for-sale

Total comprehensive income for the year

Options exercised under share option schemes

Shares purchased

Shares vested

Employee scheme treasury shares:
– Value of employee services

Share scheme transfers to retained earnings

Dividends

Movement in third party interests

Currency translation differences

As at 31 December 2018

Share
capital
£m

149

–

Employee
scheme
treasury
shares
£m

Capital
redemption
and other
reserves1
£m

Share
premium
£m

Equity
attributable
to owners of
the parent
£m

7,516

1,827

Retained
earnings
£m

6,251

1,827

Non-
controlling
interests
£m

(19)

988

(40)

–

(17)

–

168

–

(31)

–

(26)

–

(10)

230

–

1,922

–

(932)

–

(31)

1,982

(17)

(21)

(932)

–

7,261

8,580

Total
equity
£m

7,592

1,808

(31)

–

(19)

1,963

–

(17)

(21)

(932)

–

8,652

149

992

(52)

1. Capital redemption and other reserves as at 31 December 2018 include share-based payments £81m, foreign exchange £121m, capital redemption £17m, hedging reserves

£20m and available-for-sale reserves £(9)m.

115

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsConsolidated Statement of Changes in Equity (continued)

For the year ended 31 December 2017

As at 1 January 2017

Change in accounting policy2

Restated as at 1 January 2017

Profit for the year

Exchange differences on translation
of overseas operations

Net movement in cross-currency hedge

Net actuarial losses on defined
benefit pension schemes

Net movement in financial investments
designated as available-for-sale

Total comprehensive income for the year

Options exercised under share option schemes

Shares purchased

Shares vested

Employee scheme treasury shares:
– Value of employee services

Share scheme transfers to retained earnings

Dividends

Movement in third party interests

Currency translation differences

Change in accounting policy2

Share
capital
£m

149

–

149

Share
premium
£m

981

–

981

–

Employee
scheme
treasury
shares
£m

Capital
redemption
and other
reserves1
£m

Equity
attributable
to owners of
the parent
£m

Non-
controlling
interests
£m

Retained
earnings
£m

5,633

(277)

5,356

1,891

–

(45)

6,945

(277)

6,668

1,891

(99)

(10)

(45)

–

1,846

1,760

–

(16)

(13)

(872)

–

(33)

(50)

6,251

–

(50)

7,516

212

–

212

–

(99)

(10)

–

(86)

–

(19)

–

168

Total
equity
£m

7,283

(277)

7,006

1,902

(99)

(10)

(45)

1,771

(16)

(13)

(872)

(273)

–

(50)

7,592

338

–

338

–

(273)

–

(30)

–

(30)

–

(16)

–

Restated as at 31 December 2017

149

988

(40)

1. Capital redemption and other reserves as at 31 December 2017 include share-based payments £69m, foreign exchange £69m, capital redemption £17m, available-for-sale

reserves £22m and hedging reserves £(9)m.

2. Change in accounting policy represents the impact on retained earnings of the change in accounting policy related to the recognition of LGIA term assurance reserves,

described in Note 1. The change has been applied retrospectively.

116

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsPrimary statements and performance

Consolidated Cash Flow Statement

For the year ended 31 December 2018

Cash flows from operating activities

Profit for the year

Adjustments for non cash movements in net profit for the year

Net losses/(gains) on financial investments and investment properties

Investment income

Interest expense

Tax expense

Other adjustments

Net (increase)/decrease in operational assets

Investments held for trading or designated as fair value through profit or loss

Investments designated as available-for-sale

Other assets

Net increase/(decrease) in operational liabilities

Insurance contracts

Investment contracts

Other liabilities

Net (decrease)/increase in held for sale net liabilities

Cash utilised in operations

Interest paid

Interest received

Tax paid1

Dividends received

Net cash flows from operating activities

Cash flows from investing activities

Net acquisition of plant, equipment, intangibles and other assets

Net disposal/(acquisition) of operations

Investment in joint ventures and associates

Net cash flows utilised in investing activities

Cash flows from financing activities

Dividend distributions to ordinary equity holders during the year

Issue of ordinary share capital

Exercise of employee scheme shares (net)

Proceeds from borrowings

Repayment of borrowings

Movement in non-controlling interests

Net cash flows utilised in financing activities

Net (decrease)/increase in cash and cash equivalents

Exchange gains/(losses) on cash and cash equivalents

Cash and cash equivalents at 1 January (before reallocation of held for sale cash)

Total cash and cash equivalents

Less: cash and cash equivalents of operations classified as held for sale

Cash and cash equivalents at 31 December

Notes

2018
£m

2017
£m

1,808

1,902

23,132

(25,024)

(10,182)

(9,953)

293

210

183

220

377

154

(10,381)

11,794

(248)

1,258

277

(2,344)

3,257

(3,989)

(22,571)

(10,798)

12,057

(8,500)

(9,684)

(215)

4,841

(504)

5,201

(361)

(401)

326

(130)

(205)

20,650

12,139

(4,595)

(221)

4,528

(497)

5,196

4,411

(230)

223

(7)

(14)

(932)

(872)

960

(325)

–

(281)

(847)

18,919

18,088

1,232

(600)

(262)

(485)

3,912

(19)

15,348

19,241

(767)

(322)

17,321

18,919

1. Tax comprises UK corporation tax paid of £359m (2017: £290m), overseas corporate taxes of £25m (2017: £12m), and withholding tax of £120m (2017: £195m).

117

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements1 Basis of preparation
Legal & General Group Plc, a public limited company incorporated and domiciled in the United Kingdom (UK), operates in three broad business areas
of investing and annuities, investment management and insurance through its subsidiaries and associates in the UK, the United States and other
countries throughout the world.

(i) Significant accounting policies
The group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the
International Accounting Standards Board (IASB) as adopted by the European Union, and with those parts of the UK Companies Act 2006 applicable
to companies reporting under IFRS. The group financial statements also comply with interpretations by the IFRS Interpretations Committee as issued
by the IASB and as adopted by the European Union. The group financial statements have been prepared under the historical cost convention, as
modified by the revaluation of land and buildings, available-for-sale financial assets, financial assets and financial liabilities (including derivative
instruments) at fair value through profit or loss.

The group has selected accounting policies which state fairly its financial position, financial performance and cash flows for a reporting period.
The accounting policies have been consistently applied to all years presented unless otherwise stated. Accounting policies that relate specifically
to a balance or transaction are presented above the relevant numerical disclosure.

Financial assets and financial liabilities are disclosed gross in the Consolidated Balance Sheet unless a legally enforceable right of offset exists and
there is an intention to settle recognised amounts on a net basis. Income and expenses are not offset in the Consolidated Income Statement unless
required or permitted by any accounting standard or International Financial Reporting Interpretations Committee (IFRIC) interpretation, as detailed in
the applicable accounting policies of the group.

(ii) New standards, interpretations and amendments to published standards that have been adopted by the group
The group has applied the following standards and amendments for the first time in its annual reporting period commencing 1 January 2018.

IFRS 15 – Revenue from Contracts with Customers
IFRS 15, ‘Revenue from Contracts with Customers’, is the new revenue recognition reporting standard, which became effective from 1
January 2018. IFRS 15 has replaced all of the previous revenue standards and interpretations in IFRS, in particular IAS 18 ‘Revenue’ and IAS 11
‘Construction Contracts’.

The standard introduces a five-step model to account for revenue arising from contracts with customers, the core principle of which is that an
entity will recognise revenue at an amount that reflects the consideration to which it expects to be entitled in exchange for transferring goods
or services to a customer in the reporting period.

The standard also specifies the accounting for the incremental costs of obtaining a contract and the costs directly related to fulfilling a contract.

The group has adopted IFRS 15 using the full retrospective method. Revenue arising from insurance contracts, financial instruments and leases
is out of scope of the standard. There are two categories of revenue in the group’s Consolidated Income Statement that remain in scope:

(i)

‘Fees from fund management and investment contracts’; and

(ii) Components of the account ‘Other operational income’.

There has been no material impact on the group’s consolidated financial statements from the implementation of IFRS 15 and therefore the
group’s financial statements have not been restated. Please refer to Note 28 for details on accounting policies for these revenue streams.

IFRS 9 – Financial Instruments and Amendments to IFRS 4 – Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts
In July 2014, the IASB issued IFRS 9, ‘Financial Instruments’ which is effective for annual periods beginning on or after 1 January 2018. The
standard replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’, it includes new principles around classification and measurement
of financial instruments, introduces an impairment model based on expected credit losses (replacing the current model based on incurred losses)
and new requirements on hedge accounting. The IASB subsequently issued ‘Amendments to IFRS 4: Applying IFRS 9 Financial Instruments with
IFRS 4 Insurance Contracts’ which allows entities which meet certain requirements to defer their implementation of IFRS 9 until adoption of IFRS
17 or 1 January 2021, whichever is the earlier. In November 2018 the IASB agreed to issue an exposure draft proposing to extend the deferral by
one year to 1 January 2022, to align with the proposed delay in the adoption date of IFRS 17.

For an insurer to apply this deferral:

(i) Total liabilities related to insurance must exceed 90% of total liabilities; or

(ii) Total liabilities related to insurance are greater than 80% of total liabilities but less than 90% of total liabilities so long as the insurer does not

engage in significant activity unconnected to insurance.

Total liabilities connected to insurance within the group at the initial assessment date 31 December 2015 were 99% of total liabilities. The group
therefore qualifies for the deferral of IFRS 9 and is making use of this option.

The group is required to retest its eligibility for deferral of IFRS 9, if, and only if, there is a significant change in business activities in the year. There
have been no indicators of such a change in 2018 and therefore the group continues to apply the deferral. The sale of the Mature Savings business,
announced in 2017, is not expected to change this conclusion.

All entities within the group whose activities are not primarily insurance related and which prepare financial statements on an IFRS basis (including
UK entities qualifying for disclosure exemptions under FRS 101, ‘Reduced Disclosure Framework’) have implemented IFRS 9 in 2018. The financial
statements of these entities will be made available through Companies House through 2019.

118

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsPrimary statements and performance

As required by the amendments, the disclosures below are presented in order to provide users of the financial statements with information
which allows them to compare financial assets with those of entities applying IFRS 9. The impact of IFRS 9 on the group’s consolidated financial
statements will depend on the interaction of the asset classification and measurement with the insurance contract measurement at the date
of transition, particularly for liabilities which are measured using locked-in discount rates.

(i) Fair value of financial assets with contractual terms that give rise on specified dates to cash flows that are solely payments
of principal and interest on the principal amount outstanding (i.e. passing the ‘SPPI’ test):

Equity securities

Debt securities

Accrued interest

Derivative assets

Loans at fair value

Total financial investments at fair value

Loans at amortised cost

Reinsurance receivables

Insurance and intermediaries receivables

Other financial assets

Total fair value of financial assets4

As at 31 December 2018

Financial
assets
passing

the SPPI test1,2

£m

–

All other
financial
assets3
£m

177,566

1,766

252,686

–

1,623

10,065

9,206

1,778

451,146

456

205

2,860

5,323

–

451,146

1. Financial assets classified as held for trading or that are managed and whose performance is evaluated on a fair value basis do not require an SPPI test to be performed.

These assets are reported in Other financial assets.

2. For financial assets which pass the SPPI test held at 31 December 2018 there was a change in the fair value in the year of £(112)m.
3. For all other financial assets held at 31 December 2018 there was a change in the fair value in the year of £(17,918)m.
4. Financial assets excludes cash and cash equivalents and receivables under finance leases.

(ii) Credit risk information of financial assets passing the SPPI test:

Debt securities

Accrued interest

Total financial investments at fair value

Loans at amortised cost

Reinsurance receivables

Insurance and intermediaries receivables

Other financial assets

Total carrying value of financial assets
passing the SPPI test3

AAA
£m

361

363

–

375

AA
£m

141

142

219

–

375

A
£m

707

711

–

381

1,093

As at 31 December 2018

BBB
£m

510

515

135

–

667

BB or below1
£m

Other2
£m

–

101

205

2,434

2,764

Total
£m

1,766

1,778

456

205

2,860

5,323

1. Financial assets classified as ‘BB or below’ are considered to be lower than investment grade, and therefore are not deemed to have low credit risk under IFRS 9.

The fair value of these assets approximates to their carrying value.

2. Other financial assets are made up of unrated and short term receivables for which a formal credit rating is not assigned. The fair value of financial assets

in this category that are not deemed to have low credit risk as at 31 December 2018 is £106m.

3. Financial assets excludes cash and cash equivalents and receivables under finance leases.

119

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements1 Basis of preparation (continued)
(ii) New standards, interpretations and amendments to published standards that have been adopted by the group (continued)
Amendments to IAS 40 – Transfers of Investment Property
The amendments clarify when an entity should transfer property, including property under construction or development, into or out of investment
property. The amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property
and there is evidence of the change in use. A mere change in management’s intentions for the use of a property does not provide evidence of a
change in use. These amendments do not have any impact on the group’s consolidated financial statements.

Amendments to IFRS 2 – Classification and Measurement of Share-based Payment Transactions
The IASB issued amendments to IFRS 2 Share-based Payment that address three main areas: the effects of vesting conditions on the
measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement
features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction
changes its classification from cash-settled to equity-settled. On adoption, entities are required to apply the amendments without restating prior
periods, but retrospective application is permitted if elected for all three amendments and other criteria are met. The group already accounts for
net settlement features as equity-settled and therefore there is no impact on the group’s consolidated financial statements.

Amendments to IAS 28 – Investments in Associates and Joint Ventures – Clarification that measuring investees at fair value through
profit or loss is an investment-by-investment choice
The amendments clarify that an entity that is a venture capital organisation, or other qualifying entity, may elect, at initial recognition on an
investment-by-investment basis, to measure its investments in associates and joint ventures at fair value through profit or loss. If an entity, that is
not itself an investment entity, has an interest in an associate or joint venture that is an investment entity, the entity may, when applying the equity
method, elect to retain the fair value measurement applied by that investment entity associate or joint venture to the investment entity associate’s
or joint venture’s interests in subsidiaries. This election is made separately for each investment in an associate or joint venture, at the later of the
date on which: (a) the investment in an associate or joint venture is initially recognised; (b) the associate or joint venture becomes an investment
entity; and (c) the investment in an associate or joint venture first becomes a parent. These amendments do not have any impact on the group’s
consolidated financial statements.

IFRIC Interpretation 22 – Foreign Currency Transactions and Advanced Consideration
The interpretation clarifies that when applying IAS 21, ‘The Effects of Changes in Foreign Exchange Rates’, to currency transactions involving
an advance payment or receipt, the transaction date for translating recognised amounts is the date on which the entity initially recognises the
prepayment asset or the deferred income liability. This Interpretation does not have any impact on the group’s consolidated financial statements.

(iii) Changes in accounting policy
LGIA (Legal & General Insurance America) Term Assurance
During the year, the group has changed its accounting policy for term assurance liabilities on business transacted by its US subsidiaries, which
was previously based on recognised actuarial methods reflecting US GAAP. From 1 January 2018, the group has calculated such liabilities on the
basis of current information using the gross premium valuation method, which is in line with how similar products are accounted for in other parts
of the business.

The group believes the new policy is preferable as it more closely aligns the accounting for this business with that of business written in the UK,
and therefore results in the financial statements providing reliable and more relevant information about the impact of term assurance business
on the group’s financial position, financial performance or cash flows, in line with IFRS requirements.

This represents a voluntary change in accounting policy and has been applied retrospectively, with prior year retained earnings adjusted accordingly.

The principal impact of the change on the prior year consolidated financial statements is in the non-participating insurance contract liabilities and
in deferred acquisition costs, which have been derecognised, and the associated cash flows now recognised within the insurance contract
liability calculation.

The group reported an initial best estimate of the impact of this change in accounting policy as part of its 2018 half year report. During the second
half of 2018 we have continued to refine the calculation of the retrospective impact based on enhanced historic information. The final impact on
each line item of the Consolidated Balance Sheet as at 31 December 2017 is shown in the table below:

Deferred acquisition costs

Reinsurers’ share of contract liabilities

Non-participating insurance contract liabilities

Overseas deferred tax liability

Other liabilities

Retained earnings

As reported at
31 December 2017
£m

Adjustments
£m

As restated at
31 December 2017
£m

1,507

5,703

62,318

337

563

6,578

(1,367)

(158)

(1,010)

(116)

(72)

(327)

140

5,545

61,308

221

491

6,251

As a consequence of the change highlighted above, the group has reclassified (as at 1 January 2017) £164m of financial investments backing
term assurance business from designated as available-for-sale to designated as fair value through profit or loss. This represents a further change
in accounting policy permitted by IFRS 4, ‘Insurance Contracts’.

120

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsPrimary statements and performance

UK Whole of Life and Term Assurance Mortality Assumptions
During the year, the group changed its accounting policy for UK whole of life and term assurance mortality improvers. This change has arisen
following the change in the regulatory regime to Solvency II. The old regime only allowed improvers to be added where reserves would be
increased, in line with INSPRU 1.2.60 section 5a requirements. Under the new policy mortality improvement assumptions can now be applied
consistently across all types of mortality business. The change covers all UK whole of life and term assurance products, and results in the group no
longer needing to comply with INSPRU. The group believes that the new policy better reflects the risks that the business is exposed to, providing
more reliable and relevant information to users of the financial statements.

This represents a voluntary change in accounting policy. However, because the impact of this change on prior period is considered insignificant,
the group has applied the change prospectively.

(iv) Standards, interpretations and amendments to published standards which are not yet effective
Certain standards, amendments and interpretations to existing standards have been published which are mandatory for the group’s accounting
periods beginning on or after 1 January 2019 or later periods and which the group has not adopted early, as disclosed below.

IFRS 16 – Leases
IFRS 16, ‘Leases’, issued in January 2016, is effective for annual periods beginning on or after 1 January 2019, and replaces all existing lease
requirements and guidance under IFRS, including IAS 17, ‘Leases’, IFRIC 4, ‘Determining Whether an Arrangement Contains a Lease’, SIC-15,
‘Operating Leases – Incentives’ and SIC-27, ‘Evaluating the Substance of Transactions in the Legal Form of a Lease’. IFRS 16 requires lessees to
recognise a lease liability reflecting future lease payments and a ‘right-of-use asset’ for virtually all lease contracts, bringing many commitments in
relation to operating leases (as currently defined in IAS 17) onto the balance sheet. The impact of the standard on lessor accounting is significantly
smaller with the provisions remaining closely aligned to those in IAS 17, although the IASB have issued updated guidance on the definition of lease
modifications and sub-lease arrangements.

The group plans to adopt IFRS 16 by using the modified retrospective approach, and not restate comparative financial information. At the date of
the initial application the group will recognise a lease liability and a right-of-use asset of an equal amount (adjusted by the amount of any prepaid or
accrued lease payments relating to that lease recognised in the group Consolidated Balance Sheet immediately before the date of initial application),
as allowed by the standard. Additionally the group plans to elect to apply the standard to contracts that were previously assessed as leases applying
IAS 17 and IFRIC 4. On transition, the group will therefore not apply the standard to contracts that were not previously identified as containing a lease
applying IAS 17 and IFRIC 4. The group is planning to elect to use the exemptions proposed by the standard on lease contracts for which the lease
terms ends within 12 months as of the date of initial application, and lease contracts for which the underlying asset is of low value.

During 2018, a detailed impact assessment was performed, and it is expected that on transition the impact on the group Consolidated Balance
Sheet will not be material.

IFRS 17 – Insurance Contracts
IFRS 17, ‘Insurance Contracts’ was issued in May 2017 and is effective for annual periods beginning on or after 1 January 2021 (subject to EU
endorsement). In November 2018 the IASB agreed to issue an exposure draft proposing a one year delay in the adoption date which, if approved
would delay the date of application to 1 January 2022. The standard will be applied retrospectively, subject to the transitional options provided for
in the standard, and provides a comprehensive approach for accounting for insurance contracts including their measurement, income statement
presentation and disclosure. The group has mobilised a project to assess the financial and operational implications of the standard, and work will
continue throughout 2019 to ensure technical compliance and to develop the required system capability to implement the standard.

IFRIC Interpretation 23 – Uncertainty over Income Tax Treatments
IFRIC 23, ‘Uncertainty over Income Tax Treatments’ was issued in June 2017 and is effective for annual periods beginning on or after 1 January 2019.
The Interpretation clarifies the application of recognition and measurement requirements in IAS 12, ‘Income Taxes’ when there is uncertainty over
income tax treatments. The group does not expect the impact to be significant.

Annual Improvements to IFRS Standards 2015-2017 Cycle
These improvements were issued in December 2017 and consist of minor amendments affecting IFRS 3 ‘Business combinations’, IFRS 11, ‘Joint
arrangements’, IAS 12, ‘Income taxes’ and IAS 23, ‘Borrowing costs’. The amendments are effective for annual reporting periods beginning on or
after 1 January 2019, subject to EU endorsement. The group does not expect the impact to be significant.

Amendments to IAS 19 – Employee Benefits
These amendments were issued in February 2018 and are effective for annual periods beginning on or after 1 January 2019, subject to EU
endorsement. The amendments require entities to use updated assumptions to determine current service cost and net interest for the remainder
of the period after a plan amendment, curtailment or settlement; they also clarify how the requirements for accounting for a plan amendment,
curtailment or settlement affect the asset ceiling requirements. The impact of these amendments on the group will depend on the future
occurrence of plan amendments, curtailments or settlements.

Amendments to IAS 28 – Investments in Associates and Joint Ventures
These amendments, titled ‘Long-term Interests in Associates and Joint Ventures’ were issued in October 2017 and are effective for annual periods
beginning on or after 1 January 2019, subject to EU endorsement. The amendments clarify the accounting for long-term interests in an associate
or joint venture, which in substance form part of the net investment in the associate or joint venture, but to which equity accounting is not applied.
The group does not expect the impact to be significant.

121

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements1 Basis of preparation (continued)
(iv) Standards, interpretations and amendments to published standards which are not yet effective (continued)
Amendments to IFRS 3 – Business Combinations
These amendments, issued in October 2018, are effective for business combinations for which the acquisition date is on or after 1 January 2020,
subject to EU endorsement. The amendments provide more guidance on the definition of a business.

Amendments to IAS 1 – Presentation of Financial Statements and IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors
These amendments, issued in October 2018, clarify the definition of ‘material’, and align the definition used in the Conceptual Framework and the
standards themselves. The amendments are effective for annual reporting periods beginning on or after 1 January 2020, subject to EU endorsement.

(v) Critical accounting policies and the use of estimates
The preparation of the financial statements includes the use of estimates and assumptions which affect items reported in the Consolidated Balance
Sheet and Consolidated Income Statement and the disclosure of contingent assets and liabilities at the date of the financial statements. Although
these estimates are based on management’s best knowledge of current circumstances and future events and actions, material adjustments could
be made to the carrying amounts of assets and liabilities within the next financial year. The Audit Committee reviews the reasonableness of
judgements associated with and the application of significant accounting policies. The significant accounting issues considered by the Audit
Committee are included within the Audit Committee Report on page 66.

The major areas of critical accounting judgement on policy application are considered below:

Insurance and investment contract liabilities (Notes 20 and 21): Product classification and the assessment of the significance of insurance
risk transferred to the group in determining whether a contract should be accounted for as an insurance or investment contract.
Contracts which transfer significant insurance risk to the group are classified as insurance contracts. Contracts that transfer financial risk
(e.g. change in interest rate or security price) to the group but not significant insurance risk are classified as investment contracts.

Judgement is required in order to assess the significance of the transfer of insurance risk within a contract. This assessment is based on whether
the occurrence of an insured event could cause the group to make significant additional payments, i.e. if the occurrence of the event causes
significantly higher cash out flows for the group than its non-occurrence.

Certain contracts, which are both insurance and investment, contain discretionary participating features representing the contractual right to
receive additional benefits as a supplement to guaranteed benefits under certain conditions, being:

• that the additional benefits are a significant portion of the total contractual benefits;

• the amount and timing of the additional benefits are at the discretion of the group; and

• that the additional benefits are contractually dependent upon the performance of a company, fund or specified pool of assets.

Insurance contracts and investment contracts with such discretionary participation features are accounted for under IFRS 4, while investment
contracts without discretionary participation features are accounted for as financial instruments under IAS 39.

Judgement is therefore required in order to establish whether any additional benefits in an insurance or investment contract meet the above
requirements for being considered discretionary participation features.

Consolidation (Notes 42-44): Assessment of whether the group controls underlying entities and should therefore consolidate them.
The assessment takes account of various criteria, including decision making ability, equity holding and the rights to a variable return from the entity.

Control arises when the group is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those
returns through its power over the entity.

For operating entities this generally accompanies a shareholding of 50% or more in the entity. Subsidiaries that are consolidated where the group
owns less than 50% of the ordinary share capital (structured entities), are consolidated based on an assessment of control normally arising from
special rights attaching to the class of share owned, other contractual arrangements and factors such as the purpose of the investee, the nature
of its relevant activities, voting rights (including potential voting rights) and substantive and protective rights.

The group invests in various fund and unit trust entities where it also acts as the asset manager to those entities. In these instances, in determining
whether the group controls the entities, the assessment focuses on the aggregate economic interests of the group (direct interest and expected
management fees) and on whether the group acts as a principal or agent. This includes an assessment of the removal rights of other investors
(their practical ability to allow the group not to control the fund). Additionally, holdings in such investments can fluctuate on a daily basis according
to the participation of the group and other investors in them. As a result, in determining control, we look at the trend of ownership over a longer
period (rather than at a point in time) to mitigate the impact of daily fluctuations which do not reflect the wider facts and circumstances of the
group’s involvement. This is performed in line with the following principles:

• where the entity is managed by a group asset manager, and the group’s ownership holding in the entity exceeds 50%, the group is judged to

have control over the entity;

• where the entity is managed by a group asset manager, and the group’s ownership holding in the entity is between 30% and 50%, the facts
and circumstances of the group’s involvement in the entity are considered, including the rights to any fees earned by the asset manager from
the entity, in forming a judgement as to whether the group has control over the entity; and

• where the entity is managed by a group asset manager, and the group’s ownership holding in the entity is less than 30%, the group is judged

to not have control over the entity, but again the facts and circumstances of the group’s involvement in the entity are considered.

122

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsPrimary statements and performance

The following sets out information about the critical accounting assumptions made by the group about the future, and other major sources of
estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amounts
of assets and liabilities within the next financial year:

Valuation of insurance and investment contract liabilities (Notes 18-21)
Determination of longevity, mortality and morbidity assumptions used in the calculation of the insurance contract liabilities. The assumptions for
the rate of future longevity, mortality and morbidity are based on the group’s internal experience and judgements about how experience may vary
in the future. This assessment takes into account market benchmarking, internal experience studies and independent industry data.

Determination of valuation interest rates used to discount the liabilities are sensitive to the assumptions made, for example, on credit default
of the backing assets. These assumptions take into account consideration of market experience and historic internal data.

Valuation of unquoted illiquid assets and investment property (Note 11)
Determination of fair value of unquoted and illiquid assets, and investment property involves judgements to model valuations, through the
incorporation of both observable and unobservable market inputs, which include assumptions that lead to the existence of a range of plausible
valuations for financial assets.

Defined benefit pension plan (Note 23)
Determination of pension plan assumptions including mortality, discount rates and inflation. These assumptions have been set in accordance
with the requirements of IAS 19 and include consistent judgements with those in setting the annuity liabilities where possible. Note 23 includes
a sensitivity analysis to alternative assumptions.

(vi) Consolidation principles
Subsidiary undertakings
The consolidated financial statements incorporate the assets, liabilities, equity, income, expenses and cash flows of the company and of its
subsidiary undertakings drawn up to 31 December each year. All intra-group balances, transactions, income and expenses are eliminated in full.

Subsidiaries are those entities (including special purpose entities, mutual funds and unit trusts) over which the group directly or indirectly has control
(i.e. when the group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns
through its power over the investee) (Note 42). Profits or losses of subsidiary undertakings sold or acquired during the year are included in the
consolidated results up to the date of disposal or from the date of gaining control. Puttable instruments held by external parties in consolidated
investment vehicles, such as unit trusts, are classified as liabilities and appear as ‘Net asset value attributable to unit holders’ – in the Consolidated
Balance Sheet.

Associates and joint ventures
The group has interests in associates and joint ventures (Note 43) which form part of an investment portfolio held through private equity vehicles,
mutual funds, unit trusts and similar entities. In accordance with the choice permitted by IAS 28, ‘Investments in associates’, these interests have
been classified as fair value through profit or loss and measured at fair value within financial investments, with changes in fair value recognised in
the Consolidated Income Statement.

Associates which do not form part of an investment portfolio are initially recognised in the Consolidated Balance Sheet at cost. The carrying amount
of the associate is increased or decreased to reflect the group’s share of total comprehensive income after the date of the acquisition.

123

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements1 Basis of preparation (continued)
(vii) Product classification
The group’s products are classified for accounting purposes as either insurance contracts (participating and non-participating) or investment
contracts (participating and non-participating). The basis of accounting for these products is outlined in Notes 20 and 21 respectively. The following
table summarises the classification of the group’s significant types of non-participating insurance and investment contracts as described in Note 6
for each applicable reportable segment. All of the group’s participating business is classified as held for sale, and hence no additional information
in relation to these products has been provided.

Reportable segment

Non-participating insurance contracts

Non-participating investment contracts

LGR

LGI

• Pension risk transfers

• Individual annuities

• Longevity insurance

• UK Retail protection

• UK Group protection

• US protection

• US Universal life

• US Individual annuities

General Insurance

• Household

• Accident, Sickness and Unemployment (ASU)

• Pet

LGIM

• Lifetime mortgages

• Fixed term individual annuities

• Workplace savings

• Institutional pension

• Segregated investment management mandates

• Collective investment schemes

(viii) Fiduciary activities
Assets associated with fiduciary activities and the income arising from those assets, together with associated commitments to return such assets
to customers, are not included in these financial statements. Where the group acts in a fiduciary capacity, for instance as a trustee or agent, it has
no contractual rights over the assets concerned.

(ix) Foreign exchange and exchange rates
Foreign currency transactions are translated into the functional currency using the exchange rate prevailing at the date of the transactions. The
functional currency of the group’s foreign operations is the currency of the primary economic environment in which the entity operates. The assets
and liabilities of all of the group’s foreign operations are translated into sterling, the group’s presentation currency, at the closing rate at the date of
the Consolidated Balance Sheet. The income and expenses for each income statement are translated at average exchange rates. On consolidation,
exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments
designated as hedges of such investments, are taken to a separate component of shareholders’ equity.

Foreign exchange gains and losses are recognised in the Consolidated Income Statement, except when recognised in equity as qualifying
cash flow or net investment hedges.

The closing exchange rates at 31 December 2018 were 1.28 United States dollar and 1.11 euro (31 December 2017: 1.35 United States dollar
and 1.13 euro).

The average exchange rates for the year ended 31 December 2018 were 1.34 United States dollar and 1.13 euro (31 December 2017:
1.29 United States dollar and 1.14 euro).

124

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsPrimary statements and performance

2 Supplementary operating profit# information
(i) Reconciliation between operating profit and profit from ordinary activities after income tax

Legal & General Retirement (LGR)

– LGR Institutional (LGRI)

– LGR Retail (LGRR)

Legal & General Investment Management (LGIM)

Legal & General Capital (LGC)

Legal & General Insurance (LGI)

– UK and Other

– US (LGIA)

General Insurance

Operating profit from continuing operations

Operating profit from discontinued operations2

Operating profit from divisions/tax expense on divisions

Group debt costs3

Group investment projects and expenses

Operating profit/tax expense

Investment and other variances

(Decrease)/increase on non-controlling interests

Profit for the year/tax expense for the year

Profit/(loss)
before tax1
2018
£m

Tax (expense)/
credit
2018
£m

Profit/(loss)
after tax
2018
£m

Profit/(loss)
before tax1
2017
£m

Tax (expense)/
credit
2017
£m

Notes

1,548

1,149

399

407

322

308

246

–

2,585

2,664

(203)

(126)

2,335

(188)

(19)

2,128

(263)

(193)

(70)

(81)

(61)

(39)

(46)

–

(444)

(15)

(459)

1,285

1,247

956

329

326

261

269

200

–

2,141

2,205

(164)

(102)

906

341

400

272

303

209

2,259

107

2,366

(191)

(120)

(396)

1,939

2,055

–

(112)

(19)

(320)

1,808

2,090

(210)

(150)

(60)

(82)

(48)

(81)

(40)

(41)

(7)

(428)

(21)

(449)

(388)

200

–

(188)

2(iv)

2(v)

Profit/(loss)
after tax
2017
£m

1,037

756

281

318

224

222

169

1,831

1,917

(154)

(96)

1,667

224

1,902

1. The profit/(loss) before tax reflects profit/(loss) before tax attributable to equity holders.
2. Operating profit from discontinued operations reflects the operating profit of the Savings division following the group’s announcement in December 2017 to sell the

Mature Savings business to Swiss Re. For 2017, discontinued operations also include the results of Legal & General Netherlands (LGN) which was sold during 2017 and
was a component of the LGI (UK and Other) division.

3. Group debt costs exclude interest on non recourse financing.

This supplementary operating profit information (one of the group’s key performance indicators) provides further analysis of the results reported
under IFRS and the group believes it provides shareholders with a better understanding of the underlying performance of the business in the year.

• LGR represents worldwide pension risk transfer business, including longevity insurance (within LGRI), and individual retirement and lifetime

mortgages (within LGRR).

• LGIM represents institutional and retail investment management and workplace savings businesses.

• LGC represents shareholder assets invested in direct investments primarily in the areas of housing, urban regeneration, clean energy and SME

finance, as well as traded and treasury assets.

• LGI primarily represents UK and US retail protection business, UK group protection and Fintech business.

• General Insurance comprises short-term household and other personal insurance.

• Discontinued operations represent businesses that have either been sold or announced to sell subject to formal transfer, namely Mature Savings. In
2017 the discontinued operations include Mature Savings (sale announced in December 2017) and Legal & General Netherlands (sold in April 2017).

Operating profit measures the pre-tax result excluding the impact of investment volatility, economic assumption changes and exceptional items.
Operating profit therefore reflects longer-term economic assumptions for the group’s insurance businesses and shareholder funds, except for LGC’s
trading businesses (which reflects the IFRS profit before tax) and LGIA non-term business (which excludes unrealised investment returns to align
with the liability measurement under US GAAP). Variances between actual and smoothed investment return assumptions are reported below
operating profit, which include any differences between investment return on actual assets and the long-term asset mix. Exceptional income and
expenses which arise outside the normal course of business in the period, such as merger and acquisition, and start-up costs, are also excluded
from operating profit.

# All references to ‘Operating profit’ throughout this report represent ‘Group adjusted operating profit’, an alternative performance measure defined in the glossary.

125

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements2 Supplementary operating profit# information (continued)
(ii) Reconciliation of release from operations to operating profit before tax

For the year ended
31 December 2018

Release from
operations1
£m

New business
surplus/
(strain)
£m

Net
release from
operations
£m

Experience
variances
£m

Changes in
valuation
assumptions
£m

Non-cash
items and
other
£m

International
and other
£m

LGR

– LGRI

– LGRR

LGIM

– LGIM (excluding

Workplace Savings)

– Workplace Savings2

LGC

LGI

– UK and Other

– US (LGIA)

General Insurance

From continuing
operations

From discontinued
operations3

Total from divisions

Group debt costs

Group investment
projects and expenses

Total

551

379

172

354

323

261

258

181

–

217

188

(25)

–

(25)

–

(22)

–

768

567

201

329

323

261

236

159

–

1,424

170

1,594

1,468

(164)

(34)

1,270

–

170

–

170

1,638

(164)

(34)

1,440

(3)

–

(3)

–

(6)

–

444

324

120

(1)

–

(1)

–

478

–

478

(3)

–

(19)

–

(7)

(8)

–

(7)

–

(7)

–

(68)

(75)

Operating
profit/(loss)
after tax
£m

1,285

956

329

326

323

261

269

200

–

Tax expense/
(credit)
£m

263

193

–

(7)

–

Operating
profit/(loss)
before tax
£m

1,548

1,149

399

407

404

322

308

246

–

2,141

444

2,585

2,205

(164)

(102)

1,939

459

(39)

(24)

396

2,664

(203)

(126)

2,335

1. Release from operations includes dividends from the US of £77m within the US (LGIA).
2. Workplace Savings represents administration business only. Profits on fund management services are included within LGIM (excluding Workplace Savings).
3. Discontinued operations reflects the result of the Savings division following the announcement in December 2017 to sell the Mature Savings business to Swiss Re.

Release from operations for LGR, LGIM – Workplace Savings and LGI represents the expected IFRS surplus generated in the year from the in-force
non profit annuities, Workplace Savings and UK protection businesses using best estimate assumptions. The LGIM release from operations also
includes operating profit after tax from the institutional and retail investment management businesses. The LGI release from operations also
includes dividends remitted from LGIA. The release from operations within discontinued operations primarily reflects the unwind of expected
profits after tax under the risk transfer agreement with ReAssure Limited (a subsidiary of Swiss Re) from the Mature Savings business.

New business surplus/strain for LGR, LGIM – Workplace Savings and LGI represents the cost of acquiring new business and setting up prudent
reserves in respect of the new business for UK non profit annuities, workplace savings and protection, net of tax. The new business surplus and
release from operations for LGR, LGIM and LGI excludes any capital held in excess of the prudent reserves from the liability calculation.

LGR’s new business metrics are presented based on a target long term asset portfolio. 2018 has seen record pension risk transfer (PRT) volumes,
and as a result we continue to source direct investment assets to support this business in 2019, as appropriate, taking into account the alternative
risk and rewards of traded credit. At year end, any difference between the actual assets and the long-term asset mix is reflected in investment
variance.

Net release from operations for LGR, LGIM – Workplace Savings, LGI and discontinued operations is defined as release from operations plus new
business surplus/(strain).

Release from operations and net release from operations for LGC, LGIM and General Insurance represents the operating profit (net of tax).

See Note (iii) for more detail on experience variances, changes to valuation assumptions and non-cash items.

# All references to ‘Operating profit’ throughout this report represent ‘Group adjusted operating profit’, an alternative performance measure defined in the glossary.

126

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsPrimary statements and performance

For the year ended
31 December 2017

Release from
operations1
£m

New business
surplus/
(strain)
£m

Net
release from
operations
£m

Experience
variances
£m

Changes in
valuation
assumptions
£m

Non-cash
items and
other
£m

International
and other
£m

LGR

– LGRI

– LGRR

LGIM

– LGIM (excluding

Workplace Savings)

– Workplace Savings2

LGC

LGI

– UK and Other

– US (LGIA)

General Insurance

From continuing
operations

From discontinued
operations3

Total from divisions

Group debt costs

Group investment
projects and expenses

Total

508

347

161

342

318

224

273

193

180

152

(21)

–

(21)

–

688

499

189

321

318

224

275

195

1,377

161

1,538

107

1,484

(154)

(32)

1,298

(5)

156

–

156

102

1,640

(154)

(32)

1,454

(4)

–

(4)

–

(50)

–

(1)

–

274

190

(1)

–

(1)

–

321

324

–

(25)

–

(20)

(21)

(41)

–

324

(41)

–

(26)

(27)

–

(26)

(23)

–

(64)

(87)

Operating
profit/(loss)
after tax
£m

1,037

756

281

318

–

224

222

169

Tax expense/
(credit)
£m

210

150

–

Operating
profit/(loss)
before tax
£m

1,247

906

341

400

–

272

303

209

1,831

428

2,259

1,917

(154)

(96)

1,667

449

(37)

(24)

388

107

2,366

(191)

(120)

2,055

1. Release from operations includes dividends from the US of £80m within the US (LGIA).
2. Workplace Savings represents administration business only. Profits on fund management services are included within LGIM (excluding Workplace Savings).
3. Discontinued operations primarily reflects the result of the Savings division following the announcement in December 2017 to sell the Mature Savings business

to Swiss Re. For this reconciliation, discontinued operations also include the results of Legal & General Netherlands. This business was sold during 2017.

127

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements2 Supplementary operating profit# information (continued)
(iii) Analysis of LGR and LGI operating profit

Net release from operations

Experience variances

– Persistency

– Mortality/morbidity1

– Expenses

– Project and development costs

– Other2,3

Total experience variances

Changes to valuation assumptions

– Persistency

– Mortality/morbidity4

– Expenses

– Other

Total changes to valuation assumptions

Movement in non-cash items

– Acquisition expense tax relief

– Other5

Total movement in non-cash items

International and other

Operating profit after tax

Tax gross up

Operating profit before tax

LGR
2018
£m

768

(13)

(11)

(24)

–

444

–

444

–

1,285

263

1,548

LGI
2018
£m

236

(12)

(7)

–

(4)

(3)

(11)

(8)

(19)

(7)

269

308

LGR
2017
£m

688

(21)

(15)

–

303

(20)

(9)

274

–

1,037

210

1,247

LGI
2017
£m

275

(18)

(26)

(3)

(6)

(50)

(11)

(1)

(18)

(7)

(25)

(26)

222

303

1. Mortality/morbidity experience variances for LGR reflect higher than expected deaths over the year.
2. Other experience variances for LGR reflect changes made to annuity reserving and updates to the policy/member data.
3. Other experience variances for LGI reflect a number of modelling refinements in reserving for future claims.
4. Mortality assumption changes for LGR reflect a one off release of £359m (net of tax) from an update in the longevity trend assumption from adjusted CMI 2015 to adjusted CMI 2016.
5. LGR Movement in non-cash items is largely due to a positive adjustment made to reflect all asset management activity on new bulk annuity contracts being handled by LGIM.

(iv) Group investment projects and expenses

Group investment projects and central expenses

Restructuring and other costs

Total group investment projects and expenses

(v) Investment and other variances

Investment variance1

M&A related and other variances2

Total investment and other variances

2018
£m

113

126

2018
£m

(126)

(62)

(188)

2017
£m

120

2017
£m

129

(105)

1. Investment variance includes differences between actual and smoothed investment return on traded and real assets, economic assumption changes (e.g. credit default

and inflation) and the impact of any difference between the actual allocated asset mix and the long-term assumed asset mix on new pension risk transfer business written
during the year and held at a period end.

2. Includes gains and losses, expenses and intangible amortisation relating to acquisitions and disposals. 2018 includes the recognition of a one-off profit of £20m arising on

the stepped acquisition of CALA Homes (see Note 26)

# All references to ‘Operating profit’ throughout this report represent ‘Group adjusted operating profit’, an alternative performance measure defined in the glossary.

128

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsPrimary statements and performance

3 Other expenses
An analysis of other expenses is set out below:

Staff costs (including pensions and share-based payments)

Redundancy costs

Operating lease rentals1

Auditor’s remuneration

Depreciation and impairment of plant and equipment

Amortisation and impairment of purchased interest in long-term businesses and other intangible assets

Direct operating expenses arising from investment properties which generate rental income

House building expenses2

Other administrative expenses

Total other expenses

Less: other expenses from discontinued operations

Other expenses from continuing operations

Notes

2018
£m

820

819

190

1,923

(147)

1,776

2017
£m

702

–

426

1,291

(205)

1,086

1. Where a significant proportion of the risks and rewards of ownership is retained by the lessor, leases are classified as operating leases. Payments made by lessees
under operating leases (net of any incentives from the lessor) are charged to the Consolidated Income Statement on a straight line basis over the period of the lease.

2. House building expenses represent cost of sales of the group’s housing businesses, including CALA Homes. A total of £981m of house building income has been

recognised in the year (see Note 28(d)).

4 Dividends

A dividend distribution to the company’s shareholders is recognised as a liability in the period in which the dividends are authorised and are
no longer at the discretion of the company.

Ordinary dividends paid and charged to equity in the year:

– Final 2016 dividend

– Final 2017 dividend

– Interim dividend

Total dividends

Ordinary share dividend proposed2

Dividend
2018
£m

Per share1
2018
p

Dividend
2017
£m

Per share1
2017
p

–

658

274

932

704

–

11.05

4.60

15.65

11.82

616

–

256

872

658

10.35

–

4.30

14.65

11.05

1. The dividend per share calculation is based on the number of equity shares registered on the ex-dividend date.
2. Subsequent to 31 December 2018, the directors declared a final dividend for 2018 of 11.82 pence per ordinary share. This dividend will be paid on 6 June 2019.

It will be accounted for as an appropriation of retained earnings in the year ended 31 December 2019 and is not included as a liability in the
Consolidated Balance Sheet as at 31 December 2018.

129

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements5 Earnings per share

Earnings per share is a measure of the portion of the group’s profit allocated to each outstanding share. It is calculated by dividing net income
attributable to ordinary equity holders by the weighted average number of ordinary shares in issue during the year, excluding employee scheme
treasury shares. For this purpose, net income is defined as the profit after tax, attributable to equity holders of the company, derived from
continuing operations.

For diluted earnings per share, the weighted average number of ordinary shares in issue, excluding employee scheme treasury shares, is adjusted to
assume conversion of all dilutive potential ordinary shares, such as share options granted to employees. Potential or contingent share issuances are
treated as dilutive when their conversion to shares would decrease net earnings per share.

After tax
2018
£m

Per share
2018
p

1,827

(64)

1,763

30.79

(1.07)

29.72

After tax
2017
£m

1,891

(80)

1,811

Per share
2017
p

31.87

(1.35)

30.52

Weighted
average
number of
shares
2018
m

5,933

5,962

–

5,962

Weighted
average
number of
shares
2017
m

5,933

5,960

–

5,960

After tax
2018
£m

1,827

–

1,827

(64)

1,763

After tax
2017
£m

1,891

–

1,891

(80)

1,811

Per share
2018
p

30.79

(0.15)

30.64

(1.07)

29.57

Per share
2017
p

31.87

(0.14)

31.73

(1.35)

30.38

(i) Basic earnings per share

Profit for the year attributable to equity holders

Less: earnings derived from discontinued operations

Basic earnings derived from continuing operations

(ii) Diluted earnings per share

Profit for the year attributable to equity holders

Net shares under options allocable for no further consideration

Total diluted earnings

Less: diluted earnings derived from discontinued operations

Diluted earnings derived from continuing operations

Profit for the year attributable to equity holders

Net shares under options allocable for no further consideration

Total diluted earnings

Less: diluted earnings derived from discontinued operations

Diluted earnings derived from continuing operations

130

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

6 Principal products
A significant part of the group’s business involves the acceptance and management of risk.

A description of the principal products offered by the group’s segments is outlined below. The group seeks to manage its exposure to risk through
controls which ensure that the residual exposures are within acceptable tolerances agreed by the board. The group’s risk appetite framework and
the methods used to monitor risk exposures can be found on pages 44 to 49.

Details of the risks associated with the group’s principal products and the controls used to manage these risks can be found in Notes 7 and 15 to 17.

Legal & General Retirement (LGR)
Annuity contracts
Annuity products provide guaranteed income for a specified time, usually the life of the policyholder, in exchange for a lump sum capital payment.
No surrender value is available under any of these products.

Pension Risk Transfer (PRT) represents bulk annuities, whereby the group accepts the assets and liabilities of a company pension scheme or a life
fund. These are written predominantly to UK clients, but also to US, Dutch and Irish clients.

Immediate and deferred annuity contracts are also offered to individual policyholders. Immediate annuities provide a regular income stream to the
policyholder, purchased with a lump sum investment, where the income stream starts immediately after the purchase. The income stream from
a deferred annuity is delayed until a specified future date. A small portfolio of immediate annuities has been written as participating business.

Some non-participating deferred annuities sold by the group contain guaranteed cash options, predominantly minimum factors for commuting
part of the annuity income into cash at the date of vesting. The value of such guaranteed options are currently immaterial.

There is a block of immediate and deferred annuities within the UK non-profit business with benefits linked to changes in the RPI or for a minority
the CPI, but with contractual maximum or minimum increases. In particular, most of these annuities have a provision that the annuity will not reduce
if RPI, or for a minority CPI, becomes negative. The total of such annuities in payment at 31 December 2018 was £830m (2017: £640m). Thus, 1%
negative inflation, which was reversed in the following year, would result in a guarantee cost of approximately £8m (2017: £6m). Negative inflation
sustained over a longer period would give rise to significantly greater guarantee costs. Some of these guarantee costs have been partially matched
through the purchase of negative inflation hedges and limited price indexation swaps.

The group also offers products for individuals that provide a guaranteed level of income over a chosen fixed period of time, in exchange for an initial lump
sum payment from the policyholder. The products can provide a fixed lump sum at maturity and/or options to surrender on non-guaranteed terms.

The group has written some deferred annuity contracts with guaranteed minimum pensions. These options expose the group to interest rate and
longevity risk as the cost would be expected to increase with decreasing interest rates and improved longevity. The market consistent value of
these guarantees carried in the balance sheet is £189m at 31 December 2018 (2017: £220m).

Longevity insurance contracts
The group also provides longevity insurance products for company pension schemes, under which regular payments are made to the scheme
reflecting their actual longevity experience, while the scheme makes an agreed set of regular payments in return. Some policies contain a
guaranteed surrender value which is currently immaterial.

Lifetime mortgages
Lifetime mortgages are a form of equity release mortgage that provide non-commercial borrowers with a loan secured against their main residence,
without the need for regular repayments. They are regulated retail mortgages offered only to borrowers over the age of 55 through specialist
intermediaries. Interest accrues over the term of the loan and is repayable at the time the principal becomes due. Loans can be advanced in a single
lump sum amount or in several subsequent drawdowns of an agreed facility. All lifetime mortgages provide a ‘no negative equity’ guarantee, which
means that if the loan is repaid from the sale of the property and if the net sale proceeds are lower than the balance of the loan, the group will
accept the net sale proceeds as full settlement.

131

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements6 Principal products (continued)
Legal & General Investment Management (LGIM)
LGIM offers both active and passive management on either a pooled or segregated basis to clients domiciled globally. Assets are managed in
London, Chicago and Hong Kong on behalf of pension funds, institutional clients, sovereign wealth clients, retail clients and subsidiary companies
within the group.

The key products provided by LGIM are Workplace Savings, Institutional Pensions, Segregated Investment Management mandates and
Collective Investment Schemes.

The core strategies applied for managing the products are set out below.

Index fund management
LGIM provides a diversified range of pooled index funds, providing a wide choice and the ability to pursue specific benchmarks efficiently. In
addition, segregated solutions are offered to institutional clients providing large scale customisation against established market capitalisation
weighted and alternative indices.

The LGIM ETF business provides clients access to LGIM’s index fund management capabilities via our Exchange Traded Fund platform. ETF
products cover a broad range of traditional and thematic asset classes.

Active fixed income and liquidity management
LGIM offers a range of pooled and segregated active fixed income funds. The LGIM liquidity funds offer institutional investors a solution for their
cash management requirements across a range of core currencies. The liquidity funds aim to deliver competitive returns with a high level of
diversification, whilst focusing on capital preservation through portfolios of high quality, liquid assets.

Solutions and Liability Driven Investment (LDI)
LGIM provides a range of pooled and bespoke solutions to help de-risk defined benefit pension schemes. These solutions will usually combine
active or passive underlying portfolios with derivative overlays designed to meet clients’ specific requirements.

Solutions also includes a range of pooled multi-asset funds for retail and institutional clients, built using LGIM’s expertise in asset allocation which is
informed by an in-house research capability. The underlying asset classes may be managed on an active or passive basis within LGIM. An allocation
strategy service is also offered to institutional clients, which may also allocate some of the portfolio to managers other than LGIM.

Active equity
An active equity management business comprising focused teams managing stock selection across different regions.

Real assets
LGIM offers a range of pooled funds, segregated accounts and joint ventures investing on behalf of UK and overseas investors across physical real
estate, private corporate debt, infrastructure debt and real estate loans. The business has specialist teams of fund and asset managers and an
in-house research team.

Workplace Savings
Workplace Savings provides corporate pension scheme solutions to enable companies to meet their auto-enrolment obligations. Workplace
Savings (a business division of LGAS operated within LGIM) acts as scheme operator and administrator for these products while the customers
hold the individual or scheme level pension policies issued by LGAS.

Legal & General Capital (LGC)
Investment strategy and implementation
Legal & General Capital manages shareholder assets which are not directly required to meet contractual obligations to policyholders. LGC’s
investments fall into two distinct categories: direct investments and traded assets. The value of, and income from, both categories is sensitive
to conditions within investment markets and the broader economy. Potential volatility in returns is managed using a range of techniques,
including foreign exchange and interest rate hedging, and exposure concentration limits by asset type, sector and geographic region.

Direct investments and structuring
Direct investments are an integral part of the wider group strategy. LGC’s direct investments are typically illiquid investments entered into through
acquisition, joint venture with strategic partners or by the creation of new companies. LGC seeks to make direct investments in sectors where there
are structural funding shortfalls, and is organised into three sectors: housing, future cities (including urban regeneration and clean energy) and SME
finance (including venture capital). LGC employs capital and sector expertise to such investments to target attractive risk-adjusted returns which can
deliver higher returns and/or lower volatility for our shareholder capital than listed equity.

132

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements

Balance sheet management

Legal & General Insurance (LGI)
LGI business comprises UK and US retail protection, UK group protection, US universal life business and Fintech business.

UK protection business (retail and group)
The group offers protection products which provide mortality or morbidity benefits. They may include health, disability, critical illness and accident
benefits; these additional benefits are commonly provided as supplements to main life policies but can also be sold separately. The benefit amounts
would usually be specified in the policy terms. Some sickness benefits cover the policyholder’s mortgage repayments and are linked to the
prevailing mortgage interest rates. In addition to these benefits, some contracts may guarantee premium rates, provide guaranteed insurability
benefits and offer policyholders conversion options.

US protection business
Protection consists of individual term assurance, which provides death benefits over the medium to long term. The contracts have level premiums
for an initial period with premiums set annually thereafter. During the initial period, there is generally an option to convert the contract to a universal
life contract. After the initial period, the premium rates are not guaranteed, but cannot exceed the age-related guaranteed premium.

Reinsurance is used within the protection businesses to manage exposure to large claims. These practices lead to the establishment of reinsurance
assets on the group’s balance sheet. Within LGA, reinsurance and securitisation is also used to provide regulatory solvency relief (including relief
from regulation governing term insurance and universal life reserves).

US universal life
Universal life contracts written by LGA provide savings and death benefits over the medium to long term. The savings element has a guaranteed
minimum growth rate. LGA has exposure to loss in the event that interest rates decrease and it is unable to earn enough on the underlying assets
to cover the guaranteed rate. LGA is also exposed to loss should interest rates increase, as the underlying market value of assets will generally fall
without a change in the surrender value.

Annuities
Immediate annuities have similar characteristics as products sold by LGR. Deferred annuity contracts written by LGA contain a provision that,
at maturity, a policyholder may move the account value into an immediate annuity, at rates which are either those currently in effect, or rates
guaranteed in the contract.

General Insurance (GI)
General Insurance business comprises Household, Accident Sickness and Unemployment (ASU), and Pet products.

Household
These contracts provide cover in respect of policyholders’ homes, investment properties, contents, personal belongings, and incidental liabilities
which they may incur as a property owner, occupier and individual. Exposure is normally limited to the rebuilding cost of the home, the replacement
cost of belongings and a policy limit in respect of liability claims. In addition, there is an additional cover option for Family Legal Protection (FLP) to
cover costs of pursuing certain UK legal proceedings arising from, for example: death/personal injury, buying/hiring goods or services, infringement
of property legal rights and breach of employment contracts.

Accident, Sickness and Unemployment (ASU)
These contracts provide cover in respect of continuing payment liabilities incurred by customers when they are unable to work as a result of accident,
sickness or unemployment. Exposure is limited to the monthly payment level selected by the customer sufficient to cover the payment and
associated costs, up to the duration limit specified in the policy, usually 12 months.

Pet
These contracts provide cover in respect of veterinary treatment of policyholders’ pets in the event of accident or illness. In addition, there may be
additional cover for death, third party liability as a result of damage or injury caused by their pets, and if the pet is lost or stolen. Exposure is limited
to the payment limit selected by the customer (subject to contract specific inner limits), up to the duration limit specified by the policy which varies
per condition, per 12 months and per year.

133

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements
6 Principal products (continued)
Savings1
A range of contracts are offered in a variety of different forms to meet customers’ long term savings objectives. Policyholders may choose to include
a number of protection benefits within their savings contracts. Typically, any guarantees under the contract would only apply on maturity or earlier
death. On certain older contracts there may be provisions guaranteeing surrender benefits. Savings contracts may or may not guarantee policyholders
an investment return. The contracts fall into three main types:

• Non-participating savings, pensions and endowment contracts;

• Participating savings business, comprising endowment contracts, with-profits pensions, with-profits annuities and with-profits bonds; and

• Unit linked savings contracts and collective investment savings products.

For unit linked savings contracts and collective investment savings products, there is a direct link between the investments and the obligations.
The group is not directly exposed to any market risk, currency risk or credit risk for these contracts. As a result, risk disclosures have not been
presented in respect of the associated assets and liabilities. Unit linked business is written both inside and outside the with-profits fund.

Pensions (individual and corporate)
These are long term savings contracts through which policyholders accumulate pension benefits. Some older contracts contain a basic guaranteed
benefit expressed as an amount of pension payable or a guaranteed annuity option. Other options provided by these contracts include an open
market option on maturity, early retirement and late retirement. The group would generally have discretion over the terms on which the latter
types of options are offered.

With-profits annuities
These annuity contracts provide a regular income, the amount of which is determined by the addition of regular and temporary bonuses.

Endowment policies
These contracts provide a lump sum on maturity determined by the addition of annual and final bonuses over the duration of the contract.
In addition, the contracts provide a minimum sum assured death benefit.

With-profits bonds
These contracts provide an investment return to the policyholder which is determined by the addition of regular and final bonuses over the duration
of the contract. In addition, the contracts provide a death benefit, typically of 101% of the value of the units allocated to the policyholder.

Participating contracts
The with-profits fund ceased writing new business on 31 January 2015. Only increases to existing pension policies and new members to existing
Group Personal Pension Schemes, where allowed for in the policy terms and conditions, have been accepted after that date. Regular premiums
in payment at the date of closure also continue to be accepted.

Discretionary increases to benefits on participating contracts are allowed in one or both of annual and final bonus form. Some older participating
contracts include a guaranteed minimum rate of roll up of the policyholder’s fund up to the date of retirement or maturity. Bonuses are determined
in accordance with the principles outlined in the Fund’s Principles and Practices of Financial Management (PPFM) for the management of the
with-profits fund. The principles include:

• The with-profits fund will be managed with the objective of ensuring that its assets are sufficient to meet its liabilities and other regulatory

and capital requirements without the need for additional capital from outside the with-profits fund;

• Bonus rates will be smoothed so that some of the short term fluctuations in the value of the investments of the with-profits fund and the

business results achieved in the with-profits fund are not immediately reflected in payments under with-profits policies.

The inherited estate is the excess of assets held within the with-profits fund over and above the amount required to meet liabilities, including
those which arise from the regulatory duty to treat customers fairly in settling discretionary benefits. Following the closure to new businesses of
the with-profits fund on 31 January 2015, the Board agreed a run-off plan. They consider annually whether part of the inherited estate should be
distributed to with-profits policyholders. In adverse circumstances this may result in a deduction from investment returns in order to increase the
value of the inherited estate. The amount and timing of any distribution from or increase to the inherited estate shall be determined by the Board.
In November 2018, the Board approved a 0.2% refund in respect of guarantee charges and options, and a 0.3% addition to asset share reflecting
a distribution of part of the estate.

The distribution of surplus to shareholders depends upon the bonuses declared for the year. Typically, bonus rates are set having regard to
investment returns, although the group has some discretion setting rates and would normally smooth bonuses over time. The volatility of
investment returns could impact the fund’s capital position and its ability to pay bonuses. If future investment conditions were less favourable
than anticipated, the lower bonus levels resulting would also reduce future distributions to shareholders. The estate would normally be expected
to absorb the impact of these investment risks. Only in extreme scenarios, where shareholders were required to provide support to the
with-profits fund to meet its liabilities, would these risks affect shareholder equity.

Since the group’s announcement to sell the Mature Savings business to Swiss Re in December 2017 we have entered into a Risk Transfer
Agreement with ReAssure Limited (a subsidiary of Swiss Re). Until formal legal transfer of the business to Swiss Re is complete, all asset risk
exposure related to the Mature Savings business is effectively transferred to ReAssure Limited by this agreement.

1. In December 2017, the group announced the sale of its Mature Savings business to Swiss Re. The sale is subject to regulatory approval and the Part VII transfer is expected

to complete in 2019.

134

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

7 Asset risk
The group is exposed to the following categories of asset risk as a consequence of offering the principal products outlined in Note 6. The group
is also exposed to insurance risk as a consequence of offering these products – more detail on insurance risk can be found in Note 17.

Market risk
Exposure to loss as a direct or indirect result of fluctuations in the value of, or income from, specific assets.

Credit risk
Exposure to loss if another party fails to perform its financial obligations to the group.

Liquidity risk
The risk that the group, though solvent, either does not have sufficient financial resources available to enable it to meet its obligations as they
fall due, or can secure them only at excessive cost.

The financial risks associated with LGIM’s businesses are directly borne by the investors in its funds. Therefore detailed risk disclosures have
not been presented.

The group seeks to manage its exposures to risk through controls which ensure that the residual risk exposures are within acceptable tolerances
agreed by the Board. A description of the risks associated with the group’s principal products and the associated controls is detailed below.

Market risk

Principal risks

Investment performance risk
The group is exposed to the risk that the income
from, and value of, assets held to back insurance
liabilities do not perform in line with investment
and product pricing assumptions, leading to a
potential financial loss.

The financial risk exposure for participating contracts
is different from that for non-participating business.
Lower investment returns increase the costs
associated with maturity and investment guarantees
provided on these contracts. Greater emphasis is
placed on investing to maximise future investment
returns rather than matching assets to liabilities.
This results in holding significant equity and property
investments.

Product/business
segment

Controls to mitigate the risk

Annuities and Protection

With-profits1

Stochastic models are used to assess the impact of a range of future return
scenarios on investment values and associated liabilities in order to determine
optimum portfolios of invested assets. For immediate annuities, which are
sensitive to interest rate risk, analysis of the liabilities is undertaken to create
a portfolio of securities, the value of which changes in line with the value of
liabilities when interest rates change.

These risks are managed by maintaining capital sufficient to cover the consequences
of mismatches under a number of adverse scenarios. In addition, different investment
strategies are followed for assets backing policyholder asset shares and assets
backing other participating liabilities and surplus. The former include significant equity
and property holdings, whilst the latter are invested largely in fixed interest securities.
The assets held are managed so as to provide a partial hedge to movements in fixed
interest yields and equity markets. The methodology used to calculate the liabilities
for participating contracts makes allowance for the possibility of adverse changes
in investment markets on a basis consistent with the market cost of hedging the
guarantees provided. The methodology also makes allowance for the cost of future
discretionary benefits, guarantees and options. The value of future discretionary
benefits depends on the return achieved on assets backing these contracts. The
asset mix varies with investment conditions reflecting the group’s investment policy,
which aims to optimise returns to policyholders over time whilst limiting capital
requirements for this business.

The risk is managed through maintaining a diversified range of funds in which
customers may invest. The performance of linked investment funds relative to
their investment objectives is subject to regular monitoring. Periodic assessment
is also made of the long term profitability to the group of these funds. For some
contracts the group has discretion over the level of management charges levied.

To mitigate the risk, maximum loan to value ratios are set for all lending with
further underwriting criteria setting out acceptable properties for lending purposes.
Policy terms also require properties to be fully insured and maintained, including
the right of inspection. Diversification of lending by property type and geographic
region seek to control exposures to specific aspects of the property market.

Diversification by geographic region and property type avoids concentration of
exposures to specific areas of the property market. Sites are developed in a
number of phases to spread the risk to a local market over several years and
where possible we seek to co-invest with local experts to manage assets. The
purchasing of new land for development requires approval from LGC’s Investment
Committee and the Group Capital Committee. Where appropriate, key methods
are adopted to further manage the risk, such as fixed price construction contracts,
forward sales and pre-letting. These businesses can also benefit from flexible
funding arrangements available through the group.

Unit linked

Lifetime mortgages

LGC

For unit linked contracts, there is a risk of volatility in
asset management fee income due to the impact of
interest rate and market price movements on the fair
value of the assets held in the linked funds, on which
investment management fees are based. There is also
the risk of expense over-runs should the market
depress the level of charges which could be imposed.

Property risk
Lifetime mortgages include a ‘no negative’ equity
guarantee which transfers an exposure to loss to
the group as a result of low house price inflation and an
exposure to specific properties which may experience
lower house price inflation for whatever reason.

LGC businesses build homes across the residential
market, invest in large commercial and residential
development projects and manage several developed
real-estate assets. The group’s revenue streams are
exposed to residential sales achieved, as well as the
volume of transactions, both of which may be affected
by the performance of the housing market. Independent
valuations of real-estate assets, either in development or
developed, also depend on an assessment of the wider
real-estate market.

1. In December 2017, the group announced the sale of its Mature Savings business to Swiss Re. The sale is subject to regulatory approval and the Part VII transfer

is expected to complete in 2019. Since the announcement the group has entered into a risk transfer agreement with ReAssure Limited (a subsidiary of Swiss Re).
Until the Part VII transfer is completed the asset risks are effectively transferred to ReAssure Limited by this agreement.

135

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements7 Asset risk (continued)
Market risk

Principal risks

Currency risk
To diversify credit risk within the annuities business
corporate bond portfolio, investments are held in
corporate bonds denominated in non-sterling
currencies. LGC also invest in overseas assets.
Fluctuations in the value of, or income from, these
assets relative to liabilities denominated in sterling
could result in unforeseen loss.

The consolidated international subsidiaries and
financial instruments of subsidiaries are translated into
sterling in the consolidated accounts. Changes in the
sterling value can impact consolidated equity but may
be mitigated by associated hedging transactions.

Inflation risk
Inflation risk is the potential for loss as a result of
relative or absolute changes in inflation rates. Annuity
contracts may provide for future benefits to be paid
taking account of changes in the level of inflation.
Annuity contracts in payment may include an annual
adjustment for movements in price indices.

Interest rate risk
Interest rate risk is the risk that the group is exposed
to lower returns or loss as a direct or indirect result of
fluctuations in the value of, or income from, specific
assets and liabilities arising from changes in
underlying interest rates.

The group is exposed to interest rate risk on the
investment portfolio it maintains to meet the
obligations and commitments under its non-linked
insurance and investment contracts, in that the
proceeds from the assets may not be sufficient to
meet the group’s obligations to policyholders.

Credit risk

Principal risks

Bond default risk
A significant portfolio of corporate bonds and
commercial loans are held to back the liabilities arising
from writing general insurance and annuities business.
Whilst the portfolio is diversified, the asset class is
inherently exposed to the risk of issuer default, with
the possibility of financial loss.

Reinsurance counterparty risk
Exposure to insurance risk is mitigated by ceding part
of the risks assumed to the reinsurance market.
Default of a reinsurer would require the business to be
re-brokered, potentially on less advantageous terms,
or for the risks to be borne directly resulting
in possible financial loss. Credit risk syndication also
exposes the group to counterparty default risks. The
group is required to carry an element of associated
credit risk capital on its balance sheet should the
business not be re-brokered on the same terms.

Property lending counterparty risk
As part of our asset diversification strategy, we
hold property lending and sale and leaseback
investments. We are inherently exposed to the risk of
default by a borrower or tenant.

136

Product/business
segment

Annuities, LGC and LGI

Controls to mitigate the risk

To mitigate the risk of loss from currency fluctuations, currency swaps and
forwards are used to hedge exposures to corporate bonds denominated in
currencies other than sterling. Hedging arrangements are placed with strongly
rated counterparties with collateral requirements being subject to regular
review and reconciliation with the counterparties. In all cases, it is not possible
to perfectly hedge currency risk, leading to some residual risk.

Group and LGC

To mitigate the risk of loss from currency translation the company continuously
monitors its exposure and executes appropriate hedging transactions when
necessary. Hedging arrangements are placed with strongly rated counterparties
with collateral requirements being subject to regular review and reconciliation
with the counterparties.

Annuities

The investment strategy for annuities business takes explicit account of the effect
of movements in price indices on contracted liabilities. Significant exposures that
may adversely impact profitability are hedged using inflation swaps. Annuity
contracts also typically provide for a cap on the annual increase in inflation linked
benefits in payment. It is not possible to perfectly hedge inflation risk linked with
contracted liabilities, leading to some residual risk.

To mitigate the risk that guarantees and commitments are not met, financial
instruments are purchased, which broadly match the expected non-participating
policy benefits payable, by their nature and term. The composition of the
investment portfolio is governed by the nature of the insurance or savings
liabilities, the expected rate of return applicable on each class of asset and the
capital available to meet the price fluctuations for each asset class, relative to
the liabilities they support.

Group and LGC

Asset liability matching significantly reduces the group’s exposure to interest
rate risk. IFRS sensitivity to interest rate changes is included in Note 19.

Product/business
segment

Annuities, General
Insurance, and LGIA

Protection, Annuities,
General Insurance,
and LGIA

Controls to mitigate the risk

Portfolio level and specific issuer limits are set by financial strength rating, sector
and geographic region so as to limit exposure from a default event. Issuer limits are
regularly reviewed to take account of changes in market conditions, sector
performance and the re-assessment of financial strength by rating agencies and the
group’s own internal analysts. Exposures are monitored relative to limits. Financial
instruments are also used to mitigate the impact of rating downgrades and defaults.
If appropriate, actions are taken to trade out investments at risk of default.

When selecting new reinsurance partners for its protection business, the group
considers only companies which have a minimum credit rating equivalent to A- from
Standard & Poor’s. For each reinsurer, exposure limits are determined based on
credit ratings and projected exposure over the term of the treaty. Actual exposures
are regularly monitored relative to these limits. Similarly, for longevity and credit risk
syndication transactions, the group targets the use of strongly rated counterparties
and seeks to ensure that positions are fully collateralised. The adequacy and quality
of collateral is subject to ongoing monitoring.

Annuities and LGC

Each property lending and sale and leaseback investment transaction is subject
to a due diligence process to assess the credit risks implicit in the transaction and
confirm that any risk of default has been appropriately mitigated. We also protect
our interests through taking security over the underlying property associated with
each investment transaction.

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

Credit risk

Principal risks

Banking counterparty risk
The group is exposed to potential financial loss should
banks or the issuers of financial instruments default on
their obligations to us. We are also exposed to
counterparty risks in respect of the providers of
settlement and custody services.

Product/business
segment

Group and LGC

Controls to mitigate the risk

The group controls its exposures to banking counterparties and the issuers of
financial instruments using a framework of counterparty limits. These limits take
account of the relative financial strength of the counterparty as well as other
exposures that the group may have. Limits are subject to regular review with actual
exposures monitored against limits. The group has defined criteria for the selection
of custody and settlement services. The financial strength of providers is regularly
reviewed.

Liquidity Risk

Principal risks

Product/business
segment

Controls to mitigate the risk

Contingent event risk
Events that result in liquidity risk include a flu
pandemic or natural disaster leading to significantly
higher levels of claims than would normally be
expected, or extreme events impacting the timing of
cash flows or the ability to realise investments at a
given value within a specified timeframe.

LGI, General Insurance
and Group

Collateral liquidity risk
Within the annuities business, the use of financial
instruments to hedge default, interest rate, currency
and inflation risks can require the posting of collateral
with counterparties at short notice.

LGR

Investment liquidity risk
Within the with-profit fund, exposure to liquidity risk
may arise if the profile of investment assets held to
meet obligations to policyholders is not aligned with
the maturity profile of policies, or the profile does not
adequately take account of the rights of policyholders
to exercise options or guarantees to specified early
surrender terms or minimum rates of return.

Non-participating savings contracts are exposed to
liquidity risk in that certain asset classes in which
underlying funds invest, such as property, may not be
readily realisable in certain market conditions, or only
realisable at a reduced value.

Savings1

Direct lending, sale and leaseback investments and
lifetime mortgage business are inherently illiquid
forms of investment, with limited secondary markets
to realise the value of assets outside agreed
redemption terms.

LGR and LGC

The group seeks to ensure that it meets its obligations as they fall due and avoids
incurring material losses on forced asset sales in order to meet those obligations. A
limited level of contingent liquidity risk is, however, an accepted element of writing
insurance contracts. It is furthermore a consequence of the markets in which the
group operates and the executions of investment management strategies.
However, the group’s insurance businesses seek to maintain sufficient liquid assets
and standby facilities to meet a prudent estimate of the cash outflows that may
arise from contingent events. The level of required liquidity is identified using
techniques including stress tests for shock events and the profile of actual liquid
assets regularly compared to the required liability profile. The group’s treasury
function provides formal facilities to other areas of the group to cover contingent
liquidity requirements arising from more extreme events and where investment
assets may not be readily realisable.

Liquidity requirements to meet potential collateral calls under stressed conditions
are actively managed and an appropriate pool of eligible assets specified in the
agreements with counterparties is maintained. As at 31 December 2018, LGR
held eligible collateral worth four times the total amount of outstanding collateral
(using the most representative definition of collateral contained within the group’s
different collateral agreements).

Liquidity risk is managed ensuring that an appropriate proportion of the fund is
held in cash or other readily realisable assets to meet each tranche of maturities
and anticipated early withdrawals as they fall due. Where policyholders have
discretion to require early payment of policy proceeds, contractual safeguards are
in place to ensure that the fund and remaining policyholders are not
disadvantaged should a material number of policyholders exercise this discretion.

Liquidity risks associated with non-participating savings contracts are
documented and communicated to customers within product terms and
conditions. The terms also highlight that for certain asset classes such as
property, the group retains the right to defer the processing of fund withdrawal
requests for up to six months, should underlying assets need to be realised to
meet payment requests.

Given the illiquid nature of the annuity and other liabilities the group is able and
willing to take advantage of the premium offered by illiquid assets. The group,
however, sets limits on the overall exposure to illiquid investments taking account
of the nature and type of liabilities that the assets are held to meet.

1. In December 2017, the group announced the sale of its Mature Savings business to Swiss Re. The sale is subject to regulatory approval and the Part VII transfer

As at 31 December 2018, the group had £3.6bn (2017: £3.6bn) of cash and cash equivalents in shareholder funds and non profit non-unit linked funds
and a £1.0bn syndicated committed revolving credit facility in place, provided by a number of its key relationship banks, maturing in December 2022.

137

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements8 Assets analysis
The group has categorised its assets and liabilities in the following disclosure in accordance with the level of shareholder exposure to market and
credit risks. Various reinsurance arrangements are in place as a mechanism to mitigate the risks including a risk transfer agreement with ReAssure
Limited (a subsidiary of Swiss Re) whereby the group transfers all economic risks and rewards of the Mature Savings business to Swiss Re from
the effective date of 1 January 2018. The four categorisations presented are:

Unit linked
For unit linked contracts, there is a direct link between the investments and the obligations. Unit linked business is written in both Legal and General
Assurance Society Limited and Legal and General Assurance (Pensions Management) Limited. The financial risk on these contracts is borne by the
policyholders. The group is therefore not directly exposed to any market risk, currency risk or credit risk for these contracts. As a result, risk
disclosures have not been presented for unit linked assets and liabilities.

With-profits
Policyholders and shareholders share in the risks and returns of the with-profits fund. The return to shareholders on virtually all participating
products is in the form of a transfer to shareholders’ equity, which is analogous to a dividend from the fund and is dependent upon the bonuses
credited or declared on policies in that year. The bonuses are broadly based on historic and current rates of return on equity, property and fixed
income securities, as well as expectations of future investment returns. The with-profits classification excludes unit linked contracts.

Non profit non-unit linked
Shareholders are exposed to the risk and rewards of ownership of assets backing non profit non-unit linked business.

Shareholder
All other assets are classified as shareholder assets. Shareholders of the group are directly exposed to market and credit risk on these assets.
This includes the assets and liabilities of our overseas insurance operations and general insurance.

The table below presents an analysis of the balance sheet by category. All of the quantitative risk disclosures in Notes 15 and 16 have been
provided using this categorisation.

138

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

As at 31 December 2018

Assets

Goodwill and Purchased interests in long term businesses and other intangible assets

Investment in associates and joint ventures accounted for using the equity method

Property, plant and equipment

Investments1

Reinsurers’ share of contract liabilities

Other assets

Assets of operations classified as held for sale

Total assets

Liabilities

Core borrowings

Operational borrowings

Non-participating contract liabilities

Other liabilities

Liabilities of operations classified as held for sale

Total liabilities

As at 31 December 2017

Assets

Goodwill and Purchased interests in long term businesses
and other intangible assets

Investment in associates and joint ventures accounted
for using the equity method

Property, plant and equipment

Investments1

Reinsurers’ share of contract liabilities2

Other assets2

Assets of operations classified as held for sale

Total assets

Liabilities

Core borrowings

Operational borrowings

Non-participating contract liabilities2

Other liabilities2

Liabilities of operations classified as held for sale

Total liabilities

Shareholder
£m

Non profit
non-unit
linked
£m

With-
profits
£m

Unit
linked
£m

Total
£m

288

259

285

259

10,905

343

2,628

–

67,177

4,343

748

459

–

2,224

374,478

454,784

–

7,825

2,782

17,913

4,737

6,158

26,234

14,513

72,731

10,049

395,224

492,517

3,963

909

677

3,558

–

64,203

4,714

505

9,108

69,478

–

10,054

10,057

(41)

3,922

1,026

292,907

357,787

83,013

19,282

91,288

29,842

395,222

483,865

Shareholder
£m

144

252

9,804

225

1,321

133

Non profit
non-unit
linked
£m

–

61,505

5,031

745

510

11,937

67,797

3,517

395

550

2,463

–

60,829

3,959

507

6,926

65,295

With-
profits
£m

Unit
linked
£m

–

Total
£m

149

252

3,038

394,844

469,191

–

8,545

11,669

–

11,575

11,663

289

4,420

5,545

6,572

13,396

22,584

412,949

504,352

(58)

114

3,459

538

315,580

376,959

75,365

21,875

81,846

33,958

412,876

496,760

1. Investments includes financial investments, investment property and cash and cash equivalents.
2. Following a change in accounting policy for LGIA term assurance reserves, a number of balance sheet items have been restated, notably deferred acquisition costs,
reinsurers’ share of contract liabilities, non-participating insurance contracts, deferred tax liabilities and other liabilities. Further details on the change in accounting
policy are provided in Note 1.

139

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements9 Purchased interest in long term businesses (PILTB) and other intangible assets

Portfolios of in-force insurance or investment contracts acquired either directly or through the acquisition of a subsidiary undertaking are
capitalised at fair value. The value of business acquired represents the present value of anticipated future profits in acquired contracts. These
amounts are amortised over the anticipated lives of the related contracts in the portfolio.

Other intangible assets mainly consist of customer relationships, brand and capitalised software costs. Intangible assets acquired via business
combinations are recognised at fair value and are subsequently amortised on a straight line method over their estimated useful life. Where software
costs are separately identifiable and measurable, they are capitalised at cost and amortised over their expected useful life on a straight line basis.

Purchased interest in long term businesses and other intangible assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. The recoverable amount is the higher of an asset’s fair value less costs to sell and value
in use.

Cost

As at 1 January

Additions1

Increase due to currency translation

As at 31 December

Accumulated amortisation and impairment

As at 1 January

Amortisation for the year

Increase due to currency translation

As at 31 December

Total net book value as at 31 December

Less: assets of operations classified as held for sale2

Net book value as at 31 December

To be amortised within 12 months3

To be amortised after 12 months3

PILTB
insurance
contracts
2018
£m

PILTB
investment
contracts
2018
£m

Other
intangible
assets
2018
£m

377

–

391

(365)

(1)

(14)

(380)

–

(33)

–

(33)

211

119

–

330

(82)

(33)

–

(115)

–

215

Total
2018
£m

621

119

754

(480)

(34)

(14)

(528)

226

(3)

223

186

1. Other intangible assets include £42m related to acquisitions made during the year.
2. Detailed disclosure related to assets of operations classified as held for sale is included in Note 27.
3. The maturity analysis of the assets between less and more than 12 months is based on the Total net book value as at 31 December.

140

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

Cost

As at 1 January

Additions

Disposals

(Decrease)/increase due to currency translation

As at 31 December

Accumulated amortisation and impairment

As at 1 January

Amortisation for the year

Impairment

Disposals

Decrease/(increase) due to currency translation

As at 31 December

Total net book value as at 31 December

Less: assets of operations classified as held for sale1

Net book value as at 31 December

To be amortised within 12 months2

To be amortised after 12 months2

1. Detailed disclosure relating to assets of operations classified as held for sale is included in Note 27.
2. The maturity analysis of the assets between less and more than 12 months is based on the Total net book value as at 31 December.

PILTB
insurance
contracts
2017
£m

PILTB
investment
contracts
2017
£m

Other
intangible
assets
2017
£m

398

–

(21)

377

(385)

(1)

–

(365)

–

(29)

(3)

(52)

(12)

–

(33)

235

(65)

211

(35)

(4)

(2)

(82)

–

129

(106)

(543)

Total
2017
£m

698

(94)

(23)

621

(48)

(4)

(480)

141

(3)

138

110

141

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements10 Deferred acquisition costs

The group incurs costs to obtain and process new business. These are accounted for in line with the appropriate accounting standards as follows:

Long term insurance business
Acquisition costs comprise direct costs, such as initial commission, and the indirect costs of obtaining and processing new business. Some
acquisition costs relating to non-participating insurance contracts written outside the with-profits fund which are incurred during a financial year
are deferred by use of an asset which is amortised over the period during which the costs are expected to be recoverable, and in accordance with
the expected incidence of future related margins. For participating contracts, acquisition costs are charged to the income statement when incurred.

General insurance
A proportion of commission and other acquisition costs relating to unearned premiums is carried forward as deferred acquisition costs or, in
respect of reinsurance outwards, as deferred income.

Investment contracts
For participating investment contracts, acquisition costs comprise direct costs such as initial commission and the indirect costs of obtaining and
processing new business. These costs are charged to the income statement when incurred. For non-participating investment contracts, only
directly attributable costs relating to investment management services which vary with, and are related to, securing new contracts and renewing
existing contracts, are capitalised and amortised over the period during which the service is provided on a straight line basis. All other costs are
recognised as expenses when incurred.

As at 1 January

Acquisition costs deferred

Amortisation charged to income statement

Change in accounting policy1

Increase/(decrease) due to currency translation

Other

Total as at 31 December

Less: assets of operations classified as held for sale2

As at 31 December

To be amortised within 12 months3

To be amortised after 12 months3

Insurance
contracts
2018
£m

Investment
contracts
2018
£m

121

(114)

–

112

–

112

479

(3)

–

(12)

466

(438)

435

Total
2018
£m

578

123

(117)

–

(12)

578

(438)

140

480

Insurance
contracts
2017
£m

Investment
contracts
2017
£m

1,541

225

(169)

(1,367)

(131)

–

564

(76)

–

(11)

479

(438)

419

Total
2017
£m

2,105

227

(245)

(1,367)

(131)

(11)

578

(438)

140

119

459

1. Change in accounting policy represents the cumulative impact of the change in accounting policy related to LGIA term assurance reserves, described in Note 1.

The change has been applied retrospectively.

2. Detailed disclosure relating to assets of operations classified as held for sale is included in Note 27.
3. The maturity analysis of the assets between less and more than 12 months is based on the Total as at 31 December.

142

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

11 Financial investments and investment property

The group holds financial investments and investment property to back insurance contracts on behalf of policyholders and as group capital.

The group classifies its financial investments on initial recognition as held for trading (HFT), designated at fair value through profit or loss (FVTPL),
available-for-sale (AFS) or loans and receivables. Initial recognition of financial investments is on the trade date.

The group’s policy is to measure investments at FVTPL except for certain overseas assets where the related liability is valued on a passive basis
(not using current information), in which case investments are classified as AFS or loans held at amortised cost. All derivatives other than those
designated as hedges are classified as HFT.

Certain financial investments held by the group are designated as FVTPL as their performance is evaluated on a total return basis, consistent with
asset performance reporting to the Group Investment and Market Risk Committee and the group’s investment strategy. Assets designated as FVTPL
include debt securities (including lifetime mortgages) and equity instruments which would otherwise have been classified as AFS and reverse
repurchase agreements within loans which would otherwise be designated at amortised cost. Assets backing participating and non-participating
policyholder liabilities outside the US are designated as FVTPL. For participating contracts the assets are managed on a fair value basis to maximise
the total return to policyholders over the contract life. The group’s non-participating investment contract liabilities outside of the US are measured
on the basis of current information and are designated as FVTPL to avoid an accounting mismatch in the income statement.

Financial investments classified as HFT and FVTPL are measured at fair value with gains and losses reflected in the Consolidated Income Statement.
Transaction costs are expensed as incurred.

Financial investments classified as AFS are measured at fair value with unrealised gains and losses recognised in a separate reserve within equity.
Realised gains and losses, impairment losses, dividends, interest and foreign exchange movements on non-equity instruments are reflected in the
Consolidated Income Statement. Directly attributable transaction costs are included in the initial measurement of the investment.

Financial investments classified as loans are either measured at FVTPL, or initially measured at fair value plus transaction costs, and subsequently
measured at amortised cost using the effective interest method. The FVTPL classification currently only applies to reverse repurchase agreements.

Financial investments are recognised when the group becomes a party to the contractual provisions of the instrument. Financial investments are
derecognised only when the contractual rights to the cash flows from the investment expire, or when the group transfers substantially all the risks
and rewards of ownership to another entity.

Financial assets, other than those at FVTPL, are assessed for impairment at each balance sheet date. They are impaired where there is objective
evidence that, as a result of one or more events after initial recognition of the financial asset, the estimated future cash flows have been affected.

Investment property comprises land and buildings which are held for long term rental yields and capital growth. It is carried at fair value with
changes in fair value recognised in the Consolidated Income Statement within investment return.

Investment property in the UK is valued bi-annually by external chartered surveyors at open market values in accordance with the ‘Appraisal and
Valuation Manual’ of The Royal Institution of Chartered Surveyors or using internal valuations and estimates during the intervening period. Outside
the UK, valuations are produced in conjunction with external qualified professional valuers in the countries concerned. In the event of a material
change in market conditions between the valuation date and balance sheet date, an internal valuation is performed and adjustments made to reflect
any material changes in fair value.

The group receives and pledges collateral in the form of cash or non-cash assets in respect of various transactions, in order to reduce the credit risk
of these transactions. The amount and type of collateral required where the group receives collateral depends on an assessment of the credit risk
of the counterparty.

Collateral received in the form of cash, where the group has contractual rights to receive the cash flows generated, is recognised as an asset in the
Consolidated Balance Sheet with a corresponding liability for its repayment. Non-cash collateral received is not recognised in the Consolidated
Balance Sheet, unless the counterparty defaults on its obligations under the relevant agreement.

Non-cash collateral pledged where the group retains the contractual rights to receive the cash flows generated is not derecognised from the
Consolidated Balance Sheet, unless the group defaults on its obligations under the relevant agreement.

Cash collateral pledged, where the counterparty has contractual rights to receive the cash flows generated, is derecognised from the Consolidated
Balance Sheet and a corresponding receivable is recognised for its return.

143

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements11 Financial investments and investment property (continued)

Financial investments at fair value classified as:

Fair value through profit or loss

Available-for-sale

Held for trading

Loans at fair value

Financial investments at fair value

Loans at amortised cost

Total financial investments

Investment property1

Total financial investments and investment property

Less: assets of operations classified
as held for sale1

Shareholder
2018
£m

Note

Non profit
non-unit
linked
2018
£m

With-profits
2018
£m

Unit linked
2018
£m

Total
2018
£m

11(ii)

6,526

1,537

371

8,452

456

8,908

166

9,074

–

57,560

8,976

359,054

432,116

–

4,393

486

–

5,603

8,304

1,537

10,065

9,206

62,439

9,072

372,961

452,924

–

62,439

2,930

65,369

–

456

9,072

372,961

453,380

520

4,992

8,608

9,592

377,953

461,988

–

(7,602)

(16,923)

(24,525)

Total financial investments and investment property

9,074

65,369

1,990

361,030

437,463

Expected to be recovered within 12 months2

Expected to be recovered after 12 months2

56,823

405,165

1. Investment property includes £1,643m relating to assets of operations classified as held for sale. Detailed disclosure relating to assets of operations classified as held for

sale is included in Note 27.

2. The maturity analysis of the assets between less and more than 12 months is based on Total financial investments and investment property.

Financial investments at fair value classified as:

Fair value through profit or loss

Available-for-sale

Held for trading

Loans at fair value

Financial investments at fair value

Loans at amortised cost

Total financial investments

Investment property2

Total financial investments and investment property

Less: assets of operations classified
as held for sale2

Shareholder1
2017
£m

Note

Non profit
non-unit
linked
2017
£m

With-profits
2017
£m

Unit linked
2017
£m

Total
2017
£m

11(ii)

5,742

1,280

316

7,377

496

7,873

110

7,983

52,828

9,477

373,210

441,257

–

3,948

363

57,139

–

57,139

2,722

59,861

–

116

7,429

7,874

1,288

11,514

8,669

9,691

388,521

462,728

–

496

9,691

388,521

463,224

658

4,847

8,337

10,349

393,368

471,561

(56)

–

(8,114)

(13,119)

(21,289)

Total financial investments and investment property

7,927

59,861

2,235

380,249

450,272

Expected to be recovered within 12 months3

Expected to be recovered after 12 months3

58,803

412,758

1. Following the change in accounting policy for LGIA term assurance, £223m of shareholder financial investments at fair value classified as available-for-sale have been

reclassified to fair value through profit or loss. Further details of the change in accounting policy are provided in Note 1.

2. Investment property includes £1,227m relating to assets of operations classified as held for sale. Detailed disclosure relating to assets of operations classified as held for

sale is included in Note 27.

3. The maturity analysis of the assets between less and more than 12 months is based on Total financial investments and investment property.

Investment risks on unit linked assets are borne by the policyholders. The remaining risks associated with financial investments are outlined in Note 7.

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Financial investments, cash and cash equivalents include £2,654m (2017: £1,788m) of assets pledged as collateral against net derivative liability
counterparty positions. The assets used as collateral are Treasury Gilts, Foreign Government Bonds, AAA and AA Corporate Bonds and Cash
(2017: Treasury Gilts, Foreign Government Bonds, AAA and AA Corporate Bonds and Cash) having a residual maturity of over 25 years (2017: over
32 years). The group is entitled to receive all of the cash flows from the asset during the period when it is pledged as collateral. Further, there is no
obligation to pay or transfer these cash flows to another entity. The group can decide to substitute an asset which is designated as collateral at any
time, provided the relevant terms and conditions of the International Swap Dealers Association agreement are met.

Financial investments include £43,775m (2017: £32,358m) of assets that have been sold but not derecognised and are subject to repurchase
agreements. The related obligation to repurchase the financial assets is included within Payables and other financial liabilities (Note 24).

Various pension risk transfer deals include collateralised structures. £6,799m (2017: £6,653m) of Corporate Bonds and Treasury Gilts are pledged
as collateral in relation to these.

Financial investments have been allocated between those expected to be settled within 12 months and after 12 months in line with the expected
settlement of the backed liabilities. Assets in excess of the insurance and investment contract liabilities have been classified as expected to be
settled after 12 months.

(i) Financial investments at fair value

Equity securities

Debt securities1

Accrued interest

Derivative assets

Loans at fair value

Shareholder
2018
£m

Notes

2,322

5,708

371

11(ii)

Non profit
non-unit
linked
2018
£m

205

56,864

491

4,393

486

With-profits
2018
£m

Unit linked
2018
£m

Total
2018
£m

2,936

5,988

172,103

177,566

185,892

254,452

1,059

5,603

8,304

1,635

10,065

9,206

Total financial investments at fair value

8,452

62,439

9,072

372,961

452,924

Equity securities

Debt securities1

Accrued interest

Derivative assets

Loans at fair value

Shareholder
2017
£m

Notes

2,418

4,575

316

11(ii)

Non profit
non-unit
linked
2017
£m

282

52,008

468

4,018

363

With-profits
2017
£m

Unit linked
2017
£m

Total
2017
£m

3,260

6,162

116

203,045

209,005

168,196

230,941

972

8,434

7,874

1,518

12,595

8,669

Total financial investments at fair value

7,377

57,139

9,691

388,521

462,728

1. Non profit non-unit linked debt securities include £2.0bn (2017: £2.2bn) of commercial real estate loans and £3.2bn (2017: £2.0bn) of lifetime mortgages designated

as fair value through profit and loss.

Accrued interest in the above tables represents accrued interest on debt securities only. Accrued interest on loans at fair value is included
within loans at fair value.

Property investments which are held via partnerships or unit trust vehicles are also included within equity securities. A gain of £18m
(2017: gain of £13m) has been recognised in the Consolidated Income Statement in respect of the movement in fair value of these investments.

Included within unit linked equity securities are £214m (2017: £282m) of debt instruments which incorporate an embedded derivative linked to
the value of the group’s share price.

145

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements11 Financial investments and investment property (continued)
(ii) Loans

Shareholder
2018
£m

Non profit
non-unit
linked
2018
£m

With-profits
2018
£m

Unit linked
2018
£m

Loans at amortised costs

Policy loans

Other loans and receivables1

Loans at fair value

Reverse repurchase agreements

Total loans

Loans at amortised costs

Policy loans

Other loans and receivables1

Loans at fair value

Reverse repurchase agreements

Total loans

Total
2018
£m

418

456

Total
2017
£m

459

496

–

418

456

371

827

–

486

–

8,304

9,206

9,662

Shareholder
2017
£m

Non profit
non-unit
linked
2017
£m

With-profits
2017
£m

Unit linked
2017
£m

459

496

316

812

–

363

–

116

7,874

8,669

9,165

1. Other loans and receivables include £354m (2017: £324m) of US commercial mortgage loans.

There are no material differences between the carrying values reflected above and the fair values of these loans.

(iii) Fair value hierarchy
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date.

Fair value measurements are based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect the group’s view of market assumptions in the absence of observable market information. The group
utilises techniques that maximise the use of observable inputs and minimise the use of unobservable inputs.

The levels of fair value measurement bases are defined as follows:

Level 1: fair values measured using quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2: fair values measured using valuation techniques for all inputs significant to the measurement other than quoted prices included within
level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

Level 3: fair values measured using valuation techniques for any input for the asset or liability significant to the measurement that is not based
on observable market data (unobservable inputs).

The group’s financial assets are valued, where possible, using standard market pricing sources, such as IHS Markit, ICE and Bloomberg, or Index
Providers such as Barclays, Merrill Lynch or JPMorgan. Each uses mathematical modelling and multiple source validation in order to determine
consensus prices, with the exception of OTC Derivative holdings; OTCs are marked to market using an in-house system (Lombard Oberon),
external vendor (IHS Markit), internal model or Counterparty Broker marks. In normal market conditions, we would consider these market prices
to be observable and therefore classify them as Level 1. Where inputs to the valuation have been sourced from a market that is not suitably active
the prices have been classified as Level 2. Refer to Note 11 (iii) (a) for Level 3 methodology.

The group’s policy is to re-assess categorisation of financial assets at the end of each reporting period and to recognise transfers between levels
at that point in time.

There have been no significant transfers between Level 1 and Level 2 in 2018 other than those noted above (2017: no significant transfers).

146

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

For the year ended 31 December 2018

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Shareholder

Equity securities

Debt securities

Accrued interest

Derivative assets

Investment property

Loans at fair value

Non profit non-unit linked

Equity securities

Debt securities

Accrued interest

Derivative assets

Investment property

Loans at fair value

With-profits

Equity securities

Debt securities

Accrued interest

Derivative assets

Investment property

Loans at fair value

Unit linked

Equity securities

Debt securities

Accrued interest

Derivative assets

Investment property

Loans at fair value

2,322

5,708

166

371

205

56,864

491

4,393

2,930

486

2,936

5,988

520

1,432

1,851

–

194

7,031

–

2,742

1,707

–

172,103

185,892

169,414

131,679

1,059

5,603

4,992

8,304

502

428

–

3,199

–

371

890

658

–

166

–

36,937

12,896

446

4,336

–

486

–

4,277

–

2,026

53,941

557

5,175

–

8,304

2,930

–

194

–

520

–

663

272

–

4,992

–

Total financial investments and investment property at fair value1, 2

461,532

317,042

120,210

24,280

1. This table excludes loans (including accrued interest) of £456m, which are held at amortised cost.
2. This table includes financial investments of £22,882m and investment property of £1,643m relating to assets of operations classified as held for sale, included in Note 27.

147

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements11 Financial investments and investment property (continued)
(iii) Fair value hierarchy (continued)

For the year ended 31 December 2017

Total
£m

Level 1
£m

Shareholder

Equity securities

Debt securities

Accrued interest

Derivative assets

Investment property

Loans at fair value

Non profit non-unit linked

Equity securities

Debt securities

Accrued interest

Derivative assets

Investment property

Loans at fair value

With-profits

Equity securities

Debt securities

Accrued interest

Derivative assets

Investment property

Loans at fair value

Unit linked

Equity securities

Debt securities

Accrued interest

Derivative assets

Investment property

Loans at fair value

2,418

4,575

110

316

282

52,008

468

4,018

2,722

363

3,260

6,162

658

116

1,743

1,134

–

278

7,436

–

3,074

2,105

–

203,045

199,524

168,196

115,470

972

8,434

4,847

7,874

416

124

–

Level 2
£m

3,076

–

316

–

Level 3
£m

674

365

–

110

–

35,084

9,488

410

4,018

–

363

4,053

–

116

2,930

52,718

556

8,310

–

7,874

–

2,722

–

182

–

658

–

591

–

4,847

–

Total financial investments and investment property at fair value1, 2

471,065

331,415

119,974

19,676

1. This table excludes loans of £496m, which are held at amortised cost.
2. This table includes financial investments of £20,062m and investment property of £1,227m relating to assets of operations classified as held for sale, included in Note 27.

148

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

(a) Level 3 assets measured at fair value
Level 3 assets, where internal models are used, comprise property, unquoted equities, untraded debt securities and securities where unquoted
prices are provided by a single broker. Unquoted securities include suspended securities, investments in private equity and property vehicles.
Untraded debt securities include private placements, commercial real estate loans, income strips and lifetime mortgages.

In many situations, inputs used to measure the fair value of an asset or liability may fall into different levels of the fair value hierarchy. In these
situations, the group determines the level in which the fair value falls based upon the lowest level input that is significant to the determination
of the fair value. As a result, both observable and unobservable inputs may be used in the determination of fair values that the group has
classified within Level 3.

The group determines the fair values of certain financial assets and liabilities based on quoted market prices, where available. The group also
determines fair value based on estimated future cash flows discounted at the appropriate current market rate. As appropriate, fair values reflect
adjustments for counterparty credit quality, the group’s credit standing, liquidity and risk margins on unobservable inputs.

Equity securities
Level 3 equity securities amount to £1,757m (2017: £1,451m), of which the majority is made up of holdings of investment property vehicles and
private investment funds. They are valued at the proportion of the group’s holding of the Net Asset Value reported by the investment vehicles.
Other equity securities are valued by a number of third party specialists using a range of techniques, including latest round of funding and
discounted cash flow models.

Other financial investments
Lifetime mortgage (LTM) loans amount to £3,227m (2017: £2,023m). They are valued using a discounted cash flow model by projecting best-
estimate net asset proceeds and discounting using rates inferred from current LTM pricing. The inferred illiquidity premiums for the majority of the
portfolio range between 100 and 350bps. This ensures the value of loans at outset is consistent with the purchase price of the loan, and achieves
consistency between new and in-force loans. Inputs to the model include property growth rates and voluntary early redemptions. The valuation
as at 31 December 2018 reflects a long-term property growth rate assumption of RPI + 0.5%.

Private credit loans (including commercial real estate loans) amount to £8,001m (2017: £6,265m). Their valuation is outsourced to Markit who use
discounted future cash flows based on a yield curve. The discount factors take into consideration the z-spread of the LGIM approved comparable
bond and the initial spread agreed by both parties. Unobservable inputs that go into the determination of comparators, include: rating, sector,
sub-sector, performance dynamics, financing structure and duration of investment. Existing private credit investments which were executed back
as far as 2011, are subject to a range of interest rate formats, although the majority is fixed rate. The weighted average duration of the portfolio
is 11 years, with a weighted average life of 16.6 years. Maturities in the portfolio currently extend out to 2064. The private credit portfolio of assets
is not externally rated but has internal ratings assigned by an independent credit team in line with internally developed methodologies. These credit
ratings range from AAA to B.

Income strip assets amount to £1,248m (2017: £1,153m). Their valuation is outsourced to Knight Frank and CBRE who apply a yield to maturity to
discounted future cash flows to derive valuations. The overall valuation takes into account the property location, tenant details, tenure, rent, rental
break terms, lease expiries and underlying residual value of the property. The valuation as at 31 December 2018 reflects equivalent yield ranges
between 2% and 5% and estimated rental values (ERV) between £10 and £27 per sq ft.

Private placements held by the US business amount to £938m (2017: £569m). They are valued using a pricing matrix comprised of a public spread
matrix, internal ratings assigned to each holding, average life of each holding, and a premium spread matrix. These are added to the risk-free rate to
calculate the discounted cash flows and establish a market value for each investment grade private placement. The valuation as at 31 December 2018
reflects illiquidity premiums between 10 and 75bps.

Commercial mortgage loans amount to £275m (2017: £342m) and are determined by incorporating credit risk for performing loans at the portfolio
level and for loans identified to be distressed at the loan level. The projected cash flows of each loan are discounted along stochastic risk free rate
paths and are inclusive of an Option Adjusted Spread (OAS), derived from current internal pricing on new loans, along with the best observable inputs.
The valuation as at 31 December 2018 reflects illiquidity premiums between 20 and 40bps.

Other debt securities which are not traded in an active market have been valued using third party or counterparty valuations. These prices are
considered to be unobservable due to infrequent market transactions.

149

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements11 Financial investments and investment property (continued)
(iii) Fair value hierarchy (continued)
(a) Level 3 assets measured at fair value (continued)
Investment property
Level 3 investment property amounting to £8,608m (2017: £8,337m) is valued with the involvement of external valuers. All property valuations are
carried out in accordance with the latest edition of the Valuation Standards published by the Royal Institute of Chartered Surveyors, and are
undertaken by appropriately qualified valuers as defined therein. Whilst transaction evidence underpins the valuation process, the definition of market
value, including the commentary, in practice requires the valuer to reflect the realities of the current market. In this context valuers must use their
market knowledge and professional judgement and not rely only upon historic market sentiment based on historic transactional comparables.

The valuation of investment properties also include an income approach that is based on current rental income plus anticipated uplifts, where the
uplift and discount rates are derived from rates implied by recent market transactions. These inputs are deemed unobservable. The valuation as at
31 December 2018 reflects equivalent yield ranges between 4% and 10% and ERV between £1 and £139 per sq ft.

Fair values are subject to a control framework designed to ensure that input variables and outputs are assessed independent of the risk taker. These
inputs and outputs are reviewed and approved by a valuation committee and validated independently as appropriate.

The group’s policy is to reassess the categorisation of financial assets at the end of each reporting period and to recognise transfers between levels
at that point in time.

As at 1 January

1,451

9,888

8,337

19,676

Equity
securities
2018
£m

Other
financial
investments
2018
£m

Investment
property
2018
£m

Total
2018
£m

Equity
securities
2017
£m

1,101

Other
financial
investments
2017
£m

Investment
property
2017
£m

Total
2017
£m

4,390

8,150

13,641

Total gains/(losses) for the period recognised in profit:

– in other comprehensive income

– realised and unrealised gains/(losses)1

Purchases/additions

Sales/Disposals

Transfers into Level 3

Transfers out of Level 3

Other

As at 31 December

519

(375)

126

–

(18)

(92)

5,521

(1,707)

295

–

1,153

(904)

–

(28)

(17)

(7)

7,193

(2,986)

421

–

104

316

(267)

138

–

266

3,595

(118)

1,718

–

1,757

13,915

8,608

24,280

1,451

9,888

–

456

1,218

(975)

–

(512)

8,337

826

5,129

(1,360)

1,856

–

(453)

19,676

1. The realised and unrealised gains and losses have been recognised in investment return in the Consolidated Income Statement.

(b) Effect on changes in assumptions on Level 3
Fair values of financial instruments are, in certain circumstances, measured using valuation techniques that incorporate assumptions that are
not evidenced by prices from observable current market transactions in the same instrument and are not based on observable market data.

Where possible, the group assesses the sensitivity of fair values of Level 3 investments to changes in unobservable inputs to reasonable alternative
assumptions. As outlined above, Level 3 investments are valued using internally-modelled valuations or independent third parties. Where internally-
modelled valuations are used, sensitivities are determined by adjusting various inputs of the model and assigning them a weighting. Where
independent third parties are used, sensitivities are determined as outlined below:

• Unquoted investments in property vehicles and direct holdings in investment property are valued using valuations provided by independent
valuers on the basis of open market value as defined in the appraisal and valuation manual of the Royal Institute of Chartered Surveyors.
Reasonably possible alternative valuations have been determined using alternative yields.

• Private equity investments are valued in accordance with the International Private Equity and Venture Capital Valuation Guidelines.

Reasonably possible alternative valuations have been determined by stressing key assumptions used in the valuation models.

The group is therefore able to perform a sensitivity analysis for its Level 3 investments, which amount to £24.3bn (2017: £19.7bn). The
effect of changes in significant unobservable valuation inputs to reasonable alternative assumptions would result in a change in fair value
of +/- £1.6bn (2017: +/-£1.2bn), which represents 7% (2017: 6%) of the total value of Level 3 investments, including investment property.

Of the total sensitivity impact, +/- £0.9bn (2017: +/-£1.0bn) relates to Level 3 financial assets (excluding investment property),
which represents 6% (2017: 9%) of total Level 3 financial assets and 4% (2017: 5%) of total Level 3 investments.

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12 Derivative assets and liabilities

The group’s activities expose it to the financial risks of changes in foreign exchange rates and interest rates. The group uses derivatives such as foreign
exchange forward contracts and interest rate swap contracts to hedge these exposures. The group uses hedge accounting, provided the prescribed
criteria in IAS 39 ‘Financial instruments: Recognition and measurement’ are met, to recognise the offsetting effects of changes in the fair value or cash
flow of the derivative instrument and the hedged item. The group’s principal uses of hedge accounting are to:

(i) Defer in equity the changes in the fair value of derivatives designated as the hedge of a future cash flow attributable to a recognised asset or liability,
a highly probable forecast transaction, or a firm commitment until the period in which the future transaction affects profit or loss or is no longer
expected to occur; and

(ii) Hedge the fair value movements in loans due to interest rate and exchange rate fluctuations. Any gain or loss from remeasuring the hedging
instrument at fair value is recognised immediately in the Consolidated Income Statement. Any gain or loss on the hedged item attributable to the
hedged risk is adjusted against the carrying amount of the hedged item and recognised in the Consolidated Income Statement.

The relationship between the hedging instrument and the hedged item, together with the risk management objective and strategy for undertaking
the hedge transaction, are documented at the inception of the transaction. The effectiveness of the hedge is documented and monitored on an ongoing
basis. Hedge accounting is only applied for highly effective hedges (between 80% and 125% effectiveness) with any ineffective portion of the gain or
loss recognised in the Consolidated Income Statement in the current year.

Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instruments which do not qualify
for hedge accounting are recognised immediately in the Consolidated Income Statement.

Where the risks and characteristics of derivatives embedded in other contracts are not closely related to those of the host contract and the whole
contract is not carried at fair value, the derivative is separated from that host contract and measured at fair value, with fair value movements
reflected within investment return, unless the embedded derivative itself meets the definition of an insurance contract.

Cash inflows and outflows are presented on a net basis where the group is required to settle net or has a legally enforceable right of offset and
the intention is to settle on a net basis.

Forward foreign exchange contracts – net investment hedges
The group hedges part of the foreign exchange translation exposure on its net investment in certain overseas subsidiaries, using forward foreign
exchange contracts. It recognises the portion of the gain or loss which is determined to be an effective hedge through reserves within shareholders’
equity, along with the gain or loss on translation of the foreign subsidiaries.

Derivative contracts – held for trading
The group uses certain derivative contracts which are effective hedges of economic exposures in accordance with the group’s risk management
policy, but for various reasons are not designated within a formal hedge accounting relationship. Therefore, these contracts must be designated as
held for trading, and gains and losses on these contracts are recognised immediately in the Consolidated Income Statement.

151

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements
12 Derivative assets and liabilities (continued)

Shareholder derivatives:

Interest rate contracts – fair value hedges

Interest rate contracts – cash flow hedges

Currency swap contracts – held for trading

Inflation swap contracts – held for trading

Other derivatives – held for trading

Total shareholder derivatives

Non profit non–unit linked derivatives:

Interest rate contracts – fair value hedges

Interest rate contracts – cash flow hedges

Interest rate contracts – held for trading

Forward foreign exchange contracts – net investment hedges

Forward foreign exchange contracts – held for trading

Currency swap contracts – held for trading

Inflation swap contracts – held for trading

Credit derivatives – held for trading

Other derivatives – held for trading

Total non profit non–unit linked derivatives

With–profits derivatives:

Interest rate contracts – held for trading

Other derivatives – held for trading

Total with–profits derivatives

Unit linked derivatives:

Interest rate contracts – held for trading

Forward foreign exchange contracts – held for trading

Credit derivatives – held for trading

Inflation swap contracts – held for trading

Inflation rate contracts – held for trading

Equity/index derivatives – held for trading

Other derivatives – held for trading

Total unit linked derivatives

Total derivative assets and liabilities

Fair values

Assets
2018
£m

Liabilities1
2018
£m

Assets
2017
£m

Liabilities1
2017
£m

–

119

–

147

–

3,630

1,679

3,408

1,350

–

454

–

216

–

623

793

–

169

256

–

102

–

673

–

4,393

3,203

4,018

2,198

4,603

389

–

202

305

5,603

10,065

1,650

743

440

–

230

1,366

4,485

7,791

7,400

737

113

8,434

12,595

2,448

587

123

481

2,086

5,816

8,173

1. Derivative liabilities are reported in the Consolidated Balance Sheet within Payables and other financial liabilities (Note 24).

The group has entered into fixed rate borrowings denominated in USD and is therefore exposed to foreign exchange and interest rate risks. In order
to hedge these risks the group has entered into a cross currency interest rate swap, enabling the exposure to be swapped into a fixed rate in its
functional currency. These had a fair value liability totalling £25m and a notional amount of £1,099m at 31 December 2018. There was no
ineffectiveness recognised in the Consolidated Income Statement in respect of these hedges during 2018.

152

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

The contractual undiscounted cash flows in relation to non-unit linked derivatives have the following maturity profile. Unit linked derivatives
have not been included as shareholders are not directly exposed to liquidity risks.

As at 31 December 2018

Cash inflows

Shareholder derivatives

Derivative assets

Derivative liabilities

Non profit non-unit linked derivatives

Derivative assets

Derivative liabilities

With-profits derivatives

Derivative assets

Derivative liabilities

Total

Cash outflows

Shareholder derivatives

Derivative assets

Derivative liabilities

Non profit non-unit linked derivatives

Derivative assets

Derivative liabilities

With-profits derivatives

Derivative assets

Derivative liabilities

Total

Net shareholder derivatives cash flows

Net non profit non-unit linked derivatives cash flows

Net with-profits derivatives cash flows

Maturity profile of undiscounted cash flows

Fair
values
£m

Within
1 year
£m

1-5 years
£m

5-15 years
£m

15-25 years
£m

(60)

4,393

(3,203)

(43)

374

920

3,345

4,661

251

591

5,435

4,607

9,109

12,130

–

4,937

7,627

Over
25 years
£m

–

Total
£m

384

928

1,410

1,876

24,236

30,901

–

374

827

1,156

10,142

10,145

21,399

12,637

3,327

57,650

(60)

(361)

(975)

(4)

(5)

–

(370)

(985)

4,393

(3,203)

(3,045)

(5,161)

(5,250)

(5,806)

(8,584)

(14,031)

(4,280)

(8,548)

(1,132)

(2,129)

(22,291)

(35,675)

(43)

(309)

(683)

(27)

(54)

(45)

(100)

(11)

(64)

–

(41)

(392)

(942)

1,156

(10,534)

(11,146)

(22,770)

(12,903)

(3,302)

(60,655)

(42)

(200)

(150)

–

(1)

(1,014)

(1,376)

–

(264)

(2)

–

(43)

(2,829)

(133)

153

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements12 Derivative assets and liabilities (continued)
The contractual undiscounted cash flows in relation to non-unit linked derivatives have the following maturity profile. Unit linked derivatives have
not been included as shareholders are not directly exposed to liquidity risks.

As at 31 December 2017

Cash inflows

Shareholder derivatives

Derivative assets

Derivative liabilities

Non profit non-unit linked derivatives

Derivative assets

Derivative liabilities

With-profits derivatives

Derivative assets

Derivative liabilities

Total

Cash outflows

Shareholder derivatives

Derivative assets

Derivative liabilities

Non profit non-unit linked derivatives

Derivative assets

Derivative liabilities

With-profits derivatives

Derivative assets

Derivative liabilities

Total

Net shareholder derivatives cash flows

Net non profit non-unit linked derivatives cash flows

Net with-profits derivatives cash flows

Fair
values
£m

(147)

4,018

(2,198)

(12)

Within
1 year
£m

1,070

199

3,592

4,201

852

227

Maturity profile of undiscounted cash flows

1-5 years
£m

5-15 years
£m

15-25 years
£m

Over
25 years
£m

Total
£m

–

1,083

212

5,685

2,407

12,660

6,276

7,896

5,540

4,639

3,813

34,472

22,237

173

1,270

319

1,804

10,141

8,242

19,161

13,541

8,508

59,593

(147)

(957)

(229)

(6)

(39)

(3)

(4)

–

(1)

–

(967)

(273)

4,018

(2,198)

(2,909)

(4,588)

(5,361)

(3,190)

(11,896)

(7,544)

(6,978)

(6,229)

(3,264)

(4,311)

(30,408)

(25,862)

(12)

(816)

(356)

(62)

(42)

(158)

(54)

(95)

(7)

(42)

(3)

(1,173)

(462)

1,804

(9,855)

(8,700)

(19,659)

(13,310)

(7,621)

(59,145)

296

(93)

(27)

(459)

(1)

(504)

–

229

–

877

439

(46)

Future cash flows on the floating legs of interest rate and exchange derivatives are calculated using current spot rates, which may differ from the
market expectation incorporated in the fair value.

Cash flows arising from implied events covered by credit derivatives are presented in the table above on an expected basis as cash flows within one year.

Cash inflows or outflows are presented on a net basis where the group is required to settle net or has a legally enforceable right of offset and the
intention is to settle on a net basis.

154

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

13 Receivables and other assets

Reinsurance receivables

Receivables under finance leases

Accrued interest and rent

Prepayments and accrued income

Insurance and intermediaries receivables

Inventories1

Contract assets2

Other receivables3

Total other assets

Less: assets of operations classified as held for sale4

Other assets

Due within 12 months

Due after 12 months

Note

13(i)

Total
2018
£m

162

210

595

205

1,687

192

2,724

5,799

(206)

5,593

5,377

422

Total
2017
£m

235

558

238

365

154

4,685

6,368

(285)

6,083

6,342

1. Inventories, previously included within Other receivables, have been disclosed separately and principally represent house building stock including land, options on land,

work in progress and other inventory.

2. Contract assets, previously included within Other receivables, have been disclosed separately in line with the requirements of IFRS 15, ‘Revenue from contracts with

customers’. These assets represent the entity’s right to consideration in exchange for goods or services that have been transferred to a customer.

3. Other receivables include amounts receivable from brokers and clients for investing activities, unsettled cash, FX spots (which decreased by £2.3bn from 2017),

and other sundry balances.

4. Detailed disclosure related to assets of operations classified as held for sale is included in Note 27.

(i) Receivables under finance leases

The group leases certain investment properties to third parties. Under these agreements the lessee is considered to retain all the risks and reward of
ownership, therefore the contracts have been classified as finance leases. At the lease commencement date, the group has recognised a receivable
asset in its Consolidated Balance Sheet to reflect the net investment in the lease, equal to the present value of the lease payments. The group
recognises finance income over the lease term to reflect the rate of return on the net investment in the lease.

The group acts as a lessor of certain finance leases, which have a weighted average duration to maturity of 27.1 years as at 31 December 2018.
The counterparties, as lessee, are regarded to be the economic owner of the leased assets.

The future minimum lease payments under the arrangement, together with the present value, are disclosed below:

Not later than 1 year

Between 1 and 5 years

Later than 5 years

Total

Total
future
payments
2018
£m

Unearned
interest
income
2018
£m

215

255

(5)

(20)

(68)

(93)

Present
value
2018
£m

147

162

Total
future
payments
2017
£m

Unearned
interest
income
2017
£m

106

131

(3)

(11)

(25)

(39)

Present
value
2017
£m

155

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements14 Cash and cash equivalents

Cash and cash equivalents include cash in hand, deposits held at call with banks, treasury bills and other short term highly liquid investments with
maturities of three months or less from the date of acquisition.

Cash at bank and in hand

Cash equivalents

Total cash and cash equivalents

Less: assets of operations classified as held for sale1

Cash and cash equivalents

Cash at bank and in hand

Cash equivalents

Total cash and cash equivalents

Less: assets of operations classified as held for sale1

Cash and cash equivalents

Shareholder
2018
£m

288

1,543

1,831

–

Non profit
non-unit
linked
2018
£m

521

1,287

1,808

–

1,831

1,808

Shareholder
2017
£m

349

1,528

1,877

–

1,877

Non profit
non-unit
linked
2017
£m

471

1,247

1,718

(74)

1,644

With-profits
2018
£m

Unit linked
2018
£m

Total
2018
£m

2,315

15,773

18,088

1,438

12,710

14,148

233

301

(67)

234

(700)

(767)

13,448

17,321

With-profits
2017
£m

141

739

880

(77)

803

Unit linked
2017
£m

1,859

12,907

14,766

Total
2017
£m

2,820

16,421

19,241

(171)

(322)

14,595

18,919

1. Detailed disclosure related to assets of operations classified as held for sale is included in Note 27.

15 Market risk
(i) Investment performance risk
(a) Equity securities
The group controls its exposure to geographic price risks by using internal country risk exposure limits. These exposure limits are based on
macroeconomic data and key qualitative indicators. The latter take into account economic, social and political environments. The table below
indicates the group’s exposure to different equity markets around the world. Unit linked equity investments are excluded from the table as the risk is
retained by the policyholder.

Shareholder
2017
£m

Non profit
non-unit
linked
2017
£m

With-profits
2017
£m

Total
2017
£m

1,398

1,070

1,223

278

713

303

958

563

698

175

430

253

282

3,077

4,985

–

183

879

282

3,260

5,960

359

413

443

100

263

1,626

696

2,418

Exposure to worldwide equity markets

United Kingdom

North America

Europe

Japan

Asia Pacific

Other

Listed equities

Unlisted UK equities

Holdings in unit trusts

Total equities

Shareholder
2018
£m

Non profit
non-unit
linked
2018
£m

With-profits
2018
£m

388

339

382

134

1,393

859

2,322

855

447

685

169

359

228

205

2,743

–

193

205

2,936

Total
2018
£m

1,314

848

1,118

256

510

295

4,341

1,052

5,463

156

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

(b) Debt securities
The group controls its exposure to geographic price risks by using internal country credit ratings. These ratings are based on macroeconomic
data and key qualitative indicators. The latter take into account economic, social and political environments. The table below indicates the group’s
exposure to different debt security markets around the world. Unit linked debt securities are excluded from the table as the risk is retained by
the policyholder.

Total debt securities
and accrued interest

United Kingdom

USA

Netherlands

France

Germany

GIIPS:

– Greece

– Ireland

– Italy

– Portugal

– Spain

Belgium

Russia

Rest of Europe

Brazil

Rest of World

Collateralised debt obligations (CDOs)1

Total

Analysed as

Debt securities

Accrued interest

Shareholder
2018
£m

2,269

1,836

218

205

109

–

232

766

–

Non profit
non-unit
linked
2018
£m

31,940

14,579

2,191

1,162

632

–

1,247

–

149

145

–

2,173

2,949

With-profits
2018
£m

3,401

664

320

323

139

–

336

644

–

Total
2018
£m

37,610

17,079

2,729

1,690

880

1,351

–

181

221

2,741

102

4,359

Shareholder
2017
£m

1,705

1,569

214

205

115

237

407

–

Non profit
non-unit
linked
2017
£m

29,286

12,596

1,994

1,334

623

–

970

–

160

133

–

2,044

3,113

With-profits
2017
£m

3,601

744

314

317

232

–

379

436

–

Total
2017
£m

34,592

14,909

2,522

1,856

970

1,123

105

190

177

2,660

111

3,956

5,741

57,355

6,040

69,136

4,599

52,476

6,216

63,291

5,708

56,864

5,988

68,560

4,575

52,008

491

576

468

6,162

62,745

546

1. £nil (2017: £22m) of the CDOs are domiciled in the USA and £75m (2017: £74m) are domiciled in the Rest of World.

157

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements15 Market risk (continued)
(i) Investment performance risk (continued)
(c) Additional disclosures on shareholder and non profit non-unit linked debt securities exposure

2018
£m

11,615

113

5,036

192

–

273

664

–

160

814

2,746

5,272

934

5,152

4,151

3,542

1,383

9,812

1,064

734

1,610

2,783

1,742

3,227

2018
%

2017
£m

11,450

2017
%

–

260

4,238

221

251

905

182

660

2,945

4,409

490

5,378

3,384

3,120

1,283

8,721

704

793

1,742

2,355

1,459

2,023

–

63,096

100

57,075

100

Sovereigns, supras and sub-sovereigns

Banks:

– Tier 1

– Tier 2 and other subordinated

– Senior

– Covered

Financial services:

– Tier 1

– Tier 2 and other subordinated

– Senior

Insurance:

– Tier 1

– Tier 2 and other subordinated

– Senior

Consumer services and goods:

– Cyclical

– Non-cyclical

– Healthcare

Infrastructure:

– Social

– Economic

Technology and telecoms

Industrials

Utilities

Energy

Commodities

Oil and gas

Real estate

Structured finance ABS/RMBS/CMBS/Other

Lifetime mortgage loans

CDOs

Total

158

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

Analysis of sovereigns, supras and sub-sovereigns

Market value by region

United Kingdom

USA

Netherlands

France

Germany

GIIPS:

– Greece

– Ireland

– Italy

– Portugal

– Spain

Russia

Rest of Europe

Brazil

Rest of World

Total

2018
£m

2017
£m

9,238

1,038

502

–

467

291

8,689

1,204

174

458

–

504

373

11,615

11,450

159

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements15 Market risk (continued)
(ii) Currency risk
The group has minimal exposure to currency risk from financial instruments held by business units in currencies other than their functional
currencies, as nearly all such holdings are backing either insurance or investment contract liabilities or hedging.

The group operates internationally and as a result is exposed to foreign currency exchange risk arising from fluctuations in exchange rates of
various currencies. The largest United States dollar currency exposures relate to the group’s US business, Legal & General America. The majority
of currency exposures relating to euros are held by Legal & General Investment Management (Europe) Limited, a subsidiary of Legal & General
Investment Management Limited. The group does not hedge foreign currency revenues as these are substantially retained locally to support the
growth of the group’s business and meet local regulatory and market requirements.

Businesses aim to maintain sufficient assets in local currency to meet local currency liabilities; however, movements may impact the value of the
group’s consolidated shareholders’ equity which is expressed in sterling. This aspect of foreign exchange risk is monitored and managed centrally,
against pre-determined limits. These exposures are managed by aligning the deployment of regulatory capital by currency with the group’s
regulatory capital requirements by currency. Currency borrowings and derivatives may be used to manage exposures within the limits that have
been set.

As at 31 December 2018, the group held 10% (2017: 10%) of its total equity attributable to shareholders in currencies, mainly United States dollar
and euro, other than the functional currency of the relevant business unit. The exchange risks inherent in these exposures may be mitigated through
the use of derivatives, mainly forward currency contracts.

Consistent with the group’s accounting policies, the profits of overseas business units (reported as functional currencies) are translated at average
exchange rates and the net assets (reported as functional currencies) at the closing rate for the reporting period. A 10% increase (weakening of foreign
currencies) or decrease (strengthening of foreign currencies) in these rates would increase or reduce the profit for the year and net assets as follows:

Profit for the year1

Net assets attributable to USD exposures1, 2

Profit for the year1

Net assets attributable to EUR exposures1

A 10% increase in
USD:GBP exchange rate

A 10% decrease in
USD:GBP exchange rate

2018
£m

(38)

2017
£m

(26)

(19)

2018
£m

(14)

2017
£m

A 10% increase in
EUR:GBP exchange rate

A 10% decrease in
EUR:GBP exchange rate

2018
£m

–

(97)

2017
£m

–

(30)

2018
£m

–

119

2017
£m

–

1. Profit for the year impacts relate only to overseas business units where the functional currency is not sterling. Net asset impacts include both functional currency

and non-functional currency exposures.

2. US net assets have been restated following the change in accounting policy for LGIA term assurance reserves. Further details on the change in accounting policy

is provided in Note 1.

160

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

16 Credit risk
The credit profile of the group’s assets exposed to credit risk is shown below. The credit rating bands are provided by independent rating agencies.
For unrated assets, the group maintains internal ratings which are used to manage exposure to these counterparties. Unit linked assets have not
been included as shareholders are not directly exposed to the associated credit risk. Additionally, assets such as equity securities, deferred
acquisition costs and tax, have no exposure to the associated credit risk and therefore have also been excluded.

The carrying amount of the financial assets recorded in the financial statements represent the maximum exposure to credit risk.

Shareholder

As at 31 December 2018

Government securities

Other fixed rate securities

Variable rate securities

Total debt securities1

Accrued interest

Loans

Derivative assets

Cash and cash equivalents

Reinsurers’ share of contract liabilities

Other assets

Total

Notes

11(i)

11(ii)

AA
£m

1,132

871

410

2,413

218

–

575

170

A
£m

1,178

374

1,586

350

1,073

168

100

BBB
£m

333

447

157

–

BB and
below
£m

154

203

–

3,396

3,301

669

208

Internally
rated
other1
£m

125

367

564

–

2,187

2,895

Total
£m

1,699

3,055

954

5,708

827

1,831

343

2,511

11,271

AAA
£m

266

152

495

–

204

802

1. Of the total debt securities and accrued interest that have been internally rated and unrated, £1m is rated AAA, £170m AA, £77m A, £245m BBB, £46m BB and below

and £28m as other.

Non profit non-unit linked

As at 31 December 2018

Government securities

Other fixed rate securities

Variable rate securities

Lifetime mortgages

Total debt securities1

Accrued interest

Loans

Derivative assets

Cash and cash equivalents

Reinsurers’ share of contract liabilities

Other assets

Total

Notes

11(i)

11(ii)

AAA
£m

504

1,004

364

–

AA
£m

5,401

4,650

1,858

–

A
£m

12,352

2,622

–

BBB
£m

181

13,444

623

–

1,872

11,909

14,977

14,248

–

149

–

363

4,039

162

386

3,360

1,168

228

1,015

–

BB and
below
£m

380

130

–

512

–

Internally
rated
other1
£m

629

8,324

1,166

3,227

Total
£m

6,720

40,154

6,763

3,227

13,346

56,864

–

267

617

491

486

4,393

1,808

4,390

710

2,043

16,444

20,215

15,576

516

14,348

69,142

1. Of the total debt securities and accrued interest that have been internally rated and unrated, £2,303m is rated AAA, £2,554m AA, £4,283m A, £3,896m BBB, £179m BB

and below and £156m as other.

161

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements16 Credit risk (continued)
With-profits

As at 31 December 2018

Government securities

Other fixed rate securities

Variable rate securities

Total debt securities

Accrued interest

Loans

Derivative assets

Cash and cash equivalents

Reinsurers’ share of contract liabilities

Other assets

Total

Shareholder

As at 31 December 2017

Government securities

Other fixed rate securities

Variable rate securities

Total debt securities1

Accrued interest

Loans

Derivative assets

Cash and cash equivalents

Reinsurers’ share of contract liabilities

Other assets

Total

Notes

11(i)

11(ii)

Notes

11(i)

11(ii)

AAA
£m

387

228

679

–

AA
£m

1,351

705

373

2,429

–

A
£m

1,353

1,463

238

–

BBB
£m

1,177

1,225

–

689

2,489

1,797

1,264

BB and
below
£m

Internally
rated
other
£m

–

126

–

177

AAA
£m

255

138

453

–

149

–

649

AA
£m

630

626

145

1,401

–

442

172

135

A
£m

1,349

1,431

521

563

205

133

BBB
£m

305

406

–

2,153

2,897

568

BB and
below
£m

Internally
rated
other1
£m

218

271

–

339

146

416

613

172

639

942

2,380

Total
£m

1,539

3,737

712

5,988

301

–

6,483

Total
£m

1,184

3,052

339

4,575

812

1,877

382

1,272

8,986

1. Of the total debt securities and accrued interest that have been internally rated and unrated, £nil is rated AAA, £209m AA, £114m A, £225m BBB, £60m BB and below and

£9m as other.

162

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

Non profit non-unit linked

As at 31 December 2017

Government securities

Other fixed rate securities

Variable rate securities

Lifetime mortgages

Total debt securities1

Accrued interest

Loans

Derivative assets

Cash and cash equivalents

Reinsurers’ share of contract liabilities

Other assets

Total

Notes

11(i)

11(ii)

AAA
£m

576

850

335

–

AA
£m

6,255

3,662

1,641

–

A
£m

12,710

2,235

–

BBB
£m

179

11,918

692

–

1,761

11,558

14,955

12,789

–

318

4,709

167

360

190

2,701

1,295

766

142

–

BB and
below
£m

549

124

–

683

–

1,876

16,693

19,167

14,327

691

Internally
rated
other1
£m

120

7,033

1,086

2,023

Total
£m

7,150

36,722

6,113

2,023

10,262

52,008

–

508

293

1,005

12,094

468

363

4,018

1,718

5,078

1,195

64,848

1. Of the total debt securities and accrued interest that have been internally rated and unrated, £484m is rated AAA, £3,210m AA, £3,029m A, £3,432m BBB, £78m BB and

below and £55m unrated.

With-profits

As at 31 December 2017

Government securities

Other fixed rate securities

Variable rate securities

Total debt securities

Accrued interest

Loans

Derivative assets

Cash and cash equivalents

Reinsurers’ share of contract liabilities

Other assets

Total

Notes

11(i)

11(ii)

AAA
£m

419

577

–

AA
£m

1,669

757

154

2,580

–

168

–

A
£m

1,340

1,428

116

271

–

BBB
£m

1,249

1,307

–

585

2,765

1,915

1,344

100

BB and
below
£m

Internally
rated
other
£m

–

172

–

432

–

209

814

Total
£m

1,903

3,915

344

6,162

116

880

211

7,523

163

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements16 Credit risk (continued)
Impairment
The group reviews the carrying value of its financial assets (other than those held at FVTPL) at each balance sheet date. If the carrying value of a
financial asset is impaired, the carrying value is reduced through a charge to the Consolidated Income Statement. There must be objective evidence
of impairment as a result of one or more events which have occurred after the initial recognition of the asset. Impairment is only recognised if the
loss event has an impact on the estimated future cash flows of assets held at amortised cost or fair value of assets classified as available for sale.

Assets which are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use.

The table below provides information regarding the carrying value of financial assets which have been impaired and the ageing analysis of
financial assets which are past due but not impaired. Unit linked assets have not been included as shareholders are not directly exposed to risk.

Ageing analysis

As at 31 December 20181

Shareholder

Non profit non-unit linked

With-profits

As at 31 December 20171

Shareholder

Non profit non-unit linked

With-profits

Neither past
due nor
impaired
£m

10,940

68,966

6,460

Neither past
due nor
impaired
£m

8,910

64,601

7,485

Past due but not impaired

3-6
months
£m

6 months-
1 year
£m

–

Past due but not impaired

3-6
months
£m

6 months-
1 year
£m

–

0-3
months
£m

286

127

0-3
months
£m

206

Over
1 year
£m

–

Impaired
£m

–

Impaired
£m

–

Carrying
value
£m

11,271

69,142

6,483

Carrying
value
£m

8,986

64,848

7,523

1. Ageing analysis has been adjusted to include cash at bank, and the 2017 balances have also been analysed accordingly.

164

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

Offsetting
Financial assets and liabilities are offset in the Consolidated Balance Sheet when the group has a legally enforceable right to offset and has the
intention to settle the asset and liability on a net basis, or to realise the asset and liability simultaneously.

The group has not entered into any financial transactions resulting in financial assets and liabilities which have been offset in the Consolidated Balance
Sheet. The table below shows the financial assets and liabilities that are subject to master netting agreements in the shareholder, non profit non-unit
linked and with-profits. Unit linked assets and liabilities have not been included as shareholders are not directly exposed to risk.

As at 31 December 2018

Derivative assets

Reverse repurchase agreements

Total

Derivative liabilities

Repurchase agreements

Total

Amounts subject to enforceable netting arrangements

Amounts under master netting arrangements but not offset

Gross and net
amounts reported
in the Consolidated
Balance Sheet
£m

Related
financial
instruments1
£m

4,462

902

5,364

(3,306)

(78)

(3,384)

(2,953)

–

(2,953)

2,953

–

2,953

Cash
collateral
£m

(1,214)

–

(1,214)

109

–

109

Securities
collateral
pledged
£m

(343)

(889)

(1,232)

237

315

Net
amount
£m

(48)

(35)

(7)

–

(7)

1. Related financial instruments represents outstanding amounts with the same counterparty which, under agreements such as the ISDA Master Agreement, could be offset

and settled net following certain predetermined events.

As at 31 December 2017

Derivative assets

Reverse repurchase agreements

Total

Derivative liabilities

Repurchase agreements

Total

Amounts subject to enforceable netting arrangements

Amounts under master netting arrangements but not offset

Gross and net
amounts reported
in the Consolidated
Balance Sheet
£m

Related
financial
instruments1
£m

4,161

795

4,956

(2,357)

(72)

(2,429)

(2,105)

–

(2,105)

2,105

–

2,105

Cash
collateral
£m

(1,272)

–

(1,272)

178

–

178

Securities
collateral
pledged
£m

(751)

(787)

(1,538)

133

Net
amount
£m

(13)

–

(13)

1. Related financial instruments represents outstanding amounts with the same counterparty which, under agreements such as the ISDA Master Agreement, could be offset

and settled net following certain predetermined events.

In the tables above, the amounts of assets or liabilities presented in the Consolidated Balance Sheet are offset first by financial instruments
that have the right of offset under master netting or similar arrangements with any remaining amount reduced by cash and securities collateral.
The actual amount of collateral may be greater than the amounts presented in the tables above.

165

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements17 Insurance risk
The group is exposed to insurance risk as a consequence of offering the principal products outlined in Note 6. Insurance risk is the exposure to
loss arising from experience being different to that anticipated. Detailed below are the risks associated with each of the group’s segments and
the associated controls operated. They are applicable to all stated products across the group.

Principal risks

Division

Controls to mitigate risks

Longevity, mortality & morbidity risks
For contracts providing death benefits, higher mortality
rates would lead to an increase in claims costs. The
cost of health related claims depends on both the
incidence of policyholders becoming ill and the duration
over which they remain ill. Higher than expected
incidence or duration would increase costs over the
level currently assumed in the calculation of liabilities.

For savings contracts providing minimum assured
death benefits, higher mortality rates may result in an
increase in claims costs.

Older contracts containing a basic guaranteed benefit
expressed as an amount of pension payable or a
guaranteed annuity option, expose the group to interest
rate and longevity risk. The cost of guarantees increases
during periods when interest rates are low or when
annuitant mortality improves faster than expected.

For annuity contracts, the group is exposed to the risk
that mortality experience is lower than assumed.
Lower than expected mortality would require
payments to be made for longer and increase the cost
of benefits provided. Lifetime mortgage business also
explicitly has some exposure to the life expectancy of
borrowers.

LGI

Savings1

LGR

Persistency risk
In the early years of a policy, lapses may result in a
loss to the group, as the acquisition costs associated
with the contract would not have been recovered
from product margins.

LGI and
Savings1

The pricing of protection business is based on assumptions as to future trends in mortality and
morbidity having regard to past experience. Underwriting criteria are defined setting out the
risks that are unacceptable and the terms for non-standard risks presented by the lives to be
insured. Extensive use of reinsurance is made within the UK individual protection business,
placing a proportion of all risks meeting prescribed criteria. Mortality and morbidity experience
is compared to that assumed within the pricing basis with variances subject to actuarial
investigation.

The pricing basis for contracts providing minimum assured death benefits include provision for
future trends in mortality based on past experience. The level of mortality risk accepted within
each contract is not sufficiently material to warrant formal underwriting at an individual policy level.

The ultimate cost of basic guarantees provided on older contracts will depend on the take up
rate of any option and the final form of annuity selected by the policyholder. The group has
limited ability to control the take up of these options. However, the book of business itself is
diminishing in size. As at 31 December 2018 the value of guarantees is estimated to be £35m
(31 December 2017: £48m).

Annuity business is priced having regard to trends in improvements in future mortality.
Enhanced annuities, which are priced taking account of impairments to life expectancy, are
subject to specific underwriting criteria. Certain annuitant mortality risks, including enhanced
annuities, are placed with reinsurers. The group regularly reviews its mortality experience and
industry projections of longevity and adjusts the pricing and valuation assumptions accordingly.
In pricing lifetime mortgage business, account is taken of trends in mortality rates in setting the
amounts that are advanced to borrowers relative to the value of the property on which the loan
is secured.

The pricing basis for protection business includes provision for policy lapses. Following the adoption
of PS06/14 in 2006 the persistency assumption for non-participating protection business allows for
the expected pattern of persistency, adjusted to incorporate a margin for adverse deviation. Actual
trends in policy lapse rates are monitored with adverse trends being subject to actuarial
investigation.

For insured contracts, terms and conditions typically include surrender deductions to mitigate the
risk. In later periods, once the acquisition costs have been recouped, the effect of lapses and
surrenders depends upon the relationship between the exit benefit, if any, and the liability for that
contract. Exit benefits are not generally guaranteed and the group has some discretion in
determining the amount of the payment. As a result, the effect on profit in later periods is expected
to be broadly neutral.

1. In December 2017, the group announced the sale of its Mature Savings business to Swiss Re. The sale is subject to regulatory approval and the Part VII transfer is expected

to complete in 2019. Since the announcement the group has entered into a risk transfer agreement with ReAssure Limited (a subsidiary of Swiss Re). Until the Part VII
transfer is completed the insurance risks are effectively transferred to ReAssure Limited by this agreement.

166

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

Principal risks

Division

Controls to mitigate risks

Expense risk
In pricing long term insurance business, assumptions
are made as to the future cost of product servicing. A
significant adverse divergence in actual expenses
experience could reduce product profitability.

Concentration (catastrophe) risk
Insurance risk may be concentrated in geographic
regions, altering the risk profile of the group. The most
significant exposure of this type arises for group
protection business, where a single event could result
in a large number of related claims.

LGR, LGI
and
Savings1

In determining pricing assumptions, account is taken of changes in price indices and the
costs of employment, with stress testing used to evaluate the effect of significant deviations.
Actual product servicing costs are monitored relative to the costs assumed with the product
pricing basis, with variances investigated.

LGI and
General
Insurance

Group protection business contracts include an ‘event limit’ capping the total liability under
the policy from a single event. Excess of loss reinsurance further mitigates loss from the
exposure. For general insurance business, the risk acceptance policy, terms and premiums
reflect expected claims and cost associated with a location and avoids adverse selection.
Additionally, exposure by location is monitored to ensure there is a geographic spread of risk.
Catastrophe reinsurance cover also mitigates loss from concentrations of risk.

Epidemic (catastrophe) risk
The spread of an epidemic could cause large
aggregate claims across the group’s portfolio of
protection businesses.

LGI

Weather events risk
Significant weather events such as windstorms and
coastal and river floods can lead to a higher instance
of claims than anticipated.

General
Insurance

The pricing basis for protection business includes an assessment of potential claims as a result
of epidemic risks. Quota share and excess of loss reinsurance contracts are used by individual
and group protection, respectively, to further mitigate the risk. Depending on the nature of an
epidemic, mortality experience may lead to a reduction in the cost of claims for annuity business.

The financial impacts of significant weather events are managed using excess of loss
catastrophe treaties under which a portion of the costs of claims may be recovered from
external insurers, although the group retains an element of the risk internally. The reinsurance is
designed to provide financial protection against a modelled windstorm and coastal flood event
with a return probability of 1 in 200 years.

Other risks

Subsidence risk
The incidence of subsidence can have a significant
impact on the level of claims on household policies.

General
Insurance

Underwriting criteria for general insurance business includes assessment of subsidence risk,
with an appropriate premium being charged for the risk accepted in line with industry
practice.

1. In December 2017, the group announced the sale of its Mature Savings business to Swiss Re. The sale is subject to regulatory approval and the Part VII transfer is expected

Accumulation of risks
There is limited potential for single incidents to give rise to a large number of claims across the different contract types written by the group. In
particular, there is little significant overlap between the long term and short term insurance business written by the group. However, there are
potentially material correlations of insurance risk with other types of risk exposure. The group’s capital model seeks to measure risk correlations
particularly those that would tend to be more acute as the underlying risk scenarios become more extreme. An example of the accumulation of
risk is the correlation between reinsurer credit risk with mortality and morbidity exposures.

Operational risk
Operational risk is defined as loss arising from inadequate or failed internal processes, people, systems or external events. Potential for exposure
to operational risk extends to all the group’s businesses. The group has constructed a framework of internal controls to minimise material loss from
operational risk events recognising that no system of internal control can completely eliminate the risk of error, financial loss, fraudulent action or
reputational damage.

167

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements18 Long term insurance valuation assumptions
The group’s insurance assumptions, described below, relate primarily to the UK insurance business. Assumptions have also been included for
material lines of the US insurance business, Legal & General America (LGA). Other non-UK businesses do not constitute a material component
of the group’s operations and consideration of geographically determined assumptions is therefore not included.

Sale of Mature Savings
In December 2017 the group announced the sale of its Mature Savings business to Swiss Re. The sale is subject to regulatory approval and
the Part VII transfer is expected to complete in 2019. The group has entered into a Risk Transfer Agreement with ReAssure Limited (a subsidiary
of Swiss Re) until a formal legal transfer of the business to Swiss Re is complete. Shareholder economic exposure to the with-profits fund is
effectively transferred to ReAssure Limited by this agreement. As a result the assets and liabilities (including long term liabilities) of the Mature
Savings business have been reclassified as held for sale on the balance sheet.

(i) Non-participating business
For its non-participating business the group seeks to make prudent assumptions about its future experience based on current market conditions
and recent experience. The approach used to set non-participating assumptions is generally similar to that previously used to determine the
assumptions used for Solvency I. There are no material changes in this approach as a result of the Solvency II regulatory regime, which came into
effect on 1 January 2016, except for the use of term and whole of life mortality improver assumptions. Assumptions incorporate prudent margins in
excess of our best estimate assumptions to reduce the possibility of actual experience being less favourable than assumed. The assumptions
for with-profits unit-linked products continue to be on a best estimate basis, materially similar to that previously used under Solvency I (Peak 2).

Valuation rates of interest and discount rates
The valuation interest rate for each contract type is based on the yield on the assets backing the contract adjusted for the risk that asset proceeds
are not received by the group. For some business, this yield is the gross redemption yield or appropriate forward yield on fixed interest securities
and the running yield on variable interest securities. For other business it is the Internal Rate of Return on the portfolio of backing assets.

In 2018, the group continued to hold an additional reserve to protect against the risk on assets backing its UK annuity business of an uplift in
defaults in the current economic environment and maintained the level of the long term default allowance at 42bps per annum (2017: 42bps) for
unapproved securities and property backing non-profit business. For approved securities backing the non-profit annuity business, the allowance is
9bps per annum (2017: 9bps). For unapproved securities backing non-profit annuity business, the credit default allowances equate to 51bps per
annum (2017: 54bps) when expressed over the duration of the assets held, leading to an overall total default provision of £2.9bn (2017: £2.7bn).

The group believes this total default allowance is prudent to cover all reasonably foreseeable circumstances. Similar allowances are made for the
risk of default of fixed income securities backing other portfolios of liabilities.

For equity investments, the yield is based on the current dividend yield, adjusted for prudence.

For property holdings, yields are based on the rental income payable.

Mortality and morbidity
Mortality and morbidity assumptions for the UK business are set with reference to standard tables drawn up by the Continuous Mortality
Investigation Bureau (CMIB), a subsidiary of the Institute and Faculty of Actuaries, and/or UK death registrations. US assumptions are set with
reference to standard tables drawn up by the American Academy of Actuaries. Assumptions include an appropriate allowance for prudence. Tables
are based on industry-wide mortality and morbidity experience for insured lives.

The group conducts statistical investigations of its mortality and morbidity experience, the majority of which are carried out at least annually.
Investigations determine the extent to which the group’s experience differs from that underpinning the standard tables, and suggest appropriate
adjustments which need to be made to the valuation assumptions.

Persistency
The group monitors its persistency experience and carries out detailed investigations annually. Persistency experience can be volatile and past
experience may not be an appropriate future indicator.

The group tries to balance past experience and potential future conditions by making prudent assumptions about expected long term average
persistency levels.

For non-participating contracts where explicit persistency assumptions are not made, prudence is also incorporated into the liabilities by ensuring
that they are sufficient to cover the more onerous of the two scenarios where the policies either remain in-force until maturity or where they
discontinue at the valuation date.

Expenses
The group monitors its expense experience and carries out detailed investigations regularly to determine the expenses incurred in writing and
administering the different products and classes of business. Adjustments may be made for known future changes in the administration processes,
in line with the group’s business plan. An allowance for expense inflation in the future is also made, taking account of both salary and price
information. The expense assumptions also include an appropriate allowance for prudence.

Premiums
For those contracts where the policyholder does not have the right to vary the amount of the premium paid, full credit is taken for the premiums
contractually due at the valuation date. For contracts where the policyholder has the option to vary the rate of premium, the provision is taken as being
the higher of the amount calculated as if the policyholder continues to make premium payments or, alternatively, ceases to pay premiums altogether.

168

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

(ii) Participating business
For its participating business, the group seeks to establish its liabilities at their realistic value in line with the requirements set out in UK
Generally Accepted Accounting Principles (GAAP).

Non-economic assumptions
Non-economic assumptions are set to represent the group’s best estimates of future experience.

Premiums
For those contracts where the policyholder does not have the right to vary the amount of the premium paid, full credit is taken for the premiums
contractually due at the valuation date. For contracts where the policyholder has the option to vary the rate of premium, the provision is taken as
being the higher of the amount calculated as if the policyholder continues to make premium payments or, alternatively, ceases to pay premiums
altogether.

Economic assumptions
Realistic reporting requires a market consistent economic model. The model is calibrated using market data from a variety of market sources. This
enables assumptions to be determined for the term structure of risk free interest rates, and for property and equity volatility. Risk free interest rates
are determined with reference to the swap yield curve on the valuation date less a credit risk adjustment (CRA) of 10bps for 2018 (2017: swap yield
curve on the valuation date less a CRA of 10bps).

Property volatility is set with reference to historic variations in property prices. Equity volatility is set so that the model reproduces observed market
prices of traded equity derivatives. Correlations between asset classes are based on historic data.

Each investment scenario contains a consistent set of assumptions for investment returns and inflation.

Future bonuses
Future reversionary and terminal bonuses are consistent with the bonus policies set out in the Legal and General Assurance Society Limited’s
(LGAS) Principles and Practices of Financial Management (PPFM).

Guaranteed annuity options
The guarantees are valued on a market consistent basis. The valuation methodology allows for the correlation between interest rates and the
proportion of the policyholders who take up the option.

Guaranteed cash options
The liability is determined assuming that policyholders choose the most valuable alternative between the annuity and cash available at retirement.

Value of in-force non-participating contracts
The group makes a deduction from the liabilities for the expected value of future profits arising on non-participating contracts written in the
with-profits part of the LGAS Long Term Fund.

The economic assumptions used to calculate the value of these profits are consistent with those used to calculate liabilities for with-profits
business. Non-economic assumptions represent best estimates of expected future experience on this business.

169

Rate of interest/discount rates

Non-participating business

– Life assurances1

– Pension assurances1

– Annuities in deferment

– Annuities in deferment (RPI-linked; net rate after allowance for inflation)

– Vested annuities

– Vested annuities (RPI-linked; net rate after allowance for inflation)

– US annuities2

– US term assurances3

Participating business

Risk free rate (10 years)

Future bonuses

UK equity volatility (10 year option term)

Property volatility

Mortality tables

Non-participating business

Non-linked individual term assurances 4:

– Smokers

– Non-smokers

Non-linked individual term assurances with terminal illness4,5

– Smokers

– Non-smokers

Non-linked individual term assurances with critical illness (Sold until 31/12/2012)6

– Smokers

– Non-smokers

Non-linked individual term assurances with critical illness (Sold from 01/01/2013)6

– Smokers

– Non-smokers

Whole of Life Protection Plan7

– Smokers

– Non-smokers

Whole of Life over 507

Annuities in deferment8

Vested annuities9

– Pension risk transfer

– Other annuities

US annuities

US term assurances10

170

2018

2017

1.47% p.a. and 3.42% p.a.

1.38% p.a. and 3.30% p.a.

1.50% p.a. and 3.37% p.a.

1.25% p.a. and 3.30% p.a.

2.61 % p.a.

(0.84)% p.a.

2.61% p.a.

(0.84)% p.a.

4.17%

2.22% p.a.

(1.19)% p.a.

2.22% p.a.

(1.19)% p.a.

3.32%

2.85% - 3.57%

2.71% - 3.38%

1.35% p.a.

1.19% p.a.

Determined stochastically in line
with bonus policy as stated in
PPFM

Determined stochastically in line with
bonus policy as stated in PPFM

18.05%

15.00%

20.83%

15.00%

117% TMS08/TFS08 Sel 5

92% TMS00/TFS00 Sel 5

107% TMN08/TFN08 Sel 5

80% TMN00/TFN00 Sel 5

70% - 105% TMS08/TFS08 Sel 5

65% - 85% TMS00/TFS00 Sel 5

88% - 106% TMN08/TFN08 Sel 5

57% - 81% TMN00/TFN00 Sel 5

120% - 143% ACSL04M/F

121% - 145% ACSL04M/F

126% - 151% ACNL04M/F

120% - 144% ACNL04M/F

124% - 145% ACSL04M/F Sel 2

125% - 147% ACSL04M/F

131% - 177% ACNL04M/F Sel 2

123% - 175% ACNL04M/F

Bespoke tables based on TMS08/
TFS08, AM92/AF92 and UK death
registrations

Bespoke tables based on TMS00/
TFS00, AM92/AF92 and UK death
registrations

Bespoke tables based on TMN08/
TFN08, AM92/AF92 and UK death
registrations

Bespoke tables based on TMN00/
TFN00, AM92/AF92 and UK death
registrations

Bespoke tables based on ELT15,
Whole of Life Protection Plan
assumptions and UK death
registrations

Bespoke tables based on ELT15, Whole
of Life Protection Plan assumptions and
UK death registrations

75.6% - 84.2% PNMA00/PNFA00

75.6% - 84.0% PNMA00/PNFA00

76.4% - 84.2% PCMA00/PCFA00

76.4% - 84.0% PCMA00/PCFA00

59.7% - 108.8% PCMA00/PCFA00

60.9% - 115.5% PCMA00/PCFA00

Bespoke tables based on RP-2014

Healthy Annuitant Total table

Bespoke tables based on SOA 2014

VBT

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

1. A single rate is used if liabilities are negative (2018: 3.42% for Life and 3.37% for Pensions; 2017: 3.30% for both Life and Pensions) or positive (2018: 1.50% gross (for
Pension assurance) and 1.85% gross or 1.47% net (for Life assurance); 2017: 1.25% gross (for Pension assurance) and 1.73% gross or 1.38% net (for Life assurance))
throughout. The table above shows the assumption of the dominant product for the positive liabilities and the single rate for the negative liabilities. An appropriate
valuation interest rate is applied at all times during the projection, i.e. when liabilities switch from being negative to positive the valuation interest rate will also switch
from being high to low. The crossover point at which the margin changes direction is assessed for broad product groups but applied at a policy by policy level.
2. The valuation interest rate is the internal rate of return on the portfolio of backing assets and includes prudent adjustments for investment expense, default and

(re)investment risk.

3. The valuation interest rate is derived by combining the risk free yield curve (based on the USD curve specified by EIOPA for Solvency II) plus a risk adjusted spread

addition based on the portfolio of assets LGA invest in. It includes prudent adjustments for investment expense, default and (re)investment risk.

4. Improvement assumptions applied for 2018 of 1% for males and females (2017: no improvement assumption applied).
5. The percentage of the table varies with the duration that the policy has been in force for the first five years.
6. The percentage of the table varies with the duration that the policy has been in force for the first two years. For term assurance with critical illness, morbidity rates are

assumed to deteriorate at a rate of 0.50% p.a. for males and 0.75% p.a. for females (2017: 0.50% p.a. for males and 0.75% p.a. for females). There is an additive loading of
1.00% (2017: 1.00%) for guaranteed term contracts post policy duration 5.

7. Mortality rates are assumed to reduce based on CMI2014 model with a long term annual improvement rate of 1.5% for males and 1.0% for females (2017:Mortality rates
are assumed to reduce whilst business is ceded to reinsurer where longevity risk exists (after which any reduction is maintained but no further reduction is applied)
based on CMI2014 model with a long term annual improvement rate of 1.5% for males and 1.0% for females).

8. Table created by blending PCXA00 with PNXA00 tables. The base table to be used for bulk purchase annuity policies in deferment is PNMA00 up to and including age 55

and PCMA00 for age 65 and above for males. The identical method is applied to females using PNFA00 and PCFA00.

9. Mortality rates are assumed to reduce according to an adjusted version of CMIB’s mortality improvement model; CMI 2016 (2017: CMI 2015) with the following

parameters:
Males: A best estimate Long Term Rate of 1.50% p.a. up to age 85 tapering to 0% at 110 plus margins equivalent to a further 0.5% addition to the Long Term Rate, together
with a further uplift of 0.048% to all future improvement rates. (2017: A best estimate Long Term Rate of 1.50% p.a. up to age 85 tapering to 0% at 120 plus margins
equivalent to a further 0.5% addition to the Long Term Rate together with a further uplift of 0.064% to all future improvement rates.)
Females: A best estimate Long Term Rate of 1.00% p.a. up to age 85 tapering to 0% at 110 plus margins equivalent to a further 0.5% addition to the Long Term Rate,
together with a further uplift of 0.048% to all future improvement rates. (2017: A best estimate Long Term Rate of 1.00% p.a. up to age 85 tapering to 0% at 120 plus
margins equivalent to a further 0.5% addition to the Long Term Rate together with a further uplift of 0.064% to all future improvement rates.)
Smoothing is applied to derive initial rates using a smoothing parameter (Sk) value of 7.5 applied to population data from 1981 to 2016. (2017: Earlier CMI models did not
require an explicit smoothing parameter to be set, population dataset 1971 - 2015).
Different business classes have different effective dates for applying improvers.
For individual annuities distributed through retail channels, a further allowance is made for the effect of initial selection.
The basis above is applicable up to age 90. After age 90 the basis is blended towards a bespoke table from age 105 onwards (2017: After age 90 the basis is blended
towards a bespoke table from age 105 onwards).

10.For LGA business, the mortality rates are based on the SOA 2014 Valuation Basic Table (VBT). Adjustments are made for sex, select period, smoker status, policy size,

policy duration and year, issue year and age.

171

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements18 Long term insurance valuation assumptions (continued)
(iii) Long term valuation assumptions (continued)
Persistency assumptions
Lapse rates assumptions are used in the valuation of certain classes of long term business. Where this is the case, the valuation persistency basis is
set by applying a prudential margin over the best estimate assumptions. The tables below show the major products where lapse rates have been used.

For UK term assurance business, the margin acts to increase the best estimate lapse rate in the early part of a policy’s lifetime (when it is treated as an
asset) but to reduce the best estimate lapse rate later in the policy’s lifetime (when it is treated as a liability). The crossover point at which the margin
changes direction is assessed for broad product groups but applied at a policy by policy level. Any liability to reinsurers on discontinuance within the first
four years from inception is allowed for explicitly in the cash flows, using the valuation lapse basis, together with a prudent allowance for clawback of
commission from agents upon lapse.

For unitised business, the margin acts to either increase or decrease the best estimate lapse rates, depending upon which approach results in the
higher liability. The direction of the margin is assessed for unit life business and unit pensions business separately.

A summary of the lapse basis for major classes of non-profit business is shown below. The lapse rates for unit linked business represent the
decrement from in-force to surrender.

For US term assurance, a single margin is used across guaranteed period durations for a given policy. All US term assurance contracts are assumed
to lapse at the end of the guaranteed period. Policies past the guaranteed period as of the valuation date are assumed to lapse on the next
premium due date.

2018 Average lapse rate for the policy years

1-5
%

9.1

10.4

12.9

–

2.0

2.7

4.3

2.5

2.2

2.1

6-10
%

5.1

9.4

8.9

5.9

0.8

7.0

4.7

2.2

1.7

11-15
%

16-20
%

3.6

8.5

6.0

4.6

0.7

3.7

n/a

3.2

1.6

1.4

3.2

8.4

5.2

4.2

0.7

3.4

n/a

2.5

1.1

2017 Average lapse rate for the policy years

1-5
%

9.7

9.5

13.0

–

3.5

2.2

4.6

2.6

2.4

2.3

6-10
%

4.7

9.2

9.0

5.9

0.8

6.9

5.2

2.6

2.0

1.9

11-15
%

16-20
%

3.1

7.8

5.2

4.5

0.7

3.9

n/a

3.0

1.5

1.6

3.0

7.7

4.9

4.4

0.7

3.4

n/a

2.0

1.6

Product

Level term

Decreasing term

Accelerated critical illness cover

Pensions term

Whole of Life (conventional non profit)

Bond (unit linked non profit)

US term – 10 year guarantee period

US term – 15 year guarantee period

US term – 20 year guarantee period

US term – 30 year guarantee period

Product

Level term

Decreasing term

Accelerated critical illness cover

Pensions term

Whole of Life (conventional non profit)

Bond (unit linked non profit)

US term – 10 year guarantee period

US term – 15 year guarantee period

US term – 20 year guarantee period

US term – 30 year guarantee period

172

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

For with-profits business, the realistic valuation was the biting basis under the previous Solvency I regime and therefore detail of the long term best
estimate lapse rates is given below for unitised with-profits (UWP) and unit linked non-participating products. The lapse rates for unit linked
business represent the decrement from in-force to surrender.

Product

Savings endowment (unitised with-profits)

Target cash endowment (unitised with-profits)

Savings endowment (unit linked non-participating)

Target cash endowment (unit linked non-participating)

Bond (unitised with-profits)

Bond (unit linked non-participating)

Individual pension regular premium (unitised with-profits)

Individual pension regular premium (unit linked non-participating)

Group pension regular premium (unitised with-profits)

Group pension regular premium (unit linked non-participating)

Individual pension single premium (unitised with-profits)

Individual pension single premium (unit linked non-participating)

Group pension single premium (unitised with-profits)

Group pension single premium (unit linked non-participating)

Trustee Investment Plan single premium (unitised with-profits)

Trustee Investment Plan single premium (unit linked non-participating)

Product

Savings endowment (unitised with-profits)

Target cash endowment (unitised with-profits)

Savings endowment (unit linked non-participating)

Target cash endowment (unit linked non-participating)

Bond (unitised with-profits)

Bond (unit linked non-participating)

Individual pension regular premium (unitised with-profits)

Individual pension regular premium (unit linked non-participating)

Group pension regular premium (unitised with-profits)

Group pension regular premium (unit linked non-participating)

Individual pension single premium (unitised with-profits)

Individual pension single premium (unit linked non-participating)

Group pension single premium (unitised with-profits)

Group pension single premium (unit linked non-participating)

Trustee Investment Plan single premium (unitised with-profits)

Trustee Investment Plan single premium (unit linked non-participating)

2018 Average lapse rate for the policy years

1-5
%

–

1.6

–

4.4

5.0

6-10
%

–

5.6

1.1

4.4

5.4

11-15
%

16-20
%

1.0

4.6

1.0

4.6

5.1

3.0

4.4

5.0

4.0

4.3

4.0

4.3

3.7

5.5

4.4

4.9

13.2

13.7

13.9

3.8

3.3

4.4

6.1

16.2

–

5.4

3.4

4.8

5.7

12.0

13.7

6.2

3.3

4.4

5.6

11.4

15.0

6.2

3.3

4.2

5.6

10.6

15.0

2017 Average lapse rate for the policy years

1-5
%

–

1.6

–

4.4

5.0

6-10
%

–

5.6

1.1

4.4

5.5

11-15
%

16-20
%

1.0

4.6

1.0

4.6

5.1

3.0

4.4

5.0

4.0

4.3

4.0

4.3

3.7

5.5

4.4

4.9

13.6

14.0

14.2

3.9

3.3

4.4

6.1

16.0

2.7

5.5

3.4

4.8

5.8

11.9

19.5

6.3

3.3

4.4

5.7

11.3

13.4

6.3

3.3

4.2

5.7

10.5

13.4

1. The 2017 lapse rates have been restated as they did not accurately reflect the rates used in the calculation of insurance contract liabilities for the year ended 31 December

2017. There is no impact on the group’s primary statements.

Endowment reserve
The endowment reserve has been set taking reasonable account of assessment of the expected future population of complaints, the expected
uphold rate for these complaints, the potential impact of any Financial Ombudsmen Service decisions on referred complaints and the average
compensation per complaint.

Overseas business
In calculating the long term business provisions for international long term business operation, local actuarial tables and interest rates are used.

173

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements19 IFRS sensitivity analysis

Economic sensitivity

Long-term insurance

100bps increase in interest rates1

50bps decrease in interest rates1

50bps increase in future inflation expectations

Credit spreads widen by 100bps with no change in expected defaults

25% rise in equity markets

25% fall in equity markets

15% rise in property values

15% fall in property values

10bps increase in credit default assumptions

10bps decrease in credit default assumptions

Non-economic sensitivity

Long-term insurance

1% increase in annuitant mortality

1% decrease in annuitant mortality

5% increase in assurance mortality1

General insurance

Impact on
pre-tax group
profit net of
re-insurance
2018
£m

Impact on
group equity
net of
re-insurance
2018
£m

Impact on
pre-tax group
profit net of
re-insurance
2017
£m

Impact on
group equity
net of
re-insurance
2017
£m

384

(220)

(138)

458

(459)

738

(761)

(551)

558

157

(147)

(375)

209

(122)

(213)

399

(399)

606

(623)

(446)

451

192

(183)

(298)

195

(126)

(108)

514

(443)

408

(441)

(477)

469

186

(178)

(49)

(45)

(172)

456

(399)

346

(373)

(383)

377

197

(191)

(37)

Single storm event with 1 in 200 year probability2

(235)

(190)

(221)

(179)

1. Sensitivities have been calculated in accordance with the new reserving basis for term assurance business in LGIA adopted from 1 January 2018, which now uses current

information where applicable. Further details on this change in accounting policy are provided in Note 1.

2. Sensitivity shows the ultimate cost to the group taking in to account intra group reassurance arrangements. Sensitivities in 2017 showed the impact on Legal & General

Insurance Limited alone and have been restated to be on a consistent basis.

174

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

The table on page 174 shows the impacts on group pre-tax profit and equity, net of reinsurance, under each sensitivity scenario. The group has
aligned sensitivity analysis disclosure requirements across various reported metrics, primarily for interest rate, equity, property value, and annuitant
mortality. The current disclosure also reflects management’s view of key risks in current economic conditions.

For the year ended 31 December 2017, US term assurance liabilities were calculated on a US GAAP basis which takes a more passive approach to
assumption setting. The economic and demographic assumptions set at inception were assumed to be unchanged under the sensitivities specified,
making the liabilities insensitive to changes in assumptions. Following a change in accounting policy for these liabilities during 2018 (see Note 1 for
details) to bring them in line with how similar products are accounted for in other parts of the business, a gross premium valuation methodology has
been used, and assumptions are now set on the basis of current information. This change in accounting policy has a significant impact on the
interest rate and assurance mortality assumption stresses for the US term assurance liabilities.

The interest rate sensitivity assumes a 100bps increase, and 50bps decrease, in the gross redemption yield on fixed interest securities together
with a 100bps and 50bps change in the real yields on variable securities for respective sensitivity analyses. The interest rate sensitivities reflect
the impact of the regulatory restrictions on the reinvestment rate used to value the liabilities of the long term business. No yield floors have been
applied in the estimation of the stresses, despite the current low interest rate environment.

The inflation stress adopted is a 50bps p.a. increase in inflation resulting in a 50bps p.a. reduction in real yield and no change to the nominal yield.
In addition the expense inflation rate is increased by 50bps p.a. In the sensitivity for credit spreads, corporate bond yields have increased by 100bps,
gilt and approved security yields are unchanged, and there has been no adjustment to the default assumptions.

The equity stress is a +/- 25% in equity values. The property stress adopted is a +/-15% in property market values. Rental income is assumed to
be unchanged; however the vacant possession value is stressed down by 15% in line with the market value stress. Where property is being used
to back liabilities, the valuation interest rate used to place a value on the liabilities moves with the implied change in property yields.

The credit default stress assumes a +/-10bps stress to the current credit default assumptions for unapproved corporate bonds which will have an
impact on the valuation interest rates used to discount liabilities. The credit default assumption is set based on the credit rating of the individual
bonds in the asset portfolio and their outstanding term using Moody’s global credit default rates.

The annuitant mortality stress is a +/-1% in the mortality rates for immediate and deferred annuitants with no change to the mortality
improvement rates. The assurance mortality stress represents an increase in mortality/morbidity rates for assurance contracts by 5%.

The group has external weather catastrophe reinsurance in place such that for any single weather event with claims up to £600m (2017: £520m)
the ultimate cost of claims is limited to £200m. Intra group reinsurance means for losses in excess of £50m (2017: £30m) but less than £600m
(2017: £520m) the cost of claims in Legal & General Insurance Limited would be £25m. (2017: £30m plus 50% of a £5m excess £30m layer).
Legal and General Assurance Society Limited is exposed to 93% of claims between £50m and £120m (2017: £35m to £105m) and Legal &
General Reinsurance Limited is exposed to 85% of claims between £120m and £220m (2017: 71% of claims between £105m and £225m). An
event costing £600m is approximately equivalent to (but slightly lower than) the end-2018 modelled 1 in 200 year loss. In addition to the cost of
claims the group would also incur additional claims handling costs and the cost of reinstatement premiums.

The above sensitivity analyses do not reflect management actions which could be taken to reduce the impacts. The group seeks to actively
manage its asset and liability position. A change in market conditions may lead to changes in the asset allocation or charging structure which may
have a more, or less, significant impact on the value of the liabilities. The analyses also ignore any second order effects of the assumption change,
including the potential impact on the group asset-liability position and any second order tax effects. In calculating the alternative values, all other
assumptions are left unchanged, though in practice, items may be correlated. The sensitivity of the profit and equity to changes in assumptions
may not be linear. These results should not be extrapolated to changes of a much larger order, which could be significantly more or less than
the amounts shown on page 174.

175

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements20 Insurance contract liabilities

Insurance contracts are contracts which transfer significant insurance risk to the insurer at the inception of the contract. This is the case if, and only
if, an insured event could cause an insurer to make significant additional payments in any scenario, other than a scenario which lacks commercial
substance. Such contracts remain insurance contracts until all rights and obligations are extinguished or expire. Contracts can be reclassified as
insurance contracts after inception if insurance risk becomes significant. Any contracts not considered to be insurance contracts under IFRS are
classified as investment contracts.

A number of insurance and investment contracts contain discretionary participating features (DPF) which entitle the policyholders to receive
guaranteed benefits as well as additional benefits:

• the amount or timing of which is contractually at the discretion of the group; and

• which are contractually based on:

– the performance of a specified pool of contracts or a specified type of contract;

– realised and/or unrealised investment returns on a specified pool of assets held by the issuer; or

– the profit or loss of the company, fund or other entity which issues the contract.

Contracts with DPF are referred to as participating contracts. With-profits contracts in the UK are classified as participating.

Long term insurance
Death claims are accounted for on notification of death. Surrenders for non-linked policies are accounted for when payment is made. Critical illness
claims are accounted for when admitted. All other long term claims and surrenders are accounted for when payment is due. Claims payable include
the direct costs of settlement.

The change in the insurance liability reflects the reduction in liabilities due to the payment of claims in the year, offset by liabilities arising from
new business. The movement also reflects assumption changes relating to variables such as claims expectations, expenses and the unwind of the
previous period’s expectations.

Under current IFRS requirements, insurance contract liabilities are measured using local Generally Accepted Accounting Principles (GAAP),
as permitted by IFRS 4, ‘Insurance contracts’.

UK
For non-participating insurance contracts, the liabilities are calculated on the basis of current information using the gross premium valuation
method. This brings into account the full premiums receivable under contracts written, having prudent regard to expected lapses and surrenders,
estimated renewal and maintenance costs, and contractually guaranteed benefits. For unit linked insurance contract liabilities the provision is based
on the fund value together with an allowance for any excess of future expenses over charges where appropriate.

For participating contracts, the liabilities to policyholders are determined on a realistic basis in accordance with guidance previously set out in
Financial Reporting Standard (FRS) 27, ‘Life assurance’. Although FRS 27 is no longer an operational standard, the group has grandfathered the
provisions into its IFRS reserving methodology. This includes an assessment of the cost of any future options and guarantees granted to
policyholders valued on a market consistent basis. The calculation also takes account of bonus decisions which are consistent with Legal and
General Assurance Society Limited’s Principles and Practices of Financial Management (PPFM). The shareholders’ share of the future cost of
bonuses is excluded from the assessment of the realistic liability.

In determining the realistic value of liabilities for participating contracts, the value of future profits on non-participating business written in the
with-profits part of the fund is accounted for as part of the calculation. The present value of future profits (PVFP) for this business is separately
determined and its value is deducted from the sum of the liabilities for participating contracts and the unallocated divisible surplus.

Unitised liabilities are recognised when premiums are received and non-unitised liabilities are recognised when premiums are due.

Following the group’s announcement in December 2017 to sell Mature Savings business to Swiss Re the participating insurance contract liabilities,
which is part of Mature Savings business, has been classified as held for sale.

Overseas
All annuity and term assurance business written by overseas subsidiaries is recognised and measured in line with those written in the UK. All other
long term insurance contract liabilities for business transacted by overseas subsidiaries are determined on the basis of recognised actuarial
methods which reflect local supervisory principles or, in the case of the US, on the basis of US GAAP.

General insurance
Liabilities, together with related reinsurance recoveries, are established on the basis of current information. Such liabilities can never be definitive
as to their timing or the amount of claims and are therefore subject to subsequent reassessment on a regular basis. Claims and related reinsurance
recoveries are accounted for in respect of all incidents up to the year end. Provision is made on the basis of available information for the estimated
ultimate cost, including claims settlement expenses, claims reported but not yet settled and claims incurred but not yet reported. An unexpired risk
provision is made for any overall excess of expected claims and deferred acquisition costs over unearned premiums and after taking account of
investment return.

Liability adequacy tests
The group performs liability adequacy testing on its insurance liabilities to ensure that the carrying amount of liabilities (less related deferred
acquisition costs) is sufficient to cover current estimates of future cash flows. When performing the liability adequacy test, the group discounts all
contractual cash flows and compares this amount with the carrying value of the liability. Any deficiency is immediately charged to the Consolidated
Income Statement, initially reducing deferred acquisition costs and then by establishing a provision for losses.

176

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

Reinsurance
The group’s insurance subsidiaries cede insurance premiums and risk in the normal course of business in order to limit the potential for losses
and to provide financing. Outwards reinsurance premiums are accounted for in the same accounting period as the related premiums for the direct
or inwards reinsurance business being reinsured. Reinsurance assets include balances due from reinsurers for paid and unpaid losses and loss
adjustment expenses, ceded unearned premiums and ceded future life policy benefits. Amounts recoverable from reinsurers are estimated in a
manner consistent with the claim liability associated with the reinsured policy. Reinsurance is recorded as an asset in the Consolidated Balance
Sheet unless a right of offset exists, in which case the associated liabilities are reduced commensurately.

Contracts with reinsurers are assessed to determine whether they contain significant insurance risk. Contracts that do not give rise to significant
transfer of insurance risk to the reinsurer are considered to be financial reinsurance and are accounted for and disclosed in a manner consistent
with financial instruments.

(i) Analysis of non-participating insurance contract liabilities

Non-participating insurance contracts

General insurance contracts

Total non-participating insurance contract liabilities

Less: liabilities of operations classified as held for sale2

Insurance contract liabilities

Gross
2018
£m

Reinsurance
2018
£m

Gross1
2017
£m

Reinsurance
2017
£m

65,301

(4,723)

62,145

(5,316)

346

(10)

291

(8)

65,647

(4,733)

62,436

(5,324)

(940)

(1,128)

64,707

(4,685)

61,308

(5,276)

1. Following the change in accounting policy for LGIA term life reserves the gross non-participating insurance contract liabilities and the related reinsurance have
been restated. The net impact of the restatement is a reduction of £1,010m in gross non-participating insurance contract liabilities and £158m in reinsurance.
Further details on the change in accounting policy is provided in Note 1.

2. Detailed disclosure relating to liabilities of operations held for sale is included in Note 27.

(ii) Expected non-participating insurance contract liability cash flows

As at 31 December 2018

Non-participating insurance contracts

General insurance contracts1

Date of undiscounted cash flows

0-5
years
£m

5-15
years
£m

15-25
years
£m

13,626

25,819

19,535

130

–

Over 25
years
£m

19,673

–

Total
£m

78,653

132

Non-participating insurance contract liabilities

13,756

25,821

19,535

19,673

78,785

As at 31 December 2017

Non-participating insurance contracts

General insurance contracts1

Date of undiscounted cash flows

0-5
years
£m

5-15
years
£m

15-25
years
£m

10,943

22,459

16,967

–

Over 25
years
£m

17,955

–

Total
£m

68,324

Non-participating insurance contract liabilities

11,038

22,460

16,967

17,955

68,420

1. Excludes unearned premium reserve of £204m (2017: £187m) for which there are no cash flows.

Non-participating insurance contract undiscounted cash flows are based on the expected date of settlement.

Amounts under unit linked contracts are generally repayable on demand and the group is responsible for ensuring there is sufficient liquidity within
the asset portfolio to enable liabilities to unit linked policyholders to be met as they fall due. However, the terms of funds investing in less liquid
assets permit the deferral of redemptions for predefined periods in circumstances where there are not sufficient liquid assets within the fund to
meet the level of requested redemptions. Accordingly, unit linked liabilities have been excluded from the table.

177

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements20 Insurance contract liabilities (continued)
(iii) Movement in non-participating insurance contract liabilities

As at 1 January

New liabilities in the year

Liabilities discharged in the year

Unwinding of discount rates

Effect of change in non-economic assumptions

Effect of change in economic assumptions

Change in accounting policy1

Foreign exchange adjustments

Modelling and methodology changes

Other

Total as at 31 December

Less: liabilities of operations classified as held for sale2

As at 31 December

Expected to be settled within 12 months (net of reinsurance)3

Expected to be settled after 12 months (net of reinsurance)3

Gross
2018
£m

Reinsurance
2018
£m

62,145

9,622

(3,399)

1,385

(1,912)

(2,729)

–

222

(68)

(5,316)

(743)

263

(136)

1,181

117

–

(21)

(72)

Gross1
2017
£m

60,511

4,809

(3,006)

1,458

(663)

789

(1,010)

(306)

(456)

Reinsurance1
2017
£m

(5,297)

(932)

208

(154)

193

(123)

158

568

65,301

(4,723)

62,145

(5,316)

(940)

64,361

1,557

59,021

(1,128)

(4,675)

61,017

1,777

55,052

(5,268)

1. Change in accounting policy represents the cumulative impact of the retrospective change in accounting policy related to LGIA term assurance reserves, described in Note 1.
2. Detailed disclosure related to the liabilities of operations classified as held for sale is included in Note 27.
3. The expected maturity analysis between within and after 12 months is based on the Total non-participating insurance contract liabilities and reinsurance as at 31 December.

(iv) Analysis of general insurance contract liabilities

Outstanding claims

Claims incurred but not reported

Unearned premiums

General insurance contract liabilities

(v) Movement in general insurance claim liabilities

As at 1 January

Claims arising

Claims paid

Adjustments to prior year liabilities

As at 31 December

Expected to be settled within 12 months (net of reinsurance)

Expected to be settled after 12 months (net of reinsurance)

(vi) Unearned premiums

As at 1 January

Earned in the year

Gross written premiums in respect of future periods

As at 31 December

Expected to be earned within 12 months (net of reinsurance)

Expected to be earned after 12 months (net of reinsurance)

178

Gross
2018
£m

Reinsurance
2018
£m

213

346

(1)

–

(9)

(10)

Gross
2018
£m

Reinsurance
2018
£m

(1)

Reinsurance
2018
£m

(7)

(17)

(9)

238

(205)

133

101

Gross
2018
£m

194

(390)

409

213

204

–

Reinsurance
2017
£m

(1)

–

(7)

(8)

Reinsurance
2017
£m

(2)

(1)

Reinsurance
2017
£m

(7)

(14)

(7)

Gross
2017
£m

194

291

Gross
2017
£m

172

(176)

Gross
2017
£m

172

(346)

368

194

187

–

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

(vii) Claims development – general insurance
Changes may occur in the amount of the group’s obligations at the end of a contract period. The top section of each table below illustrates how the
estimate of total claims outstanding for each accident year developed over time. The bottom section of the table reconciles the cumulative claims to
the amount appearing in the Consolidated Balance Sheet.

Gross of reinsurance

Accident year

Estimate of ultimate claims costs:

– At end of accident year

– One year later

– Two years later

– Three years later

– Four years later

Estimate of cumulative claims

Cumulative payments

Outstanding claims provision

Total outstanding claims provision

Prior year outstanding claims

Claims handling provision

2014
£m

169

163

161

163

164

(162)

2015
£m

172

158

(156)

2016
£m

152

145

146

(142)

2017
£m

169

164

(151)

Total claims liabilities recognised in the Consolidated Balance Sheet

No net of reinsurance claim development table has been presented as it would not be materially different from the gross claims development table above.

21 Investment contract liabilities

2018
£m

235

(125)

110

131

133

Under current IFRS requirements, participating investment contract liabilities are measured using local GAAP, as permitted by IFRS 4. In the UK,
participating investment contract liabilities are determined in accordance with guidance previously set out in FRS 27, including a value for
guarantees, in the same way as participating insurance contracts. Although FRS 27 is no longer an operational standard, the group has
grandfathered the provisions into its IFRS reserving methodology.

The group’s non-participating investment contracts are all unit linked contracts. These liabilities are measured at fair value by reference to the
value of the underlying net asset values of the group’s unitised investment funds at the balance sheet date.

Unitised liabilities are recognised when premiums are received and non-unitised liabilities are recognised when premiums are due.

Claims are not included in the income statement but are deducted from investment contract liabilities. The movement in investment contract
liabilities consists of claims incurred in the year less the corresponding elimination of the policyholder liability originally recognised in the balance
sheet and the investment return credited to policyholders.

Following the group’s announcement in December 2017 to sell Mature Savings business to Swiss Re the participating investment contract liabilities,
which are a part of Mature Savings business, have been classified as held for sale.

(i) Analysis of non-participating investment contract liabilities

Total non-participating investment contracts

Less: liabilities of operations classified as held for sale1

Non-participating investment contract liabilities

Expected to be settled within 12 months (net of reinsurance)2

Expected to be settled after 12 months (net of reinsurance)2

Gross
2018
£m

Reinsurance
2018
£m

Gross
2017
£m

Reinsurance
2017
£m

311,494

(18,414)

293,080

53,414

257,897

(183)

336,628

131

(52)

(20,977)

315,651

46,809

289,502

(317)

(269)

1. Detailed disclosure relating to the liabilities of operations classified as held for sale is included in Note 27.
2. The expected maturity analysis between within and after 12 months is based on the Total non-participating investment contract liabilities.

Amounts under unit linked contracts are generally repayable on demand and the group is responsible for ensuring there is sufficient liquidity within
the asset portfolio to enable liabilities to unit linked policyholders to be met as they fall due. However, the terms of funds investing in less liquid assets
permit the deferral of redemptions for predefined periods in circumstances where there are not sufficient liquid assets within the fund to meet the
level of requested redemptions. Accordingly cash flows of unit linked liabilities have not been reported.

The presented fair values of the non-participating investment contract liabilities reflect quoted prices in active markets and they have been classified
as Level 1 in the fair value hierarchy.

179

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements21 Investment contract liabilities (continued)
(ii) Movement in investment contract liabilities

As at 1 January

Reserves in respect of new business

Amounts paid on surrenders and maturities during the year

Investment return and related benefits1

Management charges

Other

Total as at 31 December

Less: liabilities of operations classified as held for sale2

Total as at 31 December

Gross
2018
£m

Reinsurance
2018
£m

Gross3
2017
£m

Reinsurance3
2017
£m

341,796

45,476

(58,626)

(12,327)

(248)

–

316,071

(22,991)

293,080

(317)

326,448

(3)

126

–

41,104

(57,542)

32,037

(251)

–

(183)

341,796

131

(52)

(26,145)

315,651

(286)

(6)

(44)

–

(317)

(269)

1. Investment return and related benefits is disclosed on a total basis including discontinued operations. In the Consolidated Income Statement, the investment return

for discontinued operations is included within ‘Profit after tax from discontinued operations’.

2. Detailed disclosure relating to the liabilities of operations classified as held for sale items is included in Note 27.
3. Following further analysis of the 2017 Movement in investment contract liabilities, the Reserves in respect of new business, Amounts paid on surrenders and maturities

during the year and Investment return and related benefits had to be adjusted. Total Investment contract liabilities as at 31 December 2017 was correct but the movement
in the above lines was adjusted to reflect the accurate breakdown of the movement.

22 Borrowings

Borrowings are recognised initially at fair value, net of transaction costs. Borrowings are subsequently stated at amortised cost. The difference
between the net proceeds and the redemption value is recognised in the income statement over the borrowing period using the effective interest
rate method.

Borrowings comprise core borrowings such as subordinated bond issues and long term unsecured senior debt and operational borrowings such
as commercial paper issuance and bank borrowings under both committed and uncommitted debt facilities, including bank overdrafts. Borrowings
secured on specific assets/cash flows are included as non recourse borrowings.

(i) Analysis by type

Core borrowings

Operational borrowings

Total borrowings

Less: liabilities of operations classified as held for sale1

Borrowings

Borrowings
excluding
unit linked
borrowings
2018
£m

Unit linked
borrowings
2018
£m

3,922

993

4,915

(28)

4,887

–

Borrowings
excluding
unit linked
borrowings
2017
£m

3,459

451

3,910

–

3,910

Total
2018
£m

3,922

1,054

4,976

(28)

4,948

Unit linked
borrowings
2017
£m

–

Total
2017
£m

3,459

538

3,997

–

3,997

1. Detailed disclosure relating to liabilities of operations classified as held for sale is included in Note 27.

£203m of interest expense was incurred during the year (2017: £191m) on borrowings excluding non recourse and unit linked borrowings.
The total financing costs incurred for the year were £238m (2017: £212m).

180

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

(ii) Analysis by nature
(a) Core borrowings

Subordinated borrowings

5.875% Sterling undated subordinated notes (Tier 2)

10% Sterling subordinated notes 2041 (Tier 2)

5.5% Sterling subordinated notes 2064 (Tier 2)

5.375% Sterling subordinated notes 2045 (Tier 2)

5.25% US Dollar subordinated rates 2047 (Tier 2)

5.55% US Dollar subordinated rates 2052 (Tier 2)

5.125% Sterling subordinated notes 2048 (Tier 2)

Client fund holdings of group debt1

Total subordinated borrowings

Senior borrowings

Sterling medium term notes 2031-2041

Client fund holdings of group debt1

Total senior borrowings

Total core borrowings

Carrying
amount
2018
£m

Coupon rate
2018
%

Fair value
2018
£m

Carrying
amount
2017
£m

Coupon rate
2017
%

Fair value
2017
£m

5.88

10.00

5.50

5.38

5.25

5.55

5.13

–

5.88

–

405

312

589

603

659

387

399

(31)

3,323

609

(10)

599

3,922

409

366

569

627

612

356

401

(30)

3,310

824

(13)

811

408

311

589

603

628

369

–

(32)

2,876

609

(26)

583

4,121

3,459

5.88

10.00

5.50

5.38

5.25

5.55

–

5.88

–

428

397

710

694

679

397

–

(38)

3,267

857

(37)

820

4,087

1. £41m (2017: £58m) of the group’s subordinated and senior borrowings are currently held by Legal & General customers through unit linked products. These borrowings

are shown as a deduction from total core borrowings in the table above.

The presented fair values of the group’s core borrowings reflect quoted prices in active markets and they have been classified as Level 1 in the fair
value hierarchy.

181

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements22 Borrowings (continued)
(ii) Analysis by nature (continued)
(a) Core borrowings (continued)
Subordinated borrowings
5.875% Sterling undated subordinated notes
In 2004, Legal & General Group Plc issued £400m of 5.875% Sterling undated subordinated notes. The notes are callable at par on 1 April 2019 and
every five years thereafter. On 4 February 2019, notification was given that the group intends to redeem these notes in full on 1 April 2019. Effective
from the notification date, the notes were no longer treated as tier 2 own funds for Solvency II purposes.

10% Sterling subordinated notes 2041
In 2009, Legal & General Group Plc issued £300m of 10% dated subordinated notes. The notes are callable at par on 23 July 2021 and every five
years thereafter. If not called, the coupon from 23 July 2021 will be reset to the prevailing five year benchmark gilt yield plus 9.325% p.a. These
notes mature on 23 July 2041.

5.5% Sterling subordinated notes 2064
In 2014, Legal & General Group Plc issued £600m of 5.5% dated subordinated notes. The notes are callable at par on 27 June 2044 and every five
years thereafter. If not called, the coupon from 27 June 2044 will be reset to the prevailing five year benchmark gilt yield plus 3.17% p.a. These
notes mature on 27 June 2064.

5.375% Sterling subordinated notes 2045
In 2015, Legal & General Group Plc issued £600m of 5.375% dated subordinated notes. The notes are callable at par on 27 October 2025 and every
five years thereafter. If not called, the coupon from 27 October 2025 will be reset to the prevailing five year benchmark gilt yield plus 4.58% p.a.
These notes mature on 27 October 2045.

5.25% US Dollar subordinated notes 2047
On 21 March 2017, Legal & General Group Plc issued $850m of 5.25% dated subordinated notes. The notes are callable at par on 21 March 2027
and every five years thereafter. If not called, the coupon from 21 March 2027 will be reset to the prevailing US Dollar mid-swap rate plus 3.687%
p.a. These notes mature on 21 March 2047.

5.55% US Dollar subordinated notes 2052
On 24 April 2017, Legal & General Group Plc issued $500m of 5.55% dated subordinated notes. The notes are callable at par on 24 April 2032 and
every five years thereafter. If not called, the coupon from 24 April 2032 will be reset to the prevailing US Dollar mid-swap rate plus 4.19% p.a. These
notes mature on 24 April 2052.

5.125% Sterling subordinated notes 2048
On 14 November 2018, Legal & General Group Plc issued £400m of 5.125% dated subordinated notes. The notes are callable at par on 14
November 2028 and every five years thereafter. If not called, the coupon from 14 November 2028 will be reset to the prevailing five year benchmark
gilt yield plus 4.65% p.a. These notes mature on 14 November 2048.

All of the above subordinated notes are treated as tier 2 own funds for Solvency II purposes unless otherwise stated.

Senior borrowings
Between 2000 and 2002 Legal & General Finance Plc issued £600m of senior unsecured Sterling medium term notes 2031-2041 at coupons
between 5.75% and 5.875%. These notes have various maturity dates between 2031 and 2041.

182

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

(b) Operational borrowings

Short term operational borrowings

Euro Commercial Paper

Non recourse borrowings

Consolidated Property Limited Partnerships

Later Living portfolio

CALA revolving credit facility

Class B Surplus Note

Bank loans and overdrafts

Total operational borrowings1

Less: liabilities of operations classified as held for sale2

Operational borrowings

Carrying
amount
2018
£m

Interest
rate
2018
%

Fair value
2018
£m

Carrying
amount
2017
£m

Interest
rate
2017
%

Fair value
2017
£m

293

188

296

993

(28)

965

0.93

2.46

2.75

3.37

5.61

–

2.46

293

188

296

993

(28)

965

349

1.27

349

2.46

3.20

–

451

–

451

–

451

–

451

1. Unit linked borrowings with a carrying value of £61m (2017: £87m) are excluded from the analysis above as the risk is retained by policyholders. Operational borrowings

including unit linked borrowings are £1,026m (2017: £538m).

2. Detailed disclosure related to liabilities of operations classified as held for sale is included in Note 27.

The Class B Surplus Note have been issued by a US subsidiary of the group as part of a coinsurance structure for the purpose of US statutory
regulations. The Note was issued in exchange for a bond of the same value from an unrelated party, included within financial investments on the
group’s Consolidated Balance Sheet.

Non recourse borrowings include Property Funds loans with a charge on the assets of the relevant Property Fund, loan facilities to Later Living
SPVs with a charge on all assets of each individual SPV company, CALA Group (Holdings) Limited’s revolving credit facility secured by way of a
bond and floating charge, and guarantees and fixed charges granted by CALA Group Limited and its main subsidiaries (CALA 1999 Limited, CALA
Limited, and CALA Management Limited). A number of other bonds and floating charges, fixed securities, debentures and share pledges over land
and assets have been granted by certain subsidiaries of CALA Group Limited in favour of the lenders.

The carrying value of operational borrowings approximates their fair value. The presented fair values reflect observable market information and have
been classified as Level 2 in the fair value hierarchy with the exception of the Later Living portfolio which has been classified as Level 3.

183

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements22 Borrowings (continued)
(iii) Analysis by maturity

As at 31 December 2018

Subordinated borrowings

5.875% Sterling undated subordinated notes (Tier 2)1

10% Sterling subordinated notes 2041 (Tier 2)

5.5% Sterling subordinated notes 2064 (Tier 2)

5.375% Sterling subordinated notes 2045 (Tier 2)

5.25% US Dollar subordinated notes 2047 (Tier 2)

5.55% US Dollar subordinated notes 2052 (Tier 2)

5.125% Sterling subordinated notes 2048 (Tier 2)

Senior borrowings

Sterling medium term notes 2031-2041

Client fund holdings of group debt

Total core borrowings

Operational borrowings

Euro Commercial Paper

Bank loans and overdrafts

Non recourse borrowings

Consolidated Property Limited Partnerships

Later Living portfolio

CALA revolving credit facility

Class B Surplus Note

Total operational borrowings

Less: borrowings of operations classified as held for sale2

Operational borrowings

Maturity profile of undiscounted cash flows

Carrying
amount
£m

Within
1 year
£m

1-5
years
£m

5-15
years
£m

405

312

589

603

659

387

399

609

(41)

3,922

293

188

296

993

(28)

965

(6)

(13)

–

(6)

(10)

(4)

(3)

(11)

–

(53)

(293)

(83)

–

(15)

(188)

–

(579)

–

(579)

(632)

(195)

(827)

–

(58)

(61)

–

(119)

(91)

(1,240)

(1,331)

–

(590)

–

(590)

–

(590)

(2,050)

(2,640)

15-25
years
£m

–

(300)

–

(10)

–

Over
25 years
£m

(400)

–

(600)

(667)

(392)

(400)

–

Total
£m

(406)

(313)

(600)

(606)

(677)

(396)

(403)

(611)

–

(310)

(3,059)

(4,012)

–

(296)

–

(296)

(606)

(1,358)

(1,964)

–

(293)

(83)

(58)

(76)

(188)

(296)

(994)

(966)

(3,059)

(715)

(4,978)

(5,558)

(3,774)

(10,536)

Total borrowings excluding unit linked borrowings3

4,887

Contractual undiscounted interest payments

Total contractual undiscounted cash flows

1. On 4 February 2019, notification was given that the group intends to redeem these notes in full on 1 April 2019.
2. Detailed disclosure related to liabilities of operations classified as held for sale is included in Note 27.
3. Unit linked borrowings are excluded from the analysis above as the risk is retained by policyholders.

184

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

As at 31 December 2017

Subordinated borrowings

5.875% Sterling undated subordinated notes (Tier 2)

10% Sterling subordinated notes 2041 (Tier 2)

5.5% Sterling subordinated notes 2064 (Tier 2)

5.375% Sterling subordinated notes 2045 (Tier 2)

5.25% US Subordinated notes 2047 (Tier 2)

5.55% US Subordinated notes 2052 (Tier 2)

Senior borrowings

Sterling medium term notes 2031-2041

Client fund holdings of group debt

Total core borrowings

Operational borrowings

Euro Commercial Paper

Non recourse borrowings

Maturity profile of undiscounted cash flows

Carrying
amount
£m

Within
1 year
£m

1-5
years
£m

5-15
years
£m

408

311

589

603

628

369

609

(58)

3,459

(6)

(13)

–

(6)

(9)

(4)

(11)

–

(49)

349

(349)

–

15-25
years
£m

–

(300)

–

(250)

–

Over
25 years
£m

(400)

–

(600)

(628)

(370)

–

Total
£m

(406)

(313)

(600)

(606)

(637)

(374)

(611)

–

(550)

(2,598)

(3,547)

–

(349)

(57)

(46)

(452)

(3,999)

(4,842)

(8,841)

(350)

(1,868)

(2,218)

(550)

(1,153)

(1,703)

(2,598)

(823)

(3,421)

–

(350)

–

(350)

–

Consolidated Property Limited Partnerships

Later Living portfolio

Total operational borrowings

Total borrowings excluding unit linked borrowings1

Contractual undiscounted interest payments

Total contractual undiscounted cash flows

451

3,910

–

(349)

(398)

(161)

(559)

(57)

(46)

(103)

(837)

(940)

1. Unit linked borrowings are excluded from the analysis above as the risk is retained by policyholders.

The maturity profile above is calculated on the basis that a facility to refinance a maturing loan is not recognised unless the facility and loan are
related. If refinancing under the group’s credit facilities was recognised, then all amounts shown as repayable within one year would be reclassified
as repayable between one and five years. Unit linked borrowings are excluded from the analysis as the risk is retained by the policyholders.

Undiscounted interest payments are estimated based on the year end applicable interest rate and spot exchange rates.

As at 31 December 2018, the group had in place a £1.0bn syndicated committed revolving credit facility provided by a number of its key relationship
banks, maturing in December 2022. No amounts were outstanding at 31 December 2018.

(iv) Movement in borrowings

As at 1 January

Cash movements:

– Proceeds from borrowings

– Repayment of borrowings

– Net increase in bank loans and overdrafts

Non-cash movements:

– Acquisition1

– Amortisation

– Deconsolidation of investment in property fund

– Foreign exchange movements

– Other

Total borrowings as at 31 December

Less: liabilities of operations classified as held for sale2

Total borrowings

1. Includes borrowings in CALA Homes which have been consolidated following the stepped acquisition of CALA Homes during the year.
2. Detailed disclosure related to liabilities of operations classified as held for sale is included in Note 27.

2018
£m

3,997

960

(325)

210

(15)

–

4,976

(28)

4,948

2017
£m

3,501

1,232

(600)

(17)

(150)

(101)

3,997

–

3,997

185

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements23 Provisions

Provisions are recognised when the group has a present legal or constructive obligation as a result of past events, it is probable that an outflow
of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of the obligation can
be made. Where the group expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised
as a separate asset but only when the reimbursement is virtually certain. The group recognises a provision for onerous contracts when the
expected benefits to be derived from a contract are less than the unavoidable costs of meeting the obligations under the contract.

The group operates a number of defined benefit and defined contribution pension schemes in the UK and overseas. The assets of all UK defined
benefit schemes are held in separate trustee administered funds which are subject to regular actuarial valuations every three years, updated by
formal reviews at reporting dates. The actuarial assumptions used in the triennial valuation would normally be consistent or more prudent than
those used for the purposes of IAS 19 reporting.

The liability recognised in the Consolidated Balance Sheet in respect of the defined benefit pension schemes is the present value of the defined
benefit obligation at the balance sheet date less the fair value of plan assets, provided any surplus in the Fund and Scheme is not restricted. Plan
assets exclude the insurance contracts issued by the group. The defined benefit obligation is calculated actuarially each year using the projected
unit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows. The discount rate
is based on market yields of high quality corporate bonds which are denominated in the currency in which the benefits will be paid, and that have
terms to maturity which approximate to those of the related pension liability.

The group pays contractual contributions in respect of defined contribution schemes. The group has no further payment obligations once the
contributions have been paid. The contributions are recognised as employee benefit expenses when they are due. Prepaid contributions are
recognised as an asset to the extent that a cash refund or a reduction in future payments is available.

(i) Analysis of provisions

Retirement benefit obligations

Other provisions

Total provisions

Less: liabilities of operations classified as held for sale1

Provisions

2018
£m

1,112

1,141

2017
£m

1,266

1,339

(1)

(4)

1,140

1,335

1. Detailed disclosure related to liabilities of operations classified as held for sale is included in Note 27.

(ii) Retirement benefit obligations
Defined contribution schemes
The group operates the following principal defined contribution pension schemes in the UK and overseas:

• Legal & General Group Personal Pension Plan (UK);

• Legal & General Staff Stakeholder Pension Scheme (UK);

• Legal & General America Inc. Savings Plan (US); and

• CALA defined contribution pension scheme

Contributions of £55m (2017: £49m) were charged as expenses during the year in respect of defined contribution schemes.

Defined benefit schemes
The group operates the following defined benefit pension schemes in the UK and overseas:

• Legal & General Group UK Pension and Assurance Fund (the Fund). The Fund was closed to new members from January 1995; the last full

actuarial valuation was as at 31 December 2015;

• Legal & General Group UK Senior Pension Scheme (the Scheme). The Scheme was, with a few exceptions (principally transfers from the Fund),

closed to new members from August 2000 and finally closed to new members from April 2007; the last full actuarial valuation was as at 31
December 2015;

• Legal & General America Inc. Cash Balance Plan (US); the last full actuarial valuation was as at 31 December 2017; and

• CALA Retirement and Death Benefits Scheme (UK). This scheme closed to new members from 31 December 2007 and closed to future accrual on

31 December 2015; the last triennial actuarial valuation was as at 30 April 2015.

The UK defined benefit schemes operate within the UK pensions’ regulatory framework.

The UK Fund and Scheme were closed to future accrual on 31 December 2015. As part of this arrangement, payments to the Fund and Scheme in
respect of future accruals ceased from this date and were replaced with a company contribution payment of between 5% and 15% into a defined
contribution arrangement. In addition, as part of the closure, the company will contribute an additional £3m per annum until 31 December 2024
towards the deficit.

The assets of all UK defined benefit schemes are held in separate trustee administered funds to meet long term pension obligations to past and
present employees. Trustees are appointed to the schemes and have a responsibility to act in the best interest of the scheme beneficiaries. The
trustees’ long term objectives are to minimise the risk that there are insufficient assets to meet the liabilities of the scheme over the longer term,
control the on-going operational costs of the schemes and to maximise investment returns for the beneficiaries within an acceptable level of risk.

186

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

The total number of members of the Fund and Scheme was:

Employed deferreds

Deferreds

Pensioners

Total

2018

171

3,292

3,657

7,120

2017

264

3,568

3,593

7,425

The group works closely with the trustees to develop an investment strategy for each UK scheme in order to meet the long term objectives of the
trustees as noted above. Each UK scheme has a Statement of Investment Principles which governs the mix of assets and limits for each class of
asset. As noted below, the asset mix of the UK defined benefit schemes is primarily split between bonds including Liability Driven Investment (LDI)
funds and unit trusts, equities and property. The main goal of the use of LDI is to hedge movements in the liabilities due to changes in interest rate
and inflation expectations. On a gilts flat measure, the Fund and Scheme currently hedge 61% interest rate changes and 62% inflation expectation
changes in respect of the non-insured liabilities.

Additionally, certain parts of the liabilities of the scheme are secured by way of annuities purchased from the group. These annuities are not
recognised as an asset for IAS 19 purposes, but at 31 December 2018 the value of these annuities, on an IAS 19 basis, was £858m (2017: £875m).

The Fund and Scheme expose the group to a number of risks:

Risk

Detail

Uncertainty in
benefit payments

The value of the group’s liabilities for post-retirement benefits will ultimately depend on the amount of benefits paid out.
This in turn will primarily depend on the level of inflation and how long individuals live.

Volatility in
asset values

Uncertainty in
cash funding

The group is exposed to future movements in the values of assets held in the Fund and Scheme to meet future benefit payments.

Movements in the values of the obligations or assets may result in the group being required to provide higher levels of cash
funding, although changes in the level of cash required can often be spread over a number of years. In addition, the group
is also exposed to adverse changes in pension regulation.

These risks are managed within the risk appetite of the Fund and Scheme. The sensitivity of the net obligations to changes in any of the variables
are monitored and action is taken if any risk moves outside of the appetite.

Annuities are purchased to mitigate risks for certain parts of the pension liabilities which passes the risks from the Fund and Scheme onto
the group.

Full actuarial valuations are carried out on the Fund and Scheme every three years, updated by formal reviews at each reporting date. The actuarial
assumptions used in the triennial valuation would normally be more prudent than those used for the purposes of IAS 19 reporting. Where the Fund
or Scheme are in deficit following the triennial valuations, the group and the trustee agree a deficit recovery plan. Both the Fund and Scheme have
formal deficit recovery plans which aim to make good the deficits over a certain period of time. The triennial valuation at 31 December 2015 showed
a total funding deficit for both the Fund and Scheme of £599m. As a result of this, a recovery plan was agreed of £77m a year until 2024. The latest
triennial valuation at 31 December 2015 was completed on 15 August 2017.

187

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements23 Provisions (continued)
(ii) Retirement benefit obligations (continued)
The Fund and the Scheme liabilities have an average duration of 19.1 years (2017: 19.8 years) and 18.7 years (2017: 20.1 years) respectively. The
expected undiscounted benefits payments to members of the Fund and Scheme, including pensions in payment secured by annuities purchased
from the group, are shown in the unaudited chart below:

Undiscounted beneﬁt payments

Projected beneﬁt payments (£m)

120

100

2018

2028

2038

2048

2058

2068

2078

2088

Annuity payments

Pensioner cashﬂows

Employed Deferred and Deferred member cashﬂows

The benefits paid from the defined benefit schemes are based on percentages of the employees’ final pensionable salary for each year of credited
service. The group has no liability for retirement benefits other than for pensions. The Fund and Scheme account for all of the UK and over 90%
of worldwide assets of the group’s defined benefit schemes.

The principal actuarial assumptions for the Fund and Scheme were:

Rate used to discount liabilities

Rate of increase in pensions in payment (pre-2006 service)

Rate of increase in deferred pensions (pre-2006 service)

Rate of general inflation (RPI)

Post retirement mortality

Fund and
Scheme
2018
%

Fund and
Scheme
2017
%

2.88

3.69

3.81

3.23

2.47

3.67

3.78

3.18

2018: 75%/85% (Male/Female) (Fund) and 70%/80% (Male/Female) (Scheme) of PCMA/PCFA 00 with improvement at
CMI 2016 base date 2015 with long term rates 1.5% pa males and 1.0% pa females, with tapering linearly down to nil between ages 90 and 120.

2017: 80%/90% (Male/Female) (Fund) and 70%/80% (Male/Female) (Scheme) of PCMA/PCFA 00 with improvement at
CMI 2015 base date 2013 with long term rates 1.5% pa males and 1.0% pa females, with tapering linearly down to nil between ages 90 and 120.

This equates to average life expectancy as follows:

Fund and
Scheme
2018
years

Fund and
Scheme
2017
years

60.0

87.7

88.8

89.8

90.2

60.0

88.0

88.9

90.6

Normal retirement age

Male life expectancy at retirement age

Female life expectancy at retirement age

Male life expectancy at 20 years younger than retirement age

Female life expectancy at 20 years younger than retirement age

188

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements

Balance sheet management

Movement in present value of defined benefit obligations

As at 1 January

Acquisition1

Current service cost

Past service cost

Interest expense

Actuarial remeasurement (recognised in Consolidated Statement of Comprehensive Income)

– Change in financial assumptions

– Change in demographic assumptions

– Experience

Benefits paid

Exchange differences

As at 31 December

Movement in fair value of plan assets

As at 1 January

Acquisition1

Expected return on plan assets at liability discount rate

Actuarial remeasurement (recognised in Consolidated Statement of Comprehensive Income)

Employer contributions

Benefits paid

Exchange differences

As at 31 December

Gross pension obligations

Gross pension obligations included in provisions

Annuity obligations insured by LGAS

Gross defined benefit pension deficit

Deferred tax on defined benefit pension deficit

Net defined benefit pension deficit

Fund and
Scheme
2018
£m

(2,543)

–

(3)

–

(60)

186

193

–

CALA
Homes and
Overseas
2018
£m

Fund and
Scheme
2017
£m

Overseas
2017
£m

(32)

(87)

(2)

(1)

(4)

–

(7)

(2)

(2,628)

(32)

–

(2)

–

(67)

(102)

(11)

244

–

(2)

–

(1)

–

(1)

(2,183)

(120)

(2,543)

(32)

1,282

–

(107)

(193)

–

1,092

(1,091)

858

(233)

(192)

(4)

(10)

(21)

–

(21)

(20)

1,394

–

(244)

–

1,282

(1,261)

875

(386)

(317)

–

(1)

(2)

(5)

–

(5)

(4)

1. Acquisition relates to CALA Homes defined benefit obligations and fair value of plan assets following stepped acquisition of CALA Homes in March 2018.

During 2018 annuities were purchased from the group. A premium of £59m (2017: £161m) was paid from the assets of the Fund and the Scheme to
purchase these annuities. These annuities are not recognised as an asset for IAS 19 purposes and so the actuarial remeasurement recognised in the
Consolidated Statement of Comprehensive Income includes allowance for this premium payment as well as annuity receipts over 2018 of £50m
(2017: £53m).

On 26 October 2018, the High Court ruled that UK pension schemes must equalise Guaranteed Minimum Pensions (GMP) to ensure that male and
female members of schemes were treated equitably. This judgement applied to GMP accrued between 17 May 1990 and 5 April 1997. The impact
of GMP equalisation on the value of the group’s defined benefit schemes is estimated to be negligible.

The effect on the defined benefit obligation of the Fund and Scheme of assuming reasonable alternative assumptions in isolation is shown below.
Opposite sensitivities are broadly symmetrical, but larger sensitivities are not necessarily broadly proportionate due to the existence of maxima and
minima for inflation linked benefits. These sensitivities have been calculated to show the movement in the defined benefit obligation in isolation, and
assuming no other changes in market conditions at the accounting date. This is unlikely in practice – for example, a change in discount rate is
unlikely to occur without any movement in the value of the assets held by the Fund and Scheme.

1 year increase in longevity

0.1% decrease in the rate used to discount liabilities

0.1% increase in the rate of general inflation (RPI)

2018
£m

(78)

(40)

(20)

2017
£m

(92)

(43)

(25)

189

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements23 Provisions (continued)
(ii) Retirement benefit obligations (continued)
The historic funding and experience adjustments are as follows:

Present value of defined benefit obligations

Fair value of plan assets

Gross pension obligations included in provisions

Experience adjustments on plan liabilities

Experience adjustments on plan assets

The fair value of the plan assets at the end of the year is made up as follows:

As at 31 December 2018

Equities

Bonds

Properties

Other investments1

Fair value of plan assets

As at 31 December 2017

Equities

Bonds

Properties

Other investments

Fair value of plan assets

2018
£m

(2,303)

1,191

(1,112)

(111)

2017
£m

(2,575)

1,309

(1,266)

2016
£m

(2,660)

1,421

(1,239)

240

2015
£m

(2,317)

1,186

(1,131)

(62)

2014
£m

(2,404)

1,187

(1,217)

(7)

133

Valuation based on
quoted market price

Valuation based on other
than quoted market price

Fund and
scheme
£m

CALA Homes
and Overseas
£m

Fund and
scheme
£m

CALA Homes
and Overseas
£m

113

913

–

1,040

–

Valuation based on
quoted market price

Valuation based on other
than quoted market price

Fund and
scheme
£m

Overseas
£m

Fund and
scheme
£m

Overseas
£m

1,111

–

1,208

–

1. Other investments mainly consist of cash and cash equivalents.

The bond assets are of investment grade as at 31 December 2018 (31 December 2017: Investment grade).

Employer contributions of £84m (2017: £93m) have been made during 2018. Employer contributions of £83m are expected to be paid to the plan
during 2019.

The following amounts have been charged to the income statement:

Current service costs

Past service costs

Net interest expense

Total amounts included in other expenses

Fund and
scheme
2018
£m

CALA Homes
and Overseas
2018
£m

Fund and
scheme
2017
£m

Overseas
2017
£m

–

190

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

24 Payables and other financial liabilities

Derivative liabilities and repurchase agreements are measured at fair value, with changes in fair value recognised in profit or loss.

The fair value of derivative liabilities is derived using broker quotes or models such as option pricing models, simulation models or a combination
of models. The inputs for these models include a range of factors which are deemed to be observable, including current market and contractual
prices for underlying instruments, period to maturity, correlations, yield curves and volatility of the underlying instruments.

Repurchase agreements are valued based on the discounted cash flows expected to be paid, using an observable market interest rate, in line with
the value of the underlying security.

Collateral repayable on short position reverse repurchase agreements and other financial liabilities balances, including FX spots, broker and other
payables, are measured at amortised cost. The carrying value of these liabilities approximates their fair value.

Trail commission represents a liability for the present value of future commission costs on distribution agreements with intermediaries, recognised
in the Consolidated Balance Sheet on inception of the contract. At each subsequent reporting date the liability is remeasured, with changes
reflected in profit or loss.

Derivative liabilities

Repurchase agreements1

Other financial liabilities2

Total payables and other financial liabilities

Less: liabilities of operations classified as held for sale3

Payables and other financial liabilities

Due within 12 months4

Due after 12 months4

2018
£m

7,791

43,775

11,406

62,972

2017
£m

8,173

32,357

12,026

52,556

(424)

(310)

62,548

51,178

11,794

52,246

47,212

5,344

1. The repurchase agreements are presented gross, however they and their related assets (included within debt securities) are subject to master netting arrangements.

The vast majority of the repurchase agreements are unit linked.

2. Other financial liabilities includes trail commission, FX spots and collateral repayable on short position reverse repurchase agreements. The value of collateral repayable

on short position reverse repurchase agreements was £4,883m (2017: £5,138m).

3. Detailed disclosure relating to liabilities of operations classified as held for sale is included in Note 27.
4. The maturity analysis of the liabilities between less and more than 12 months is based on the Total payables and other financial liabilities.

Fair value hierarchy

As at 31 December 2018

Derivative liabilities

Repurchase agreements

Other financial liabilities

Total payables and other financial liabilities

As at 31 December 2017

Derivative liabilities

Repurchase agreements

Other financial liabilities

Total payables and other financial liabilities

Total
£m

7,791

43,775

11,406

62,972

Total
£m

8,173

32,357

12,026

52,556

Level 1
£m

337

–

4,718

5,055

Level 1
£m

193

–

4,793

4,986

Level 2
£m

7,452

43,775

51,262

Level 2
£m

7,969

32,357

40,333

Level 3
£m

–

496

498

Level 3
£m

–

140

151

Amortised
cost
£m

–

6,157

Amortised
cost
£m

–

7,086

Trail commission (included within Other financial liabilities) is modelled using expected cash flows, incorporating expected future persistency. It has
therefore been classified as Level 3 liabilities. The entire movement in the balance has been reflected in the Consolidated Income Statement during the
period. A reasonably possible alternative persistency assumption would have the effect of increasing the trail commission liability by £4m (2017: £4m).

Significant transfers between levels
There have been no significant transfers of liabilities between Levels 1, 2 and 3 for the year ended 31 December 2018 (31 December 2017:
no significant transfers).

191

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements25 Management of capital resources
Solvency II
The group is required to measure and monitor its capital resources on a regulatory basis and to comply with the minimum capital requirements of
regulators in each territory in which it operates. At a group level, Legal & General had to comply with the requirements established by the Solvency II
Framework Directive, as adopted by the Prudential Regulation Authority (PRA) at the balance sheet date.

The group calculates its Solvency II capital requirements using a Partial Internal Model. The vast majority of the risk to which the group is exposed is
assessed on the Internal Model basis approved by the PRA. Capital requirements for a few smaller entities are assessed using the Standard Formula
basis on materiality grounds. The group’s US insurance businesses are valued on a local statutory basis, following the PRA’s approval to use the
Deduction and Aggregation method of including these businesses in the group solvency calculation.

The table below shows the “shareholder view” of the group Own Funds, Solvency Capital Requirement (SCR) and Surplus Own Funds, based on the
Partial Internal Model, Matching Adjustment and Transitional Measures on Technical Provisions (TMTP) (recalculated as at end December 2018).
The TMTP incorporates estimated impacts of end 2018 economic conditions and changes during 2018 to the Internal Model and Matching
Adjustment approvals. This is in line with group’s management of the capital position on a dynamic TMTP basis.

The Solvency II results are estimated and unaudited.

As at 31 December 2018, and on the above basis, the group had a surplus of £6.9bn (31 December 2017: £6.9bn) over its Solvency Capital
Requirement, corresponding to a Solvency II capital coverage ratio on a “shareholder view” basis of 188% (31 December 2017: 189%). The
shareholder view of the Solvency II capital position is as follows:

Core tier 1 Own Funds

Tier 2 subordinated liabilities1

Eligibility restrictions

Solvency II Own Funds2,3

Solvency Capital Requirement

Solvency II surplus

SCR coverage ratio4

2018
£bn

11.5

3.5

(0.2)

14.8

(7.9)

6.9

2017
£bn

11.6

3.1

(0.1)

14.6

(7.7)

6.9

188%

189%

1. Tier 2 subordinated liabilities include £400m of subordinated debt issued during 2018. Liabilities also include £400m of debt callable in 2019. On 4 February 2019,

notification was given that the group intends to redeem these notes in full on 1 April 2019. Effective from the notification date, the notes would no longer be treated
as tier 2 own funds for Solvency II purposes.

2. Solvency II Own Funds do not include an accrual for the full year dividend of £704m (2017: £658m) declared after the balance sheet date.
3. Solvency II Own Funds allow for a risk margin of £5.5bn (31 December 2017: £5.9bn) and TMTP of £5.2bn (31 December 2017: £6.2bn).
4. Coverage ratio is based on unrounded inputs.

The “shareholder view” basis excludes the contribution that the with-profits fund and the final salary pension scheme would normally make to
the group position. This is reflected by reducing the group’s Own Funds and the group’s SCR by the amount of the SCR for the with-profits fund
and the final salary pension scheme.

On a proforma basis, which includes the contribution of with-profits fund and the final salary pension scheme in the group’s Own Funds and
corresponding SCR, the coverage ratio at 31 December 2018 is 181% (31 December 2017: 181%).

On 6 December 2017 the group announced the sale of its Mature Savings business to Swiss Re. Swiss Re assumed the economic exposure of the
business from 1 January 2018 via a risk transfer agreement. It is expected that the formal transfer of the business will be completed in 2019, subject
to satisfaction of normal conditions for a transaction including court sanction. The transfer will be effected by way of a Part VII transfer under the
Financial Services Markets Act 2000. The impact of the risk transfer agreement is reflected in both Own Funds and SCR as at 31 December 2018.

A reconciliation of the group’s IFRS shareholders’ equity to Own Funds is given below:

IFRS shareholders’ equity2

Remove DAC, goodwill and other intangible assets and associated liabilities2

Add IFRS carrying value of subordinated debt treated as available capital under Solvency II3

Insurance contract valuation differences4

Difference in value of net deferred tax liabilities

SCR for with-profits fund and final salary pension schemes

Other5

Eligibility restrictions6

Solvency II Own Funds7

2018
£bn

8.6

(0.8)

3.3

5.1

(0.3)

(0.8)

(0.1)

(0.2)

14.8

20171
£bn

7.5

(0.4)

2.9

6.2

(0.7)

(0.1)

14.6

1. Following a change in accounting policy for LGIA term assurance reserves, specific IFRS balance sheet items have been restated, notably deferred acquisition costs,
reinsurers’ share of contract liabilities, non-participating insurance contracts, deferred tax liabilities and other liabilities. The overall net impact on the group’s IFRS
shareholders’ equity as at 31 December 2017 is a reduction of £327m. Further details on the change in accounting policy is provided in Note 1.

2. Values are per the consolidated financial statements.
3. Treated as available capital on the Solvency II balance sheet as the liabilities are subordinate to policyholder claims.
4. Differences in the measurement of technical provisions between IFRS and Solvency II.
5. Reflects valuation differences on other assets and liabilities, predominately in respect of borrowings measured at fair value under Solvency II.
6. Relating to the Own Funds of non-insurance regulated entities that are subject to local regulatory rules.
7. Solvency II Own Funds do not include an accrual for the full year dividend of £704m (2017: £658m) declared after the balance sheet date.

192

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsBalance sheet management

Capital management policies and objectives
The group aims to manage its capital resources to maintain financial strength, policyholder security and relative external ratings advantage. The group
also seeks to maximise its financial flexibility by maintaining strong liquidity and by utilising a range of alternative sources of capital including equity,
senior debt, subordinated debt and reinsurance.

Capital measures
The group measures its capital on a number of different bases, including those which comply with the regulatory frameworks within which the group
operates and those which the directors consider most appropriate for managing the business. The measures used by the group include:

Accounting and economic bases
Management use financial information prepared on both an IFRS and Economic Capital basis to manage capital and cash flow usage and to determine
dividend paying capacity.

The group maintains a risk-based capital model that is used to calculate the group’s Economic Capital position and support the management of risk
within the group. This modelling framework, suitably adjusted for regulatory constraints, also meets the needs of the Solvency II regime. Our
Economic Capital model has not been reviewed by the Prudential Regulatory Authority (PRA), nor will it be.

Regulatory bases
The financial strength of the group’s insurance subsidiaries is measured under various local regulatory requirements (see below).

Basis of regulatory capital and corresponding regulatory capital requirements
In each country in which the group operates, the local insurance regulator specifies rules and guidance for the minimum amount and type of capital
which must be held by insurance subsidiaries in excess of their insurance liabilities. The minimum capital requirements have been maintained at all
times throughout the year. This helps to ensure that payments to policyholders can be made as they fall due.

The required capital is calculated by either assessing the additional assets which would be required to meet the insurance company’s liabilities in
specified, stressed financial conditions, or by applying fixed percentages to the insurance company’s liabilities and risk exposures. The requirements
in the different jurisdictions in which the group operates are detailed below:

Group regulatory basis
The group is required to comply with the Solvency II capital requirements using a Partial Internal Model. The vast majority of the risk to which the
group is exposed is assessed on the Internal Model basis approved by the PRA. The group capital requirements for a handful of smaller entities are
assessed using the Standard Formula basis on materiality grounds. The group’s capital requirements in respect of its US insurance businesses are
valued on a local statutory basis, following PRA approval of the group’s application to use the Deduction and Aggregation method of including these
businesses in the group solvency calculation.

UK regulatory basis
At the balance sheet date, required capital for the life business was based on the Solvency II Framework Directive, as adopted by the PRA. All
material EEA insurance firms, including Legal and General Assurance Society Limited, Legal & General Insurance Limited, and Legal and General
Assurance (Pensions Management) Limited (LGIM’s insurance subsidiary) are required to hold eligible own funds in excess of their Solvency Capital
Requirement, calculated on an Internal Model basis. These firms, as well as the non-EEA insurance firm (Legal & General Reinsurance Company
Limited (LGRe) based in Bermuda contribute over 94% of the group’s SCR.

US regulatory basis
Required capital is determined to be the Company Action Level Risk Based Capital (RBC) based on the National Association of Insurance
Commissioners RBC model. RBC is a method of measuring the minimum amount of capital appropriate for an insurance company to support its
overall business operations, taking into account its size and risk profile. The calculation is based on applying factors to various asset, premium, claims,
expense and reserve items, with higher factors used for those items with greater underlying risk and lower factors for less risky items.

Bermudan regulatory basis
Bermudan regulated insurers are required to hold sufficient capital to meet 120% of the Bermudan Solvency Capital Requirement (BSCR). The BSCR
model follows a standard formula framework; capital attributed to each risk is calculated by applying capital factors to the assets and liabilities. The
individual risk elements (excluding operational risk) are combined using a covariance matrix and then added to an operational risk charge.

193

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements26 Acquisitions

Business combinations are accounted for using the purchase method, under which the acquirer recognises the acquiree’s fair value of the
identifiable assets, liabilities and contingent liabilities at the acquisition date. Purchased goodwill is recognised as an asset on the Consolidated
Balance Sheet and is carried at cost less any accumulated impairment losses in accordance with IAS 36, ‘Impairment of Assets’.

Private equity investment vehicles classified as subsidiaries are those entities over which the Group directly or indirectly has the power to govern
the operating and financial policies in order to gain economic benefits. Profits or losses of subsidiary undertakings sold or acquired during the year
are included in the consolidated results up to the date of disposal or from the date of gaining control.

CALA Group (Holdings) Limited
On 12 March 2018 the group increased its shareholding in CALA Group (Holdings) Limited (‘CALA Homes’) to 100% by acquiring the remaining 52.12%
shareholding of the company it did not previously own. Under the agreement, the counterparty for £152m of loan notes payable by CALA Homes was
novated to the group and the loan notes subsequently cancelled which reduced the fair value of the purchase consideration from £605m to £453m.

The transaction has been accounted for as a stepped acquisition in accordance with IFRS 3 ‘Business Combinations’, resulting in the recognition
of a one-off profit of £20m.

The assets and liabilities acquired at the point of the transaction have been recorded at their fair values for the purposes of the acquisition balance sheet
and included in the consolidated accounts of the group using the group’s accounting policies in accordance with IFRS.

The following table summarises the consideration for the acquisition, fair value of the 100% share of the assets acquired, liabilities assumed,
and resulting allocation to goodwill.

Assets

Intangible assets

Other non-current assets

Inventories

Other receivables

Cash and cash equivalents

Total assets

Liabilities

Loans and borrowings

Trade and other payables

Other liabilities1

Total Liabilities

Fair value of net assets acquired

Fair value of purchase consideration

Goodwill arising on acquisition

1. Other liabilities include deferred tax balances.

Fair value
£m

1,006

1,087

362

271

666

421

453

Fair value adjustments arising on acquisition were in relation to identifiable intangible assets, inventories and related deferred tax liabilities. The residual
goodwill recognised on acquisition, none of which is expected to be deductible for tax purposes, is attributable to the network of customers and
contractors and the pipeline of future land and homes that could not be directly attributed to homes currently under construction or the brand acquired.

There were no contingent consideration arrangements or indemnification assets recognised on acquisition.

Other acquisitions
During the year ended 31 December 2018, the group completed the acquisitions of 100% shareholdings in Canvas (the European exchange-traded
fund platform) and Buddies Enterprises Limited.

The assets and liabilities of the acquired businesses have been recorded at their fair values for the purposes of the acquisition balance sheet and
included in the consolidated accounts of the group using the group’s accounting policies in accordance with IFRS.

A total residual goodwill of £22m has been recognised in respect of these acquisitions.

194

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements
Balance sheet management

27 Held for sale and discontinued operations
On 6 December 2017 the group announced the sale of its Mature Savings business to Swiss Re for £650m. The sale is expected to finalise in 2019
following the completion of the Part VII transfer.

On 1 June 2018 the group announced the sale of its stake in IndiaFirst Life Insurance Company Limited (“IndiaFirst Life”), a joint venture, to an affiliate of
Warburg Pincus LLC for INR 7.1bn (c.£79m at GBP:INR 1:90). The sale completed on 7 February 2019.

The total balances classified as held for sale, and as discontinued operations, as a result of these transactions is presented below.

(i) Assets and liabilities of operations classified as held for sale

Purchased interest in long term business and other intangible assets

Deferred acquisition costs

Investments in associates and joint ventures

Investment property

Financial investments

Reinsurers’ share of contract liabilities

Cash and cash equivalents

Other assets1

Assets of operations classified as held for sale

Assets in consolidated funds2

Total assets of the disposal groups

Insurance contract and related liabilities3

Investment contract liabilities4

Operational borrowings

Payables and other financial liabilities

Other liabilities1

Liabilities of operations classified as held for sale

Total net liabilities of the disposal groups

2018
£m

438

2017
£m

438

1,643

22,882

1,227

20,062

179

767

289

26,234

3,067

29,301

6,243

22,991

424

156

322

362

22,584

11,065

33,649

7,136

26,145

–

310

367

29,842

33,958

(541)

(309)

1. Other assets and other liabilities include current and deferred tax balances.
2. Included in total assets of the disposal groups are assets in consolidated funds, which are held by the Mature Savings business and disclosed within financial investments
on the Consolidated Balance Sheet. The group controls these funds and therefore consolidates 100% of the assets with any non-controlling interest recognised in the Net
asset value attributable to unit holders. Following the disposal of the Mature Savings business, the group currently anticipates that it will retain control of these funds and
so will continue to consolidate 100% of the assets while increasing the Net asset attributable to unit holders.

3. Insurance contract liabilities include participating insurance contracts, unallocated divisional surplus relating to with-profits business net of the value of in-force

non-participating contracts.

4. Investment contract liabilities include participating and non-participating investment contracts.

(ii) Financial performance of discontinued operations

Revenue1

Expenses2

Profit before tax

Tax expense

Profit after tax from discontinued operations

Total comprehensive income from discontinued operations

1. Revenue includes investment return.
2. Expenses include change in insurance and investment contract liabilities.

(iii) Cash flow information of discontinued operations

Net cash outflow from operating activities

Net cash outflow from investing activities

Net cash outflow from financing activities

2018
£m

(1,130)

1,209

(15)

2018
£m

(31)

–

2017
£m

3,000

(2,901)

(19)

2017
£m

(464)

–

(89)

195

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsFinancial Statements

Additional financial information

28 Segmental analysis

The group provides a segmental analysis to enhance the understanding of the financial statements.

Under the requirements of IFRS 8, ‘Operating segments’, operating and reportable segments are presented in a manner consistent with the internal
reporting provided to the chief operating decision maker, which has been identified as the Board of Legal & General Group Plc.

Reportable segments
The group has five reportable segments that are continuing operations, comprising LGR, LGIM, LGC, LGI and General Insurance, as set out in Note 2.
Group central expenses and debt costs are reported separately. Transactions between reportable segments are on normal commercial terms, and are
included within the reported segments.

Reporting of assets and liabilities by reportable segment has not been included, as this is not information that is provided to key decision makers on a
regular basis. The group’s assets and liabilities are managed on a legal entity rather than reportable segment basis, in line with regulatory requirements.

Financial information on the reportable segments is further broken down where relevant in order to better explain the drivers of the group’s results.

(i) Profit/(loss) for the year

For the year ended 31 December 2018

Operating profit/(loss)#

Investment and other variances

Losses attributable to non-controlling interests

Profit/(loss) before tax attributable to equity holders

Tax (expense)/credit attributable to equity holders

Profit/(loss) for the year

For the year ended 31 December 2017

Operating profit/(loss)#

Investment and other variances

Gains attributable to non-controlling interests

Profit/(loss) before tax attributable to equity holders

Tax (expense)/credit attributable to equity holders

Profit/(loss) for the year

LGR
£m

1,548

–

1,643

(267)

1,376

LGR
£m

1,247

–

1,251

(225)

1,026

LGIM
£m

407

(4)

–

403

(81)

322

LGIM
£m

400

(9)

–

391

(84)

307

LGC
£m

322

(273)

–

LGC
£m

272

–

363

(77)

286

LGI
£m

308

(1)

–

307

(39)

268

LGI2
£m

303

(60)

–

243

182

425

General
Insurance
£m

–

(27)

–

(27)

(21)

General
Insurance
£m

–

(8)

Group
expenses
and debt
costs
£m

Total
continuing
operations1
£m

(329)

2,256

(19)

(326)

(263)

Group
expenses
and debt
costs
£m

(311)

(14)

(314)

(271)

(188)

(19)

2,049

(305)

1,744

Total
continuing
operations1
£m

1,948

1,977

(169)

1,808

1. Continuing operations exclude the results of the Mature Savings division which has been classified as discontinued following the announcement in December 2017 to sell
the Mature Savings business to Swiss Re. For the year ended 31 December 2017, continuing operations also exclude profits relating to Legal & General Netherlands, which
was sold during 2017 and was previously reflected in the LGI divisional results.

2. The LGI tax credit of £182m in 2017 primarily reflects the impact of a one-off US tax benefit of £246m arising from the revaluation of net deferred tax liabilities as a result

of the reduction in the US corporate income tax rate in 2017.

# All references to ‘Operating profit’ throughout this report represent ‘Group adjusted operating profit’, an alternative performance measure defined in the glossary.

196

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsAdditional financial information

(ii) Revenue

Revenue comprises of the following:

Net premiums earned
Revenue from insurance and investment contracts has been described in section (e) of this Note.

Investment return
Investment return has been described in Note 29 of this report.

Fees from fund management and investment contracts*
The group generates revenue from acting as the investment manager for clients. Fees charged on investment management services are based
on the contractual fee arrangements applied to assets under management and recognised as revenue as the services are provided.

The group’s income from investment contracts is primarily derived from fees for administration and managing of funds in pension plans. Revenue
generated on investment contracts is recognised as services are provided. No significant judgements are applied on the timing or transaction price.
In the instances of performance fees where revenue is subject to meeting a certain performance threshold, such revenue is not recognised until the
condition has been met, and it is highly probable that no significant reversal of amounts would occur. Variable costs directly related to securing new
contracts are capitalised and amortised over the estimated period over which the revenue is expected to be generated.

Transaction fees are charged to implement trades for clients. Such fees are charged at the time the transaction takes place and are based on the
size of the underlying contract.

House building*
House building revenue arises from the sale of residential properties and land, and is recognised net of discounts and sales incentives. Sales of
private houses are recognised on legal completion. Following the implementation of IFRS 15, the sale proceeds of part exchange properties are
also included in revenue. Sales of social housing, where multiple units are developed and sold under a contractual agreement with a single
customer, typically a housing association, are recognised over time in accordance with construction progress. Sales of land and commercial
property are recognised on unconditional exchange, namely when contracts are exchanged or missives concluded and, where appropriate,
construction is complete. The transaction price is determined using extensive research and expert judgement, current market values and
regional variations.

Warranties are provided on all properties and range from 2-10 years.

Professional services fees*
The group’s professional services fees revenue arises from professional services provided by employed surveyors and third party providers,
panel management fees and administration fees. These fees are based on fee scales or contracts. Revenue is recognised when the service has
been rendered.

In addition, the group derives professional fees from facilitation of mortgage arrangements and related products such as conveyancing. These are
based on an agreement/contract and could be tiered based on volume. The obligation in such instances is satisfied on completion of the mortgage/
service, at which point the revenue is recognised. There is no significant judgement applied on the timing or amount of fee recognised.

Insurance broker*
Fees are charged on each performance obligation offered to the customer as per agreed structure. Revenue for placement services is recognised
at the point in time when the intermediary has satisfied its performance obligation, that is when the terms of the insurance policy have been agreed
contractually by the insurer and policyholder, and the insurer has a present right to payment from the policyholder. No significant judgements are
applied on the timing or transaction price.

*Contracts are either expected to last one year or less, or reflect the right to consideration from a customer in an amount that corresponds directly with the value of the
performance completed to date. As permitted under IFRS 15, the transaction price allocated to any unsatisfied contracts is not disclosed.

197

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements28 Segmental analysis (continued)
(ii) Revenue (continued)
Analysis of segmental information for continuing operations:
(a) Total revenue

Total income

Share of profit from associates and joint ventures net of tax

Gain on acquisition/disposal of subsidiaries, associates and joint ventures

Total revenue from continuing operations1

2018
£m

2017
£m

1,264

40,392

(15)

(20)

(41)

–

1,229

40,351

1. Total revenue from continuing operations excludes the revenue of the Mature Savings division which has been classified as discontinued following the announcement in
December 2017 to sell the Mature Savings business to Swiss Re. For 2017, total revenue from continuing operations also excludes revenue relating to Legal & General
Netherlands (£99m), and gain on sale of Legal & General Netherlands (£17m) which was included in the Consolidated Income Statement. Legal & General Netherlands was
sold during 2017.

(b) Total income

For the year ended 31 December 2018

Internal income

External income

Total income

For the year ended 31 December 2017

Internal income

External income

Total income

LGR
£m

–

8,507

LGR
£m

–

6,862

LGIM1,2
£m

172

(10,654)

(10,482)

LGIM1,2
£m

158

28,779

28,937

LGI
£m

–

1,742

LGI4,5
£m

–

2,027

General
Insurance
£m

–

370

General
Insurance
£m

–

342

LGC and
other3
£m

(172)

1,299

1,127

LGC and

other3,5
£m

(158)

2,382

2,224

Total
continuing
operations4
£m

–

1,264

Total
continuing
operations4
£m

–

40,392

1. LGIM internal income relates to investment management services provided to other segments.
2. LGIM external income includes fees from fund management and investment return.
3. LGC and other includes LGC income, intra-segmental eliminations and group consolidation adjustments.
4. Continuing operations exclude the results of the Mature Savings division which has been classified as discontinued following the announcement in December 2017 to sell
the Mature Savings business to Swiss Re. For the year ended 31 December 2017, continuing operations also excludes income relating to Legal & General Netherlands,
which was sold during 2017 and was previously reflected in the LGI divisional results.

5. Following a review of the segmentation of income between certain business divisions we have reallocated £518m for the year ended 31 December 2017 from LGI to LGC

and other, as this better reflects the nature of that income.

For the year ended 31 December 2018

Investment contracts

Investment management fees

Transaction fees

Total fees from fund management and investment contracts3

For the year ended 31 December 2017

Investment contracts

Investment management fees

Transaction fees

Total fees from fund management and investment contracts3

LGIM
£m

813

930

LGIM
£m

768

870

LGC and
other1
£m

Total
continuing
operations2
£m

–

(114)

(15)

(129)

LGC and
other1
£m

–

(101)

–

(101)

699

802

Total
continuing
operations2
£m

668

771

LGI
£m

–

LGI2
£m

–

1. LGC and other includes LGC income, intra-segmental eliminations and group consolidation adjustments.
2. Continuing operations exclude the results of the Mature Savings division which has been classified as discontinued following the announcement in December 2017 to sell
the Mature Savings business to Swiss Re. For the year ended 31 December 2017, continuing operations also excludes income relating to Legal & General Netherlands,
which was sold during 2017 and was previously reflected in the LGI divisional results.

3. Fees from fund management and investment contracts are a component of total revenue from continuing operations disclosed in Note 28 (ii)(a).

198

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsAdditional financial information

(d) Other operational income from contracts with customers

For the year ended 31 December 2018

House building

Professional services fees

Insurance broker

Total other operational income from contracts with customers3

For the year ended 31 December 2017

House building

Professional services fees

Insurance broker

Total other operational income from contracts with customers3

LGR
£m

LGIM
£m

–

LGR
£m

–

LGIM
£m

–

LGC and
other1
£m

981

–

Total
continuing
operations2
£m

981

161

981

1,171

LGC and
other1
£m

Total
continuing
operations2
£m

(19)

–

(14)

152

181

LGI
£m

–

155

184

LGI2
£m

–

168

192

1. LGC and other includes LGC income, intra-segmental eliminations and group consolidation adjustments. 2018 balances primarily reflects the consolidation of the results

of CALA Homes.

2. Continuing operations exclude the results of the Mature Savings division which has been classified as discontinued following the announcement in December 2017 to sell
the Mature Savings business to Swiss Re. For the year ended 31 December 2017, continuing operations also excludes income relating to Legal & General Netherlands,
which was sold during 2017 and was previously reflected in the LGI divisional results.

3. Total other operational income from contracts with customers is a component of total revenue from continuing operations disclosed in Note 28 (ii)(a) and excludes the

share of profit from associates and joint ventures and gain on acquisition of subsidiaries, associates and joint ventures.

(e) Gross written premiums on insurance contracts

Gross written premium represents the total premiums written by the group before deductions for reinsurance.

Long term insurance premiums are recognised as revenue when due for payment. General insurance premiums are accounted for in the period in
which the risk commences. Estimates are included for premiums not notified by the year end and provision is made for the anticipated lapse of
renewals not yet confirmed. Those proportions of premiums written in a year which relate to periods of risk extending beyond the end of the year
are carried forward as unearned premiums.

Premiums received relating to investment contracts are not recognised as income, but are included in the balance sheet investment contract liability.

Outward reinsurance premiums from continuing operations are accounted for in the same accounting period as the related premiums for the direct
or inwards reinsurance business being reinsured.

For the year ended 31 December 2018

Gross written premiums

For the year ended 31 December 2017

Gross written premiums

LGI
£m

General
Insurance
£m

Total
continuing
operations1
£m

LGR
£m

10,263

2,580

410

13,253

LGR
£m

4,971

LGI1
£m

2,530

General
Insurance
£m

Total
continuing
operations1
£m

369

7,870

1. Continuing operations exclude gross written premiums from the Mature Savings division following the announcement in December 2017 to sell the Mature Savings

business to Swiss Re. For this segmental analysis as at 31 December 2017, continuing operations also exclude the gross written premiums of Legal & General
Netherlands. This business was sold during 2017 and was previously reflected in LGI divisional results.

199

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements29 Investment return

Investment return includes fair value gains and losses, excluding fair value movements attributable to available-for-sale (AFS) investments,
dividends, rent and interest. Dividends are accrued on an ex-dividend basis. Interest and rent are included on an accruals basis. Interest income
for financial assets which are not classified as fair value through profit or loss (FVTPL) is recognised using the effective interest method.

The group earns an investment return from holdings in financial instruments and property investments, held to back insurance and investment
contracts on behalf of policyholders and as group capital.

Dividend income

Interest income on financial investments at fair value through profit or loss

Other investment (expense)/income1

(Losses)/gains on financial investments designated at fair value through profit or loss

(Losses)/gains on derivative instruments designated as held for trading

Realised (losses)/gains on financial assets designated as available-for-sale

Financial investment return

Rental income

Net fair value gains on properties

Property investment return

Total investment return

Less investment return from discontinued operations

Investment return from continuing operations

2018
£m

5,204

4,897

(500)

2017
£m

5,207

4,639

136

(23,149)

24,901

(36)

(9)

772

(13,593)

35,660

444

507

467

488

(13,086)

1,239

36,148

(2,691)

(11,847)

33,457

1. Includes interest income of £50m (2017: £88m) on financial investments designated as available-for-sale. There was no significant impairment on assets classified

as available-for-sale during the year (2017: £nil).

200

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsAdditional financial information

30 Tax

The tax shown in the Consolidated Income Statement and Consolidated Statement of Comprehensive Income comprises current and deferred tax.

Current tax
Current tax comprises tax payable on current year profits, adjusted for non-tax deductible or non-taxable items, and any adjustments to tax payable
in respect of previous periods. Current tax is recognised in the Consolidated Income Statement unless it relates to items which are recognised in the
Consolidated Statement of Comprehensive Income or directly in equity.

Deferred tax
Deferred tax is calculated on differences between the accounting value of assets and liabilities and their respective tax values. Deferred tax is also
recognised in respect of unused tax losses to the extent it is probable that future taxable profits will arise against which the losses can be utilised.
Deferred tax is charged or credited to the Consolidated Income Statement, except when it relates to items charged or credited to the Consolidated
Statement of Comprehensive Income or charged or credited directly in equity.

Tax attributable to policyholders and equity holders
The total tax expense shown in the group’s Consolidated Income Statement includes income tax borne by both policyholders and shareholders.
This has been apportioned between that attributable to policyholders’ returns and equity holders’ profits. This represents the fact that the group’s
long-term business in the UK pays tax on policyholder investment return, in addition to the corporation tax charge charged on shareholder profit.
The separate presentation is intended to provide more relevant information about the tax that the group pays on the profits that it makes.

For this apportionment, the equity holders’ tax on long-term business is estimated by applying the statutory tax rate to profits attributed to equity
holders. This is considered to approximate the corporation tax attributable to shareholders as calculated under UK tax rules. The balance of income
tax associated with UK long-term business is attributed to income tax attributable to policyholders’ returns and approximates the corporation tax
attributable to policyholders as calculated under UK tax rules.

Use of estimates
Tax balances include the use of estimates and assumptions which affect items reported in the Consolidated Balance Sheet and Income Statement.
Although these estimates are based on management’s best knowledge of current circumstances and future events and actions, actual results may
differ from those estimates.

For tax this includes the determination of liabilities/recoverables for uncertain tax positions and estimation of future taxable income supporting
deferred tax asset recognition.

As the group operates internationally, it is exposed to uncertain tax positions and changes in legislation in the jurisdictions in which it operates.
The assessment of uncertain tax positions is subjective and significant management judgement is required. This judgement is based on
interpretation of legislation, management experience and professional advice. The directors have assessed the group’s uncertain tax positions and
are comfortable that the provisions in place are not material individually or in aggregate, and that a reasonable possible alternative outcome in the
next financial year would not have a material impact to the results of the group.

Tax rates
The table below provides a summary of the standard corporate income tax rates of territories we operate in.

UK1

USA2

Bermuda

Hong Kong

Ireland

Japan

2018

19.0%

21.0%

0.0%

16.5%

12.5%

2017

19.25%

35.0%

0.0%

16.5%

12.5%

30.86%

1. A reduction in the UK corporation tax rate to 17% from 1 April 2020 has been enacted in UK law. Rates between 19% and 17% have been applied to UK temporary

differences to calculate UK deferred tax assets and liabilities on the basis of when temporary differences are expected to reverse.

2. A reduction in the US federal corporate income tax rate from 35% to 21% from 1 January 2018 has been enacted in US law. The rate of 21% has been applied

to US temporary differences to calculate US deferred tax assets and liabilities.

201

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements30 Tax (continued)
(i) Tax charge in the Consolidated Income Statement

Current tax

Deferred tax

– Origination or reversal of temporary differences in the year

– Impact of reduction in UK and US corporate tax rates on deferred tax balances

Total deferred tax

Adjustment to equity holders’ tax in respect of prior years

Total tax charge1

Less tax attributable to policyholder returns

– Continuing operations

– Discontinued operations

Total tax charge attributable to equity holders

Less: tax from discontinued operations attributable to equity holders

Tax from continuing operations attributable to equity holders

2018
£m

358

(123)

(112)

(36)

210

(53)

163

110

320

(15)

305

2017
£m

499

(242)

(145)

377

(70)

(119)

(189)

188

(19)

169

1. Total tax charge comprises tax attributable to continuing operations of £358m (2017: £239m) and a discontinued operations credit of £148m (2017: charge of £138m).

The tax charge attributable to equity holders differs from the tax calculated on profit before tax at the standard UK corporation tax rate as follows:

Profit before tax attributable to equity holders

Tax calculated at 19.00% (2017: 19.25%)

Adjusted for the effects of:

Recurring reconciling items:

Income not subject to tax1

(Lower)/higher rate of tax on overseas profits2

Non-deductible expenses

Differences between taxable and accounting investment gains

Unrecognised tax losses

Non-recurring reconciling items:

Income not subject to tax1

Non-deductible expenses

Differences between taxable and accounting investment gains

Adjustments in respect of prior years3

Impact of reduction in UK and US corporate tax rates on deferred tax balances4

Tax attributable to equity holders

Equity holders’ effective tax rate5

Continuing
operations
2018
£m

2,049

389

Total
2018
£m

2,128

404

Continuing
operations
2017
£m

1,991

383

Total
2016
£m

2,090

402

–

(55)

(4)

–

(10)

–

(36)

305

–

(55)

(4)

–

(10)

–

(36)

320

14.9%

15.0%

(11)

(3)

(4)

(11)

(3)

(4)

(242)

169

8.5%

(242)

188

9.0%

1. The acquisition of the remaining share capital of CALA Homes in the year significantly reduced our non-taxable share of income from joint ventures.
2. The lower rate of tax on overseas profits in 2018 primarily relates to the effect of our Bermudan operations taxed at 0% and our US operations taxed at 21%.
3. Adjustments in respect of prior years relates to revisions to earlier estimates.
4. The US federal corporate income tax rate reduced from 35% to 21% from 1 January 2018. The enacted rate of 21% has been applied to the US temporary differences to

calculate US deferred tax assets and liabilities on the basis of when temporary differences are expected to reverse. 2017 includes the impact of the one-off US tax benefit
of £246m arising from the revaluation of net deferred tax liabilities as a result of the reduction in the US corporate income tax rate.

5. Equity holders’ effective tax rate is calculated by dividing the tax attributable to equity holders over profit before tax attributable to equity holders.

The UK standard rate of corporation tax is used in the above reconciliation as a significant proportion of the group’s profits are earned and are
taxable in the UK, which is also the main domicile for the group.

202

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsAdditional financial information

(ii) Deferred tax – Consolidated Balance Sheet
Deferred tax assets and liabilities have been recognised/(provided) for temporary differences and unused tax losses. The recognition of deferred tax
assets in respect of temporary differences and tax losses are supported by management’s best estimate of future taxable profits to absorb the
losses in future years. Deferred tax assets and liabilities presented on the Consolidated Balance Sheet have been offset to the extent it is
permissible under the relevant accounting standards. The net movement in deferred tax assets and liabilities during the year is as follows:

Deferred acquisition expenses

– UK

– Overseas

Difference between the tax and accounting value of insurance contracts

– UK

– Overseas

Realised and unrealised gains on investments

Excess of depreciation over capital allowances

Excess expenses

Accounting provisions and other

Trading losses2

Pension fund deficit

Acquired intangibles

Total net deferred tax liabilities3

Less: net deferred tax liabilities of operations classified as held for sale

Net deferred tax liabilities

Presented on the Consolidated Balance Sheet as:

– Deferred tax assets

– UK deferred tax liabilities

– Overseas deferred tax liabilities

Net tax
liability as at
1 January
20181
£m

Tax
(charged)/
credited to
the income
statement
£m

Tax
(charged)/
credited
to equity
£m

Net tax
liability as at
31 December
2018
£m

Acquisitions
£m

(40)

(334)

(69)

(265)

(282)

(33)

(2)

(489)

262

(227)

(13)

(221)

–

(216)

(96)

(120)

202

(3)

(10)

126

(7)

(2)

123

(165)

(42)

–

(80)

–

(27)

(6)

(21)

–

(22)

–

(31)

–

(31)

–

(29)

(2)

–

(22)

–

(22)

–

(22)

–

(22)

–

(40)

(577)

(171)

(406)

(72)

(28)

163

(4)

(419)

(322)

(144)

(185)

1. US deferred tax liabilities in respect of deferred acquisition costs and non-participating insurance contracts have been restated following the change in accounting policy
for LGIA term assurance reserves. Further details on the change of accounting policy are provided in Note 1. The net tax impact to overseas deferred tax liabilities is a
reduction of £116m at 31 December 2017.

2. Trading losses include UK trade and US operating losses of £4m (2017: £4m) and £159m (2017: £27m) respectively.
3. Total net deferred tax liabilities are presented gross of held for sale liabilities in 2018. Detailed disclosure relating to liabilities of operations classified as held for sale is

included in Note 27.

203

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements30 Tax (continued)
(ii) Deferred tax – Consolidated Balance Sheet (continued)

Deferred acquisition expenses

– UK

– Overseas

Difference between the tax and accounting value of insurance contracts

– UK

– Overseas

Realised and unrealised gains on investments

Excess of depreciation over capital allowances

Excess expenses

Accounting provisions and other

Trading losses

Pension fund deficit

Acquired intangibles

Total net deferred tax liabilities

Less: net deferred tax liabilities of operations classified as held for sale

Net deferred tax liabilities

Presented on the Consolidated Balance Sheet as:

– Deferred tax assets

– UK deferred tax liabilities

– Overseas deferred tax liabilities

Net tax
liability as at
1 January
20171
£m

Tax
(charged)/
credited to
the income
statement
£m

Tax
charged)/
credited
to equity
£m

Change in
Accounting
Policy1
£m

Net tax
liability as at
31 December
20171
£m

Transfers2
£m

(280)

(45)

(235)

(286)

(123)

(163)

(255)

(51)

(13)

(659)

–

(659)

(291)

(373)

146

141

(20)

–

(18)

(45)

(27)

158

–

158

(1)

157

–

(7)

–

(4)

–

262

–

262

–

123

–

123

(156)

–

(156)

–

(33)

–

(33)

–

(33)

(40)

(334)

(69)

(265)

(282)

(33)

(2)

(489)

262

(227)

(13)

(221)

1. US deferred tax liabilities in respect of deferred acquisition costs and non-participating insurance contracts have been restated following the change in accounting policy

for LGIA term assurance reserves. Further details on the change of accounting policy are provided in Note 1. The net impact to overseas deferred tax liabilities is a
reduction of £116m at 31 December 2017.

2. Transfers include net deferred tax liabilities that are now classified as held for sale.

Unrecognised deferred tax assets
The group has the following unrelieved tax losses and deductible temporary differences carried forward as at 31 December 2018, none of which
have expiry dates under current tax laws. No deferred tax asset has been recognised in respect of these as at 31 December 2018 (or 31 December
2017), as it is not probable that there will be suitable taxable profits emerging in future periods against which to relieve them. These tax assets will
only be recognised if it becomes probable that suitable taxable profits will arise in future periods. The potential deferred tax asset unrecognised as
at 31 December 2018 is £31m (2017: £22m).

Trading losses

Capital losses

Unrelieved interest payments on debt instruments

Unrecognised deferred tax assets1

Gross
2018
£m

163

Tax
2018
£m

Gross
2017
£m

114

Tax
2017
£m

1. Unrecognised deferred tax assets include UK balances of £25m (2017: £19m) and trade losses arising overseas of £6m (2017: £3m).

204

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsAdditional financial information

(iii) Current tax – Consolidated Balance Sheet

Tax recoverable within 12 months

Tax recoverable after 12 months

Total current tax assets

Less: current tax assets of operations classified as held for sale1

Current tax assets

Tax due within 12 months

Tax due after 12 months

Total current tax liabilities

Less: current tax liabilities of operations classified as held for sale1

Current tax liabilities

1. Detailed disclosure on liabilities of operations classified as held for sale items is included in Note 27.

(iv) Tax charged directly in equity

Current tax

Deferred tax

Tax recognised directly in equity1

1. Tax recognised directly in equity wholly relates to continuing operations.

31 Auditor’s remuneration

Notes

30(ii)

Remuneration receivable by the Company’s auditors for the audit of the consolidated and company financial statements

Remuneration receivable by the Company’s auditors and its associates for the supply of other services to the Company and its associates,
including remuneration for the audit of the financial statements of the Company’s subsidiaries:

– The audit of the Company’s subsidiaries

– Audit related assurance services – required by national or EU legislation

– Audit related assurance services – other

– Other assurance services

Total assurance services

Tax compliance services

Other tax services

Services related to corporate finance transactions

Other services not covered above

Total non-assurance services

Total remuneration

2018
£m

230

271

501

(83)

418

2018
£m

133

173

(2)

171

2018
£m

(7)

2018
£m

1.1

4.9

0.8

0.6

0.2

7.6

0.1

0.9

0.4

1.5

9.1

In addition to the fees for 2018 shown above, during 2018 the group paid PwC £0.4m in relation to the 2017 audit of group subsidiaries.

The fee for non-audit services is less than 70% of the average of fees paid in the last three consecutive financial years for the statutory audit
of the group.

2017
£m

155

265

420

(78)

342

2017
£m

223

270

(47)

223

2017
£m

(2)

(45)

(47)

2017
£m

1.3

4.8

0.8

1.0

0.4

8.3

0.1

0.3

0.8

9.1

205

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements32 Employee information

Monthly average number of staff employed during the year:

UK1

USA

Europe

Other

Worldwide employees

Wages and salaries

Social security costs

Share-based incentive awards

Defined benefit pension costs

Defined contribution pension costs

Total employee related expenses

2018

2017

7,974

744

6,849

653

8,770

7,570

2018
£m

581

820

2017
£m

459

702

Notes

1. On 12 March 2018 the group increased its shareholding in CALA Group (Holdings) Limited to 100% resulting in an increase of 759 in the average number of UK staff employed.

33 Share-based payments

The fair value at the date of grant of the equity instrument is recognised as an expense, spread over the vesting period of the instrument.
The total amount to be expensed is determined by reference to the fair value of the awards, excluding the impact of any non-market vesting
conditions. At each balance sheet date, the group revises its estimate of the number of equity instruments which are expected to become
exercisable. It recognises the impact of the revision of original estimates, if any, in the Consolidated Income Statement and a corresponding
adjustment is made to equity. On vesting or exercise, the difference between the expense charged to the Consolidated Income Statement and
the actual cost to the group is transferred to retained earnings. Where new shares are issued, the proceeds received are credited to share capital
and share premium.

(i) Description of plans
The group provides a number of equity settled share-based long term incentive plans for directors and eligible employees.

The Savings Related Share Option Scheme (SAYE) allows employees to enter into a regular savings contract over three and/or five years, coupled
with a corresponding option over shares of the group. The grant price is equal to 80% of the quoted market price of the group shares on the
invitation date. Fair value is calculated using the Black-Scholes model.

Nil Cost Options can be granted to senior managers under the Performance Share Plan (PSP), based upon individual and company performance.
Pre the 2014 award, the number of performance shares transferred to the individual at the end of the three year vesting period was dependent on
the group’s relative Total Shareholder Return (TSR). New performance conditions attached to awards from 2014 result in the number of options that
vest being equally dependent on the group’s relative TSR and earnings per share (EPS)/dividend per share (DPS) growth. In addition, the awards
vest after the end of the three year performance period and become exercisable in thirds over three, four and five years. Further changes were
made to the performance conditions for awards granted in 2018. The number of options that vest in respect of these awards is equally dependent
on the group’s relative TSR and EPS growth (subject to Solvency II objectives). The majority of awards vest after the end of the three year
performance period and become exercisable in thirds in year three, four and five. Awards granted to Executive Directors and Persons Delivering
Managerial Responsibilities vest after three years but any options that vest will not become exercisable until year five.

The Share Bonus Plan (SBP) awards restricted shares, combined awards of CSOP options and restricted shares and combined awards of CSOP
options and nil-paid options. With the exception of the Executive Directors, recipients of restricted shares are entitled to both vote and receive
dividends. Fair value is calculated as the market value on the grant date, adjusted to reflect the eligibility for dividend payments.

Under the HMRC tax-advantaged Employee Share Plan (ESP), permanent UK employees may elect to purchase group shares from the market at
the prevailing market price on a monthly basis. The group supplements the number of shares purchased by giving employees one free matching
share for every one share purchased up to the first £20 of the employees’ contributions and one free matching share for every two shares
purchased with contributions between £20 and £125. There is currently no match on contributions between £125 and £150. From time to time,
the group may make a grant of free shares. Both the free and matching shares must be held in trust for three years. The fair value of granted
shares is equal to the market value at grant date.

206

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsAdditional financial information

The fair values of the share grants made during the year have been calculated using the following assumptions:

Award date

Weighted average share price

Weighted average exercise price

Expected volatility

Expected life

Risk free investment rate

Dividend yield

SAYE

6 April
2018

261.7p

212.0p

27%

PSP

16 April
2018

268.0p

n/a

29%

3-5 years

0.89-1.08%

5.6%

0.92%

5.6%

(ii) Total recognised expense
The total recognised expense relating to share-based payments in 2018 was £38m (2017: £31m) before tax, all of which related to equity settled
share schemes. This is broken down between the group’s plans as detailed below:

Share bonus plan (SBP)

Performance share plan (PSP)

Employee share plan (ESP)

Savings related share option scheme (SAYE)

Total share-based payment expense

(iii) Outstanding share options

2018
£m

2017
£m

Outstanding at 1 January

Granted during the year

Forfeited during the year

Exercised during the year

Expired during the year

Outstanding at 31 December

Exercisable at 31 December

Weighted average remaining contractual life (years)

SAYE
options
2018

Weighted average
exercise price
2018
p

CSOP
options
2018

Weighted average
exercise price
2018
p

SBP
options
2018

Weighted average
exercise price
2018
p

12,604,142

4,163,957

(863,280)

(2,333,913)

(730,922)

12,839,984

66,991

193

212

202

194

196

199

205

3,963,940

1,396,946

–

(6,117)

(1,303,093)

4,051,676

3,252

257

269

–

245

281

254

118

358,611

103,791

–

(12,768)

(51,987)

397,647

–

Exercised during the year includes 18,885 options, which were predominantly CSOP options linked to SBP which have been settled using
employee scheme shares.

SAYE
options
2017

Weighted average
exercise price
2017
p

CSOP
options
2017

Weighted average
exercise price
2017
p

SBP
options
2017

Weighted average
exercise price
2017
p

Outstanding at 1 January

Granted during the year

Forfeited during the year

Exercised during the year

Expired during the year

Outstanding at 31 December

Exercisable at 31 December

14,803,696

3,717,189

(789,845)

(3,781,727)

(1,345,171)

12,604,142

159,132

Weighted average remaining contractual life (years)

185

201

199

169

193

172

3,897,089

1,451,394

–

(1,166,762)

(217,781)

3,963,940

3,252

246

250

–

212

253

257

118

393,574

75,702

–

(78,583)

(32,082)

358,611

–

Exercised during the year includes 1,245,345 options, which were predominantly CSOP options linked to SBP which have been settled
using employee scheme shares.

–

207

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements33 Share-based payments (continued)
(iv) Total options
Options over 17,289,307 shares (2017: 16,926,693 shares) are outstanding under CSOP, SAYE and SBP as at 31 December 2018. These options
have a range of weighted average exercise prices between 0p and 254p (2017: 0p and 257p) and maximum remaining contractual life up to 2028
(2017: 2027).

34 Share capital, share premium and employee scheme treasury shares

An equity instrument is any contract which evidences a residual interest in the net assets of an entity. It follows that a financial instrument is treated
as equity if:

•

there is no contractual obligation to deliver cash or other financial assets or to exchange financial assets or liabilities on unfavourable terms; and

the instrument is either a non-derivative which contains no contractual obligation to deliver a variable number of own equity instruments,
or is a derivative which will be settled only by the group exchanging a fixed amount of cash, or other financial assets, for a fixed number
of its own equity instruments.

Where any group entity purchases the company’s equity share capital, the consideration paid, including any directly attributable incremental costs
(net of income taxes), is deducted from equity attributable to shareholders. Where such shares are subsequently sold, reissued or otherwise
disposed of, any consideration received is included in equity attributable to shareholders, net of any directly attributable incremental transaction
costs and the related income tax effects. Shares held on behalf of employee share schemes are disclosed as such on the Consolidated Balance Sheet.

(i) Share capital and share premium

Authorised share capital

As at 31 December: ordinary shares of 2.5p each

Issued share capital, fully paid

As at 1 January 2018

Options exercised under share option schemes

As at 31 December 2018

Issued share capital, fully paid

As at 1 January 2017

Options exercised under share option schemes

As at 31 December 2017

2018
Number
of shares

2018
£m

2017
Number
of shares

9,200,000,000

230

9,200,000,000

2017
£m

230

Number
of shares

5,958,438,193

2,330,041

5,960,768,234

Number
of shares

5,954,656,466

3,781,727

5,958,438,193

Share
capital
£m

Share
premium
£m

149

–

149

Share
capital
£m

149

–

149

988

992

Share
premium
£m

981

988

There is one class of ordinary shares of 2.5p each. All shares issued carry equal voting rights.

The holders of the company’s ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at shareholder
meetings of the company.

208

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsAdditional financial information

(ii) Employee scheme treasury shares
The group uses the Employee Share Ownership Trust (ESOT) and the Legal & General Group Employee Share Plan (ESP) to purchase and hold
shares of the group for delivery to employees under various employee share schemes. Shares owned by these vehicles are included at cost in
the Consolidated Balance Sheet and are shown as a deduction from shareholders’ equity. They are disclosed as employee scheme treasury
shares until they vest to employees. Share-based liabilities to employees may also be settled via purchases directly from the market or by
the issue of new shares.

The ESOT has waived its voting rights and its rights to some of the dividends payable on the shares it holds. Employees are entitled to dividends
on the shares held on their behalf within the ESP.

As at 1 January

Shares purchased

Shares vested

As at 31 December

2018
Number
of shares

23,275,545

6,631,399

(2,430,847)

27,476,097

2018
£m

(5)

2017
Number
of shares

21,433,142

6,988,042

(5,145,639)

23,275,545

35 Non-controlling interests
Non-controlling interests represent third party interests in direct equity investments as well as investments in private equity and property
investment vehicles which are consolidated in the group’s results.

No individual non-controlling interest is considered to be material on the basis of the year end carrying value or share of profit or loss.

36 Other liabilities

Accruals

Deferred income

Other

Total other liabilities

Less: liabilities of operations classified as held for sale2

Other liabilities

Due within 12 months3

Due after 12 months3

2018
£m

375

248

676

(57)

619

595

1. Following the change in accounting policy for LGIA term assurance reserves other liabilities have been restated. The net impact of the restatement is a reduction

in other liabilities of £72m. Further details on the change in accounting policy are provided in Note 1.
2. Detailed disclosure relating to liabilities of operations classified as held for sale is included in Note 27.
3. The maturity analysis of the liabilities within and after 12 months is based on the Total other liabilities as at 31 December.

2017
£m

(6)

20171
£m

344

146

545

(54)

491

480

209

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements37 Reconciliation of Assets under management to Consolidated Balance Sheet financial investments,
investment property and cash and cash equivalents

Assets under management1

Derivative notionals1,2

Third party assets1,3

Other1,4

Total financial investments, investment property and cash and cash equivalents

Less: assets of operations classified as held for sale5

Financial investments, investment property and cash and cash equivalents

2018
£bn

1,015

(304)

(284)

480

(25)

455

2017
£bn

983

(273)

(261)

491

(22)

469

1. These balances are unaudited.
2. Derivative notionals are included in the assets under management measure but are not for IFRS reporting and are thus removed.
3. Third party assets are those that LGIM manage on behalf of others which are not included on the group’s Consolidated Balance Sheet.
4. Other includes assets that are managed by third parties on behalf of the group, other assets and liabilities related to financial investments, derivative assets and pooled funds.
5. Assets of operations classified as held for sale primarily relate to Mature Savings following the group’s announcement to sell the Mature Savings business to Swiss Re.

38 Related party transactions
(i) Key management personnel transactions and compensation
There were no material transactions between key management and the Legal & General group of companies during the year. All transactions
between the group and its key management are on commercial terms which are no more favourable than those available to employees in general.
Contributions to the post-employment defined benefit plans were £84m (2017: £93m) for all employees.

At 31 December 2018 and 31 December 2017 there were no loans outstanding to officers of the company.

The aggregate compensation for key management personnel, including executive and non-executive directors, is as follows:

Salaries

Post-employment benefits

Share-based incentive awards

Key management personnel compensation

Number of key management personnel

2018
£m

–

2017
£m

–

(ii) Services provided to and by related parties
All transactions between the group and associates, joint ventures and other related parties during the year are on commercial terms which are no
more favourable than those available to companies in general.

Loans and commitments to related parties are made in the normal course of business.

The group has the following material related party transactions:

• Annuity contracts issued by Legal and General Assurance Society Limited for consideration of £59m (2017: £161m) purchased by the group’s UK

defined benefit pension schemes during the period, priced on an arm’s length basis;

• Loans outstanding from related parties, including preference shares, at 31 December 2018 of £201m (2017: £203m), with a further commitment

of £6m;

• The group has total other commitments of £837m to related parties (2017: £633m), of which £507m has been drawn at 31 December 2018

(2017: £357m).

210

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsAdditional financial information

39 Contingent liabilities, guarantees and indemnities
Provision for the liabilities arising under contracts with policyholders is based on certain assumptions. The variance between actual experience
from that assumed may result in those liabilities differing from the provisions made for them. Liabilities may also arise in respect of claims relating
to the interpretation of policyholder contracts, or the circumstances in which policyholders have entered into them. The extent of these liabilities is
influenced by a number of factors including the actions and requirements of the PRA, FCA, ombudsman rulings, industry compensation schemes
and court judgements.

Various group companies receive claims and become involved in actual or threatened litigation and regulatory issues from time to time. The relevant
members of the group ensure that they make prudent provision as and when circumstances calling for such provision become clear, and that each
has adequate capital and reserves to meet reasonably foreseeable eventualities. The provisions made are regularly reviewed. It is not possible to
predict, with certainty, the extent and the timing of the financial impact of these claims, litigation or issues.

In 1975, Legal and General Assurance Society Limited (LGAS) was required by the Institute of London Underwriters (ILU) to execute the ILU form
of guarantee in respect of policies issued through the ILU’s Policy Signing Office on behalf of NRG Victory Reinsurance Company Ltd (Victory), a
company which was then a subsidiary of LGAS. In 1990, Nederlandse Reassurantie Groep Holding NV (the assets and liabilities of which have since
been assumed by Nederlandse Reassurantie Groep NV under a statutory merger in the Netherlands) acquired Victory and provided an indemnity to
LGAS against any liability LGAS may have as a result of the ILU’s requirement, and the ILU agreed that its requirement of LGAS would not apply to
policies written or renewed after the acquisition. Nederlandse Reassurantie Groep NV is now owned by Columbia Insurance Company, a subsidiary
of Berkshire Hathaway Inc. Whether LGAS has any liability as a result of the ILU’s requirement and, if so, the amount of its potential liability is
uncertain. LGAS has made no payment or provision in respect of this matter.

Group companies have given warranties, indemnities and guarantees as a normal part of their business and operating activities or in relation to
capital market transactions or corporate disposals. Legal & General Group Plc has provided indemnities and guarantees in respect of the liabilities
of group companies in support of their business activities including Pension Protection Fund compliant guarantees in respect of certain group
companies’ liabilities under the group pension fund and scheme. LGAS has provided indemnities, a liquidity and expense risk agreement, a deed
of support and a cash and securities liquidity facility in respect of the liabilities of group companies to facilitate the group’s matching adjustment
reorganisation pursuant to Solvency II.

40 Commitments
(i) Capital commitments

Authorised and contracted commitments not provided for in respect of investment property development,
payable after 31 December:

– Long term business

(ii) Operating lease commitments

The future aggregate minimum lease payments under non-cancellable operating leases are as follows:

– Not later than 1 year

– Later than 1 year and not later than 5 years

– Later than 5 years

Lease commitment payable

Future aggregate minimum sublease payments expected to be received under operating subleases

The future aggregate minimum lease receivables under non-cancellable operating leases are as follows:

– Not later than 1 year

– Later than 1 year and not later than 5 years

– Later than 5 years

Lease commitment receivable

2018
£m

2017
£m

632

478

2018
£m

101

350

480

126

400

1,455

4,751

6,606

2017
£m

360

472

392

1,445

4,945

6,782

The group leases offices and other premises under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses
and renewal rights.

211

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements41 Post balance sheet events
IndiaFirst Life Insurance Company Limited
The sale of the group’s stake in IndiaFirst Life Insurance Company Limited (announced on 1 June 2018) was completed on 7 February 2019.

5.875% Sterling undated subordinated notes
On 4 February 2019, notification was given that the group intends to redeem the 5.875% Sterling undated subordinated notes in full on 1 April 2019.
Effective from the notification date, the notes were no longer treated as tier 2 own funds for Solvency II purposes.

42 Subsidiaries

The Companies Act 2006 requires disclosure of information about the group’s subsidiaries, associates, joint ventures and other significant holdings.
A complete list of the group’s subsidiaries, associates, joint ventures and significant holdings in this context is provided in Notes 42 and 43.

Subsidiaries are those entities (including special purpose entities, mutual funds and unit trusts) over which the group directly or indirectly has the
power to govern the operating and financial policies in order to gain economic benefits. Profits or losses of subsidiary undertakings sold or acquired
during the year are included in the consolidated results up to the date of disposal or from the date of gaining control. The interests of parties, other
than the group, in investment vehicles, such as unit trusts, are classified as liabilities and appear as ’Net asset value attributable to unit holders’ in
the Consolidated Balance Sheet. The basis by which subsidiaries are consolidated in the group financial statements is outlined in the basis of
preparation (Note 1).

The particulars of the company’s subsidiaries, mutual funds and partnerships that have been consolidated as at 31 December 2018 are listed below.
The main territory of operation of subsidiaries incorporated in England and Wales is the UK. For overseas subsidiaries the principal country of
operation is the same as the country of incorporation. All subsidiaries have a 31 December year end reporting date and are 100% owned, unless
stated otherwise. The registered office of all subsidiaries in England and Wales is One Coleman Street, London EC2R 5AA, United Kingdom, and in
Ireland is Dillon Eustace, 33 Sir John Rogerson’s Quay, Dublin 2, Ireland, unless otherwise noted. All subsidiaries are held through intermediate
holding companies unless noted that they are held directly by the company. Subsidiaries that are consolidated where the group owns less than 50%
of the ordinary share capital, are consolidated based on an assessment of control normally arising from special rights attaching to the class of share
owned, other contractual arrangements and factors such as the purpose of the investee, the nature of its relevant activities, voting rights (including
potential voting rights) and substantive and protective rights.

The group reassesses the appropriateness of the consolidation of an investee whenever facts and circumstances indicate that there has been a
change in the relationship between the group and the investee which affects control.

212

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsAdditional financial information

Company name

Nature of business

Share class

Year end
reporting
date

% of equity
shares
held by the
group

Country of incorporation: England and Wales

103 Wardour Street Retail Investment Company Limited

Investment vehicle

Access Development General Partner Limited

Antham 1 Limited

Banner (Spare) Limited1

Banner Construction Limited1

Banner Developments Limited1

Banner Freehold Limited1

Banner Homes Bentley Priory Limited1

Banner Homes Central Limited1

Banner Homes Group Limited1

Banner Homes Limited1

Banner Homes Midlands Limited1

Banner Homes Southern Limited1

Banner Homes Ventures Limited1

Banner Management Limited1

BTR Core Limited

Fund general partner

Investment vehicle

Domestic building construction

Ordinary

Letting and operating of leased real estate

Ordinary

Domestic building construction

Dormant company

Domestic building construction

Investment vehicle

Ordinary

31-Dec

31-Aug

Bucklers Park Estate Management Company Limited

Management of real estate

Limited by guarantee

31-May

Buddies Enterprises Limited

CALA (ESOP) Trustees Limited1

CALA 1 Limited1

CALA Group (Holdings) Limited1

CALA Homes (Chiltern) Limited1

CALA Homes (Midlands) Limited1

Pet insurance

Financial intermediation

Domestic building construction

CALA Homes (North Home Counties) Limited1

Domestic building construction

CALA Homes (South Home Counties) Limited1

Domestic building construction

CALA Homes (Southern) Limited1

CALA Homes (Thames) Limited1

CALA Homes (Yorkshire) Limited1

CALA Properties Banbury Limited1

Care Secured Limited1

Chineham General Partner Limited

Chineham Shopping Centre Limited Partnership

City & Urban Developments Limited

CleverMover Limited

Ealing Shopping Centre Limited Partnership

Gresham Street General Partner Limited

Gresham Street Limited Partnership

Haut Investments 2 Limited

Haut Investments Limited

Industrial Property Investment Fund

Non-trading company

Domestic building construction

Dormant company

Investment vehicle

Holding company

Provision of services

Limited partnership

Investment vehicle

Limited partnership

Holding company

Investment vehicle

Investment Discounts On Line Limited

Insurance agents and brokers

IPIF Trade General Partner Limited

Dormant company

Jimcourt Limited1

Domestic building construction

1. Registered office: CALA House, 54 The Causeway, Surrey, TW18 3AX

Ordinary

31-Dec

30-Dec

31-Dec

100.0

213

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements42 Subsidiaries (continued)

Company name

Nature of business

Share class

Year end
reporting
date

% of equity
shares
held by the
group

Latchmore Park Nominee No.1 Limited

Non-trading company

Legal & General (Caerus) Limited

Institutional fund management

Legal & General (PMC Trustee) Limited

Dormant company

Legal & General (Portfolio Management Services) Limited

Institutional fund management

Legal & General (Portfolio Management Services) Nominees Limited

Dormant company

Legal & General (Strategic Land North Horsham) Limited

Legal & General (Strategic Land) Limited

Holding company

Legal & General (Unit Trust Managers) Limited

Unit trust management

Legal & General (Unit Trust Managers) Nominees Limited

Non-trading company

Legal & General Affordable Homes (Development) Limited

Domestic building construction

Legal & General Affordable Homes (Operations) Limited

Development of building projects

Legal & General Affordable Homes Limited

Development of building projects

Legal & General Capital Investments Limited2

Legal & General Co Sec Limited2

Legal & General Development Assets Holdings Limited

Holding company

Dormant company

Holding company

Legal & General Distribution Services Limited

Distribution company

Legal & General Employee Benefits Administration Limited

Non-trading company

Legal & General Estate Agencies Limited2

Mortgage finance company

Legal & General Finance PLC2

Treasury operations

Legal & General FX Structuring (SPV) Limited

SPV3

Legal & General GP LLP

Development of building projects

Legal & General Holdings No.2 Limited

Holding company

Legal & General Home Finance Administration Services Limited

Provision of services

Legal & General Home Finance Holding Company Limited

Holding company

Legal & General Home Finance Limited

Mortgage finance company

Legal & General Homes (Services Co) Limited

Provision of services

Legal & General Homes Communities (Arborfield) Limited

Development of building projects

Legal & General Homes Communities (Crowthorne) Limited

Development of building projects

Legal & General Homes Communities (Shrivenham) Limited

Development of building projects

Legal & General Homes Communities Limited

Development of building projects

Legal & General Homes Holdings Limited

Holding company

Legal & General Homes Modular Limited

Development of modular housing

Legal & General Insurance Holdings Limited

Legal & General Insurance Holdings No. 2 Limited2

Legal & General Insurance Limited

Legal & General International (Holdings) Limited

Legal & General International Limited

Holding company

General insurance

Holding company

Legal & General Investment Management (Holdings) Limited2

Holding company

Legal & General Investment Management Funds ICVC

Open ended investment company

Legal & General Investment Management Limited

Institutional fund management

Legal & General Leisure Fund Trustee Limited

Legal & General Life Fund Limited Partnership

Investment vehicle

Limited partnership

Ordinary

2. Directly held by Legal & General Group Plc. All other subsidiaries are held through intermediate holding companies.
3. Special Purpose Vehicle.

214

31-Dec

100.0

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsAdditional financial information

Company name

Nature of business

Share class

Year end
reporting
date

% of equity
shares
held by the
group

Legal & General LTM Structuring (SPV) Limited

Legal & General Middle East Limited2

Legal & General Overseas Holdings Limited

Legal & General Overseas Operations Limited2

Legal & General Partnership Holdings Limited2

Legal & General Partnership Services Limited

Legal & General Pension Fund Trustee Limited

Legal & General Pension Scheme Trustee Limited

Legal & General Pensions Limited

Legal & General Property Limited

SPV3

Holding company

Provision of services

Dormant company

SPV3

Development of building projects

Legal & General Property Partners (Industrial Fund) Limited

Development of building projects

Legal & General Property Partners (Industrial) Nominees Limited

Dormant company

Legal & General Property Partners (IPIF GP) LLP

Investment in UK real estate

Legal & General Property Partners (Leisure GP) LLP

Fund general partner

Legal & General Property Partners (Leisure) Limited

Development of building projects

Legal & General Property Partners (Life Fund) Limited

Investment vehicle

Legal & General Property Partners (Life Fund) Nominee Limited

Investment vehicle

Legal & General Property Partners (UK PIF Geared) Limited

Investment in UK real estate

Legal & General Property Partners (UK PIF) Limited

Investment in UK real estate

Legal & General Property Partners (UKPIF Geared Two) Limited

Investment in UK real estate

Legal & General Property Partners (UKPIF Two) Limited

Investment in UK real estate

Legal & General Re Holdings Limited2

Legal & General Resources Limited2

Legal & General Retail Investments (Holdings) Limited2

Legal & General Senior Living Limited

Legal & General Share Scheme Trustees Limited2

Legal & General Surveying Services Limited

Legal & General Trustees Limited

Holding company

Provision of services

Holding company

Dormant company

Provision of services

Fund trustee

Ordinary

Partnership

Ordinary

Legal & General UK PIF Two GP LLP

Investment in UK real estate

Partnership

Legal and General Assurance (Pensions Management) Limited

Long-term business

Legal and General Assurance Society Limited

Long-term and general insurance

LGIM Commercial Lending Limited

LGIM Corporate Director Limited

LGIM International Limited

LGIM Real Assets (Operator) Limited

LGIM Real Assets Limited

LGP Newco Limited

LGPL Cornwall Limited

LGV Capital Limited

LGV Capital Partners Limited

ND7 Limited

Commercial lending

Non-trading company

Institutional fund management

Development of building projects

Dormant company

Investment vehicle

Venture and development capital

Development of building projects

Ordinary

New Bailey (East) Management Company Limited

Investment company

Limited by guarantee

2. Directly held by Legal & General Group Plc. All other subsidiaries are held through intermediate holding companies.
3. Special Purpose Vehicle.

31-Dec

100.0

215

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements42 Subsidiaries (continued)

Company name

Nature of business

Share class

New Bailey (West) Management Company Limited

Investment company

Limited by guarantee

New Life Mortgage Funding Limited

Mortgage finance company

Northampton General Partner Limited

Northampton Shopping Centre Limited Partnership

NSC Building A Limited

NSC Building B Limited

Old Cornwall Limited

Investment vehicle

Limited partnership

Real estate trading

Investment vehicle

Performance Retail (General Partner) Limited

Development of building projects

Performance Retail (Nominee) Limited

Performance Retail Limited Partnership

Senior Living (Bramshott Place) Limited4

Senior Living (Caddington) Limited

Senior Living (Durrants) Limited4

Senior Living (Exeter) Limited4

Senior Living (Freelands) Limited4

Senior Living (Ledian Farm) Limited4

Senior Living (Tattenhall) Limited4

Dormant company

Limited partnership

Dormant company

Development of building projects

Ordinary

Senior Living (Tunbridge Wells) Limited

Buying and selling of own real estate

Ordinary

Senior Living (Turvey) Limited

Buying and selling of own real estate

Ordinary

Senior Living (Warwick Gates) Limited4

Development of building projects

Senior Living Finance 1 Limited

Senior Living Medici Holdco Limited4

Senior Living Medici Limited4

Senior Living Urban (Bath) Limited

Senior Living Urban Limited

Synergy Gracechurch Limited

Tattenhall Care Village LLP

Terminus Road (Nominee 1) Limited

Terminus Road (Nominee 2) Limited

The Advantage Collection Limited1

The Pathe Building Management Company Limited

Warwick Gates LLP

Whitegates (Holdings) Limited

L&G Future World Sustainable Opportunities

L&G Real Capital Builder Fund

L&G European Equity Income Fund

L&G Future World Gender in Leadership UK Index

L&G Real Income Builder Fund

L&G Multi-Asset Target Return Fund

L&G UK Smaller Companies Trust

L&G Growth Trust

L&G Cash Trust

Dormant company

Holding company

Investment vehicle

Trading company

Dormant company

Domestic building construction

Investment vehicle

Trading company

Dormant company

Unit trust

1. Registered office: CALA House, 54 The Causeway, Surrey, TW18 3AX
4. Registered office: The Stanley Building, 7 St Pancras Square, London N1C 4AG

216

Ordinary

Unit

Year end
reporting
date

% of equity
shares
held by the
group

31-Dec

30-Nov

31-Dec

31-Oct

31-Dec

100.0

99.9

99.6

98.8

95.8

93.0

92.9

91.2

80.4

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsAdditional financial information

Company name

Nature of business

Share class

Year end
reporting
date

% of equity
shares
held by the
group

L&G UK Special Situations Trust

Unit trust

LGIM Global Corporate Bond Fund

Open ended investment company

L&G Global Developed Four Factor Scientific Beta Index Fund

Authorised contractual schemes

L&G European Trust

L&G UK Alpha Trust

L&G Global Real Estate Dividend Index Fund

L&G High Income Trust

L&G Dynamic Bond Trust

ECV Partnerships Tattenhall Limited4

ECV Partnerships Warwick Limited4

Unit trust

Limited partnership

Thorpe Park Developments Limited5

Property development company

Thorpe Park Holdings Limited5

TP 2005 Limited5

TP Property Services Limited5

L&G Future World Equity Factors Index Fund

L&G Multi Manager Balanced Trust

L&G European Index Trust

L&G Emerging Markets Government Bond (US$) Index Fund

L&G Ethical Trust

L&G Japan Index Trust

L&G Global Emerging Market Index Fund

L&G Fixed Interest Trust

L&G Global Infrastructure Fund

L&G UK Mid Cap Index Fund

Holding company

Dormant company

Property services

Unit trust

L&G Emerging Markets Government Bond (Local Currency) Index Fund

Unit trust

L&G US Index Trust

L&G Mixed Investment 0-20% Fund

L&G Pacific Index Trust

Unit trust

Unit

Ordinary

Unit

Ordinary

Unit

Sapphire Campus Management Company Limited

Investment vehicle

Ordinary

Country of incorporation: Hong Kong

31-Dec

75.6

73.0

67.0

66.0

61.7

59.3

55.0

52.4

50.0

49.0

48.1

44.4

42.9

42.6

40.8

40.0

36.6

33.9

31.7

30.8

28.7

25.3

24.8

9.5

Legal & General Investment Management Asia Limited6

Institutional fund management

Ordinary

31-Dec

100.0

Country of incorporation: Ireland

L&G Future World Global Credit Fund – UK

L&G Multi Asset Core 20 Fund

L&G Multi Asset Core 45 Fund

L&G Multi Asset Core 75 Fund

QIAIF7

ICAV8

Legal & General Fund Managers (Ireland) Limited9

Institutional fund management

Ordinary

Legal & General ICAV

Open Ended Umbrella Investment Company Ordinary

Legal & General UCITS Managers (Ireland) Limited

Institutional fund management

LGIM (Ireland) Risk Management Solutions Plc

Management company

LGIM 2020 FIXED FUND

QIAIF7

Ordinary

4. Registered office: The Stanley Building, 7 St Pancras Square, London N1C 4AG
5. Registered office: Europa House, 20 Esplanade, Scarborough, North Yorkshire, YO11 2AQ
6. Registered office: Room 902, 9th Floor, Chinachem Tower, 34-37 Connaught Road Central, Hong Kong
7. Qualifying Investor Alternative Investment Fund.
8. Irish Collective Asset-management Vehicle.
9. Registered office: Grand Canal House, 1 Upper Grand Canal Street, Dublin 4, Ireland.

31-Dec

100.0

217

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements42 Subsidiaries (continued)

Company name

LGIM 2020 INFLATION FUND

LGIM 2020 REAL FUND

LGIM 2024 Leveraged Index Linked Gilt Fund

LGIM 2025 FIXED FUND

LGIM 2025 INFLATION FUND

LGIM 2025 REAL FUND

LGIM 2030 FIXED FUND

LGIM 2030 INFLATION FUND

LGIM 2030 Leveraged Index Linked Gilt Fund

LGIM 2030 REAL FUND

LGIM 2034 Leveraged Index Linked Gilt Fund

LGIM 2035 FIXED FUND

LGIM 2035 INFLATION FUND

LGIM 2035 REAL FUND

LGIM 2037 Leveraged Index Linked Gilt Fund

LGIM 2038 LEVERAGED GILT FUND

LGIM 2040 FIXED FUND

LGIM 2040 INFLATION FUND

LGIM 2040 Leveraged Index Linked Gilt Fund

LGIM 2040 REAL FUND

LGIM 2042 LEVERAGED GILT FUND

LGIM 2042 Leveraged Index Linked Gilt Fund

LGIM 2045 FIXED FUND

LGIM 2045 LEVERAGED GILT FUND

LGIM 2045 REAL FUND

LGIM 2047 Leveraged Index Linked Gilt Fund

LGIM 2049 LEVERAGED GILT FUND

LGIM 2050 FIXED FUND

LGIM 2050 INFLATION FUND

LGIM 2050 Leveraged Index Linked Gilt Fund

LGIM 2050 REAL FUND

LGIM 2055 FIXED FUND

LGIM 2055 LEVERAGED GILT FUND

LGIM 2055 Leveraged Index Linked Gilt Fund

LGIM 2055 REAL FUND

LGIM 2060 FIXED FUND

LGIM 2060 INFLATION FUND

LGIM 2060 LEVERAGED GILT FUND

LGIM 2060 REAL FUND

LGIM 2062 Leveraged Index Linked Gilt Fund

LGIM 2068 LEVERAGED GILT FUND

LGIM 2068 Leveraged Index Linked Gilt Fund

LGIM Active Gilts All Stocks Fund AH

7. Qualifying Investor Alternative Investment Fund.

218

Nature of business

Share class

Year end
reporting
date

% of equity
shares
held by the
group

QIAIF7

Ordinary

31-Dec

100.0

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsAdditional financial information

Company name

LGIM Bespoke Active Credit Fund AM

LGIM Bespoke Active Credit Fund BP

LGIM Bespoke Active Credit Fund BS

LGIM CREDIT AND LIQUIDITY – FUND BN

LGIM CREDIT AND LIQUIDITY-FUND BM

LGIM EURO 2030 REAL FUND

LGIM FIXED LONG DURATION FUND

LGIM FIXED SHORT DURATION FUND

LGIM HEDGING – FUND A

LGIM HEDGING – FUND AC

LGIM HEDGING – FUND AK

LGIM HEDGING – FUND AN

LGIM HEDGING – FUND AO

LGIM HEDGING – FUND AP

LGIM HEDGING – FUND AQ

LGIM HEDGING – FUND AR

LGIM HEDGING – FUND AS

LGIM HEDGING – FUND AU

LGIM HEDGING – FUND AV

LGIM HEDGING – FUND AW

LGIM HEDGING – FUND AY

LGIM HEDGING – FUND AZ

LGIM HEDGING – FUND B

LGIM HEDGING – FUND BA

LGIM HEDGING – FUND BB

LGIM HEDGING – FUND BF

LGIM HEDGING – FUND BH

LGIM HEDGING – FUND BJ

LGIM HEDGING – FUND BR

LGIM HEDGING – FUND C

LGIM HEDGING – FUND DC

LGIM HEDGING – FUND H

LGIM HEDGING – FUND I

LGIM HEDGING – FUND J

LGIM HEDGING – FUND L

LGIM HEDGING – FUND M

LGIM HEDGING – FUND O

LGIM HEDGING – FUND P

LGIM HEDGING – FUND Q

LGIM HEDGING – FUND R

LGIM HEDGING – FUND V

LGIM HEDGING – FUND W

LGIM HEDGING – FUND WH

Nature of business

Share class

Year end
reporting
date

% of equity
shares
held by the
group

QIAIF7

Ordinary

31-Dec

100.0

7. Qualifying Investor Alternative Investment Fund.

219

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsNature of business

Share class

Year end
reporting
date

% of equity
shares
held by the
group

42 Subsidiaries (continued)

Company name

LGIM HEDGING – FUND WS

LGIM HEDGING – FUND WT

LGIM HEDGING – FUND ZZ

LGIM HEDGING FUND AE

LGIM HEDGING FUND AI

LGIM HEDGING FUND BG

LGIM HEDGING FUND BI

LGIM HEDGING FUND BL

LGIM HEDGING FUND BT

LGIM HEDGING FUND CI

LGIM HEDGING FUND CJ

LGIM HEDGING-FUND AT

LGIM LEVERAGED GILT PLUS FUND

LGIM LEVERAGED INDEX LINK GILT PLUS FUND

LGIM LEVERAGED SYNTHETIC EQUITY FUND

LGIM LEVERAGED SYNTHETIC EQUITY FUND (GBP)

LGIM Liquidity Funds plc

LGIM Managers (Europe) Limited

LGIM REAL LONG DURATION FUND

LGIM REAL SHORT DURATION FUND

LGIM SOLUTIONS FUND CA

LGIM SOLUTIONS FUND CB

LGIM SOLUTIONS FUND CC

LGIM SOLUTIONS FUND CD

LGIM SOLUTIONS FUND CE

LGIM SOLUTIONS FUND CF

LGIM SOLUTIONS FUND CG

LGIM SOLUTIONS FUND CH

LGIM SOLUTIONS FUND CP

LGIM SOLUTIONS FUND CU

LGIM SOLUTIONS FUND DB

LGIM SOLUTIONS FUND DF

LGIM SYNTHETIC LEVERAGED CREDIT FUND

QIAIF7

Ordinary

Open Ended Umbrella Investment Company Ordinary

QIAIF7

Ordinary

Sterling Liquidity Plus Fund

Open Ended Umbrella Investment Company Ordinary

L&G Frontier Markets Equity Fund

ICAV8

Ordinary

US DOLLAR LIQUIDITY FUND

STERLING LIQUIDITY FUND

Open Ended Umbrella Investment Company Ordinary

L&G Asia Pacific ex Japan Equity Index Fund

ICAV8

Ordinary

EURO LIQUIDITY FUND

Open Ended Umbrella Investment Company Ordinary

L&G Europe ex UK Equity Index Fund

Open Ended Umbrella Investment Company Ordinary

L&G North American Equity Index Fund

ICAV8

Ordinary

7. Qualifying Investor Alternative Investment Fund.
8. Irish Collective Asset-management Vehicle.

220

31-Dec

100.0

95.8

81.9

63.6

59.7

58.4

58.1

33.6

32.2

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsAdditional financial information

Company name

Country of incorporation: Japan

Nature of business

Share class

Year end
reporting
date

% of equity
shares
held by the
group

Legal & General Investment Management Japan KK10

Investment management

Ordinary

31-Dec

100.0

Country of incorporation: Jersey

Atlantic Quay Three Limited11

Canary Property Unit Trust12

Chineham Shopping Centre Unit Trust13

Gracechurch Property Limited12

Gresham Street Unit Trust13

Northampton Shopping Centre Unit Trust13

Procession House One Unit Trust14

SCBD S6 Trust12

Senior Living (Liphook) Limited15

Synergy Gracechurch Holdings Limited12

Vantage General Partner Limited16

Performance Retail Unit Trust13

Country of incorporation: Luxembourg

L&G Buy & Maintain Credit Fund17

L&G Euro High Alpha Corporate Bond Fund17

L&G UK Core Plus Bond Fund17

Legal & General SICAV17

L&G Absolute Return Bond Plus Fund17

L&G Future World Global Credit Fund17

L&G Emerging Markets Bond Fund17

L&G Absolute Return Bond Fund17

L&G Commodity Index Fund17

L&G Emerging Markets Short Duration Bond Fund17

L&G Future World Global Equity Focus Fund17

Country of incorporation: Scotland

CALA 1999 Limited19

CALA Group Limited19

CALA Homes (East) Limited20

CALA Homes (North) Limited20

CALA Homes (Scotland) Limited20

CALA Homes (West) Limited20

CALA Homes Limited20

Investment vehicle

Unit trust

Investment vehicle

Unit trust

Investment vehicle

Fund general partner

Unit trust

SICAV18

Holding company

Domestic building construction

Non-trading company

Domestic building construction

CALA Land Investments (Bearsden) Limited19

Domestic building construction

CALA Land Investments Limited19

Development of building projects

CALA Limited19

Head office

10. Registered office: 22F Toranomon Kotohira Tower, 1-2-8 Toranomon, Minato-ku, Tokyo, 105-0001, Japan
11. Registered office: 12 Castle Street, St Helier, Jersey, JE2 3RT
12. Registered office: Lime Grove House, Green Street, St Helier, Jersey, JE1 2ST
13. Registered office: 47 Esplanade, St Helier, Jersey, JE4 9WG
14. Registered office: 44 Esplanade, St Helier, Jersey, JE4 9WG
15. Registered office: One, The Esplanade, St Helier, Jersey JE2 3QA
16. Registered office: 11-15 Seaton Place, St Helier, Jersey, JE4 0QH
17. Registered office: 2-4 Rue Eugene Ruppert, Luxembourg, L - 2453, Luxembourg
18. Société d’investissement à capital variable
19. Registered office: Adam House, 5 Mid New Cultins, Edinburgh, EH11 4DU
20. Registered office: Johnstone House, 52-54 Rose Street, Aberdeen, AB10 1HA

Ordinary

Unit

Ordinary

Unit

Ordinary

Unit

Ordinary

31-Dec

100.0

50.1

100.0

99.7

95.1

91.0

74.3

69.3

100.0

221

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements42 Subsidiaries (continued)

Company name

CALA Management Limited19

CALA Properties (Holdings) Limited20

CALA Ventures Limited19

LGV Capital Partners (GP) LLP21

Nature of business

Share class

Year end
reporting
date

% of equity
shares
held by the
group

Domestic building construction

Non-trading company

Domestic building construction

Ordinary

31-Dec

100.0

LGV Capital Partners (Scotland) Limited21

Dormant company

Sauchiehall Trustee Limited22

UK PIF FGP LLP21

UK PIF Two Founder GP Limited21

Country of incorporation: USA

Banner Life Insurance Company23

FBV Financing-1, LLC24

FBV Financing-2, LLC24

First British Vermont Reinsurance Company II, Limited25

First British Vermont Reinsurance Company III, Limited24

Global Index Advisors Inc.26

Legal & General America Inc.27

Venture and development capital

Investment vehicle

Fund general partner

Long-term business

Reinsurance

Investment advisory

Holding company

Legal & General Investment Management America Inc.27

Institutional fund management

Legal & General Investment Management United States (Holdings), Inc.27

Holding company

William Penn Life Insurance Company of New York Inc.28

Long-term business

Country of incorporation: Bermuda

First British Bermuda Reinsurance Company II Limited29

First British Bermuda Reinsurance Company III Limited29

Legal & General Reinsurance Company Limited30

Legal & General Resources Bermuda Limited30

Legal & General SAC Limited30

Reinsurance

Provision of services

Reinsurance

19. Registered office: Adam House, 5 Mid New Cultins, Edinburgh, EH11 4DU
20. Registered office: Johnstone House, 52-54 Rose Street, Aberdeen, AB10 1HA
21. Registered office: 50 Lothian Road, Festival Square, Edinburgh, EH3 9WJ
22. Registered office: Eversheds LLP, 3-5 Melville Street, Edinburgh, EH3 7PE
23. Registered office: 1701 Research Boulevard, Rockville, Maryland 20850, United States
24. Registered office: 850 New Burton Road, Suite 201, Dover, Delaware 19904, United States
25. Registered office: Marsh Management Services, 100 Bank Street, Suite 610, Burlington, Vermont 05402, United States
26. Registered office: 29 North Park Square, Ste.201, Marietta, Georgia 30060, United States
27. Registered office: Corporation Trust Centre, 1209 Orange Street, Wilmington, New Castle, Delaware 19801, United States
28. Registered office: 100 Quentin Roosevelt Blvd, PO Box 519, Garden City, New York 11530, United States
29. Registered office: Clarendon House, 2 Church Street, Hamilton HM11, Bermuda
30. Registered office: Crown House, 4 Par La Ville Road, Hamilton HM08, Bermuda

222

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsAdditional financial information

43 Associates and joint ventures

Associates are entities over which the group has significant influence but which it does not control. It is presumed that the group has significant
influence where it has between 20% and 50% of the voting rights in the investee unless indicated otherwise. Joint ventures are entities where the
group and other parties undertake an activity which is subject to joint control. The basis by which associates and joint ventures are consolidated in
the group financial statements is outlined in the basis of preparation (Note 1).

The group has the following significant holdings classified as associates and joint ventures which have been included as financial investments,
investments in associates or investments in joint ventures. The gross assets of these companies are in part funded by borrowings which are non
recourse to the group.

Company name1

Bracknell Property Unit Trust2,3

Country of
incorporation

Accounting
treatment

Jersey

FVTPL

Investment
type

Joint Venture

245 Hammersmith Road Limited Partnership4

England and Wales

Access Development Limited Partnership5

Central St Giles Unit Trust6

Peel Holdings (Media) Limited7

Bruntwood SciTech Limited8

Inspired Villages Group4

Guild Living Limited4

Accelerated Digital Ventures Limited9

Salary Direct Holdings Limited10

English Cities Fund4

NTR Wind Management Limited11

Smartr365 Finance Limited12

Caresourcer Limited13

Sennen Finance Designated Activity Company14,15

Jersey

Equity Method

Joint Venture

FVTPL

Joint Venture

England and Wales

Equity Method

Joint Venture

England and Wales

Equity Method

Joint Venture

England and Wales

Ireland

England and Wales

Scotland

Ireland

FVTPL

Associate

Equity Method

Joint Venture

Year end
reporting
date

31-Mar

31-Dec

31-Mar

30-Sep

31-Dec

30-Nov

31-Dec

31-Mar

31-Dec

30-Jun

% of equity
shares
held by
the group

50.9

Share
class

Units

Partnership

50.0

Ordinary

Units

Ordinary

Units

Ordinary

–

50.0

49.0

46.0

40.0

35.4

25.0

20.0

–

IndiaFirst Life Insurance Company Limited, a 26% joint venture has been classified as held for sale and excluded from the above following the group’s announcement in
June 2018 to sell its stake. Detailed disclosure relating to operations classified as held for sale is included in Note 27.

2. The Bracknell Property Unit Trust is not consolidated as the group does not have the power to control the entity.
3. Registered office: 40 Esplanade, St Helier, Jersey, JE2 3QB
4. Registered office: One Coleman Street, London, EC2R 5AA
5. Registered office: 11-15 Seaton Place, St Helier, Jersey, JE4 0QH
6. Registered office: Lime Grove House, Green Street, St Helier, Jersey, JE1 2ST
7. Registered office: Peel Dome Intu Trafford Centre, Traffordcity, Manchester, United Kingdom, M17 8PL
8. Registered office: Union, Albert Square, Manchester, England, M2 6LW
9. Registered office: Electric Works, Concourse Way, Sheffield, England, S1 2BJ
10. Registered office: 35-37 New Street, St Helier, Jersey, JE2 3RA
11. Registered office: Burton Court, Burton Hall Drive, Sandyford, Dublin 18, Ireland
12. Registered office: 1 Queen Caroline Street, Hammersmith, London, United Kingdom, W6 9YN
13. Registered office: Codebase, 38 Castle Terrace, Edinburgh, City Of Edinburgh, EH3 9DR
14. Registered office: 1-2 Victoria Buildings, Haddington Road, Dublin 4, D04 XN32, Ireland
15. The company is subject to joint control by the group and other parties by means of contractual arrangements or bases other than voting or similar rights. As such, it also

meets the definition of a structured entity. Refer to Note 44 for further details on consolidated and unconsolidated structured entities.

223

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements

43 Associates and joint ventures (continued)
(i) Joint ventures
Summarised financial information for joint ventures accounted for under the equity method is shown below:

Joint ventures

Current assets1

Non-current assets1

Current liabilities1

Non-current liabilities1

Profits from continuing operations – total

Profits from continuing operations – group’s share

Total comprehensive income – total

Total comprehensive income – group’s share

Equity method

2018
£m

1,046

520

2017
£m

1,085

1,644

422

1,639

126

1. Reduction in assets and liabilities reflects the derecognition of Haut Investment Limited (CALA Homes) as a joint venture during the year, and its recognition as a subsidiary.

The joint ventures have no significant contingent liabilities to which the group is exposed. The group has no commitments to provide funding to
joint ventures.

(ii) Other significant holdings
The group has the following other significant holdings which have been included as financial investments.

Company name

Mithras Investment Trust1

Bishopsgate Long Term Property Limited Partnership2

Country of
incorporation

Territory

England and Wales

Jersey

Year end
reporting
date

31-Dec

Share
class

Ordinary

Limited
Partner

% of equity
shares
held by the
group

27.8

25.0

1. The net asset value at 31 December 2018 was £4.2m (2017: £15.5m) and the registered office is 1 Northumberland Avenue, Trafalgar Square, London, WC2N 5BW.
2. The net asset value at 31 December 2018 was £103.8m (2017: £147.7m) and the registered office is 12 Castle Street, St Helier, Jersey, JE2 3RT.

224

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsAdditional financial information

44 Interests in structured entities
A structured entity is an entity that has been designed so that voting or similar rights are not the dominating factor in deciding who controls the
entity, such as when voting rights might relate to administrative tasks only and the relevant activities are directed by means of contractual
arrangement. The group has interests in investment vehicles which, depending upon their status, are classified as either consolidated or
unconsolidated structured entities as described below:

• Debt securities, consisting of traditional asset backed securities, together with securitisation and debentures and Collateralised Debt

Obligations (CDOs);

• Investment funds, largely being unit trusts;

• Specialised investment vehicles, analysed between Irish Collective Asset-management Vehicles (ICAVs), Open Ended Investment Companies

(OEICs), Societes d’Investissement a Capital Variables (SICAVs), Specialised Investment Funds (SIFs) and Property Limited Partnerships.

All of the group’s holdings in the above vehicles are subject to the terms and conditions of the respective investment vehicle’s offering
documentation and are susceptible to market price risk arising from uncertainties about future values of those investment vehicles. The investment
manager makes investment decisions after extensive due diligence of the underlying investment vehicle, including consideration of its strategy and
the overall quality of the underlying investment vehicle’s manager.

All of the investment vehicles in the investment portfolio are managed by portfolio managers who are compensated by the respective investment
vehicles for their services. Such compensation generally consists of an asset based fee and a performance related incentive fee, and is reflected in
the valuation of the investment vehicles.

(a) Interests in consolidated structured entities
The group has determined that where it has control over an investment vehicle, that investment is a consolidated structured entity. The group has
not provided, and has no intention to provide, financial or other support to any other structured entities which it does not consolidate.

(b) Interests in unconsolidated structured entities
As part of its investment activities, the group also invests in unconsolidated structured entities. As at 31 December 2018, the group’s interest in
such entities reflected on the group’s Consolidated Balance Sheet and classified as financial investments held at fair value through profit or loss was
£13,396m (2017: £11,800m). A summary of the group’s interests in unconsolidated structured entities is provided below:

Debt securities

Analysed as:

Asset backed securities

Securitisations and debentures

CDOs

Investment funds

Analysed as:

Unit trusts

Property limited partnerships

Exchange traded funds

Specialised Investment Vehicles

Analysed as:

ICAVs

OEICs

SICAVs

SIFs

Property limited partnerships

Total

Financial
investments
2018
£m

Financial
Investments
2017
£m

2,634

2,383

115

125

145

8,465

6,439

546

376

149

1,255

134

1,892

197

13,396

11,800

225

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements44 Interests in structured entities (continued)
(b) Interests in unconsolidated structured entities (continued)
Management fees received for investments that the group manages also represent interests in unconsolidated structured entities, and the group
always maintains an interest in those funds which it manages. Where the group does not manage the investments, its maximum exposure to loss
is the carrying amount in the group Consolidated Balance Sheet. Where the group does manage these investments, the maximum exposure is the
underlying balance sheet value, together with future management fees.

The table below shows the assets under management of those structured entities which the group manages, together with investment
management fees received from external parties.

Investment funds

Specialised Investment Vehicles

Analysed as:

OEICs

SICAVs

Property limited partnerships

Other1

Total

Investment
management
fees
2018
£m

Investment
management
fees
2017
£m

AUM
2017
£m

112

42,063

129

141

1,085

651

3,266

109

47,174

144

AUM
2018
£m

45,394

516

612

4,068

1,453

52,043

1. Other relates to AUM and investment management fees from ACS and ICAVs as well as ETFs (following the acquisition of Canvas in March 2018).

No significant sponsorship has been provided to any of the above entities. The group has not, and has no intention, to provide any significant
financial or other support to any other structured entities which it does not consolidate.

In addition to the above, the group has an exposure of £224m (2017: £228m) related to special purpose vehicles classified as joint ventures and
accounted for using the equity method, with a carrying value on the group Consolidated Balance Sheet as at 31 December 2018 of £nil (2017: £nil).

226

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsCompany financial statements

Company Balance Sheet

As at 31 December 2018

Non-current assets

Investments in subsidiaries

Loans to subsidiaries

Current assets

Receivables

Derivative assets

Other financial investments

Cash and cash equivalents

Total assets

Non-current liabilities

Payables: amounts falling due after more than one year

Current liabilities

Payables: amounts falling due within one year

Derivative liabilities

Total liabilities

Net assets

Equity

Share capital

Share premium

Revaluation reserve

Capital redemption and other reserves

Retained earnings

Total equity

Notes

2018
£m

8,465

714

1,364

163

2017
£m

7,717

720

1,612

–

10,710

10,146

3,959

3,501

138

4,126

6,584

149

992

2,459

118

2,866

6,584

150

119

3,770

6,376

149

988

2,459

2,703

6,376

The notes on pages 229 to 233 form an integral part of these financial statements.

The financial statements on pages 227 to 233 were approved by the directors on 5 March 2019 and were signed on their behalf by:

Sir John Kingman
Chairman

Nigel Wilson
Group Chief Executive

Stuart Jeffrey Davies
Group Chief Financial Officer

227

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsCalled up
share
capital
£m

Share
premium
account
£m

149

988

Capital
redemp-
tion
reserve
£m

–

Called up
share
capital
£m

149

Share
premium
account
£m

981

Capital
redemp-
tion
reserve
£m

–

Share-
based
payment
reserve
£m

Hedging
reserve
£m

Re-
valuation
reserve
£m

2,459

–

2,459

Re-
valuation
reserve
£m

2,459

–

2,459

Retained
earnings
£m

2,703

1,085

–

(932)

2,866

Retained
earnings
£m

1,804

1,767

–

(872)

2,703

Total
equity
£m

6,376

1,085

(16)

(932)

6,584

Total
equity
£m

5,470

1,767

(9)

(15)

(872)

6,376

–

(26)

–

(19)

–

(9)

–

(9)

–

149

992

Share-
based
payment
reserve
£m

Hedging
reserve
£m

149

988

(9)

Company Statement of Changes in Equity

For the year ended
31 December 2018

As at 1 January 2018

Profit for the financial year

Movement in cross-currency hedge

Options exercised under share option schemes

Shares vested and transferred from share-based
payment reserve

Employee scheme treasury shares:

– Value of employee services

Dividends

As at 31 December 2018

For the year ended
31 December 2017

As at 1 January 2017

Profit for the financial year

Addition to hedging reserve: cross-currency hedge

Options exercised under share option schemes

Shares vested and transferred from share-based
payment reserve

Employee scheme treasury shares:

– Value of employee services

Dividends

As at 31 December 2017

228

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements1 Accounting policies
Basis of preparation
These financial statements have been prepared in accordance with the Companies Act 2006 as applicable to companies using Financial Reporting
Standard 101, ‘Reduced Disclosure Framework’ (FRS 101). The financial statements have been prepared under the historical cost convention, as
modified by the revaluation of land and buildings and derivative financial assets and financial liabilities measured at fair value through profit and loss.

There were no material critical accounting estimates used or judgements made by management in the preparation of these financial statements.

The following exemptions from the requirements of IFRS have been applied in the preparation of these financial statements, in accordance
with FRS 101:

• Paragraphs 45(b) and 46 to 52 of IFRS 2, ‘Share-based payment’ (details of the number and weighted-average exercise price of share options,

and how the fair value of goods or services received was determined).

• The requirement of paragraph s 91 to 99 of IFRS 13 fair value measurement, where equivalent disclosures are included in the consolidated

financial statements of the group.

• The following paragraphs of IAS 1, ‘Presentation of financial statements’:

– 10(d) (statement of cash flows),

– 16 (a statement of compliance with all IFRS),

– 38 in respect of paragraph 79(a)(iv) (outstanding shares comparative),

– 38A (requirement for minimum of two primary statements, including cash flow statement),

– 38B-D (additional comparative information),

– 111 (cash flow statement information), and

– 134-136 (capital management disclosures);

• IAS 7, ‘Statement of cash flows’;

• IFRS 7 ‘Financial Instrument Disclosures’;

• Paragraph 30 and 31 of IAS 8 ‘Accounting policies, changes in accounting estimates and errors’ (requirement for the disclosure of information

when an entity has not applied a new IFRS that has been issued but is not yet effective);

• The requirements in IAS 24, ‘Related party disclosures’ to disclose related party transactions entered into between two or more members of a

group and key management compensation.

The company’s financial statements have been prepared in compliance with Section 394 and 396 of the Companies Act 2006 adopting the
exemption of omitting the income statement conferred by Section 408 of that Act.

The company’s financial statements have been prepared on a going concern basis.

Adoption of IFRS 9 ‘Financial Instruments’
IFRS 9 ‘Financial Instruments’ is the new reporting standard for financial instruments, and became effective on 1 January 2018. IFRS 9 has replaced
previous financial instrument standards and interpretations covered by IAS 39 ‘Financial Instruments: Recognition and Measurement’, bringing
together all aspects of the accounting for financial instruments: classification and measurement, impairment and hedge accounting. In 2018 the
company has applied IFRS 9 for the first time.

Classification and measurement of financial assets
The standard introduces new assessments for the classification and measurement of financial assets, as detailed under ‘Investments’ below. The
business model assessment was made as at the date of initial application, and then applied to those financial assets that were not derecognised
before 1 January 2018. The ‘SPPI’ test was performed based on facts and circumstances as at the initial recognition of the asset.

There has been no change in classification and measurement of the company’s financial assets as a result of the introduction of IFRS 9. Loans to
subsidiaries and receivable balances remain at amortised cost. Other financial investments continue to be held at FVTPL.

Classification and measurement of financial liabilities
IFRS 9 largely retains the existing requirements in IAS 39 for the classification and measurement of financial liabilities. The adoption of IFRS 9 has
not had a significant effect on the company’s accounting policies related to financial liabilities.

Impairment
IFRS 9 introduces a new impairment model for financial assets not held at FVTPL. As a result, the company must now determine forward looking
expected credit losses (ECL) for all its financial assets held at amortised cost.

The company measures loss allowance at an amount equal to lifetime ECLs, except for debt securities that are determined to have low credit risk at
the reporting date and other debt securities for which credit risk has not increased significantly since initial recognition. In these cases, ECLs are
based on the 12-month ECL, which is the ECL that results from a possible default up to 12 months after the reporting date. The company uses
relevant quantitative and qualitative information and analysis based on historical experience, and informed credit assessment including forward-
looking information in order to evaluate the credit-worthiness of each security at each reporting date, to determine whether a significant increase in
credit risk since origination occurred. Should this be the case, the allowance will be based on the lifetime ECL.

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Legal & General Group Plc Annual Report and Accounts 2018Company financial statementsFinancial Statements1 Accounting policies (continued)
ECLs are calculated by considering the probability of default (PD), the loss given default (LGD) and the exposure at default (EAD). The PD is
determined by reference to third party information on available companies, or using qualitative information available to the company, and depends
on whether a financial asset requires determination of a 12-month ECL or lifetime ECL. The LGD is determined with reference to any exposure
reducing instruments such as collateral or liquid assets that the counterparty may have. The EAD is determined as the amount of the loan balance
outstanding at the reporting date.

The adoption of the ECL requirements of IFRS 9 did not result in the recognition of impairment losses as at the date of initial application or at the
reporting date.

The company has applied the new standard retrospectively with an initial application date of 1 January 2018, however, as permitted by the transition
provisions of IFRS 9, the company has elected not to restate comparative period information and the accounting policies as set out in the basis of
preparation in the company Financial Statements for the year ended 31 December 2017. Differences in the carrying amounts of financial assets
and financial liabilities resulting from the adoption of IFRS 9 are recognised as an adjustment to retained earnings as at 1 January 2018. All hedging
relationships designated under IAS 39 at 31 December 2017 met the criteria for hedge accounting under IFRS 9 at 1 January 2018 and are
therefore regarded as continuing hedging relationships.

Financial assets
On initial recognition, financial assets are measured at fair value. Subsequently, they can be measured at amortised cost, fair value through other
comprehensive income (FVOCI) or fair value through profit or loss (FVTPL). The classification depends on two criteria:

(i)

the business model within which financial assets are managed; and

(ii) their contractual cash flow characteristics (whether the cash flows represent ‘solely payments of principal and interest’ (SPPI)).

A debt instrument is measured at amortised cost if it meets the following conditions:

(i)

it is held within a business model that has an objective to hold financial assets to collect contractual cash flows; and

(ii) the contractual terms of the financial asset result in cash flows that are solely payments of principal and interest on the principal amount

outstanding (SPPI).

A debt security is measured at FVOCI if it meets the following conditions:

(i)

it is held for collection of contractual cash flows and for selling the financial assets; and

(ii) the asset’s cash flows represent solely payments of principal and interest.

Movements in the carrying amount are recognised in other comprehensive income except for the recognition of impairment gains or losses and
interest revenue which are recognised in the income statement. When the financial asset is derecognised, the cumulative gain or loss previously
recognised in other comprehensive income is reclassified from equity to the income statement.

Assets that are held at FVTPL include derivative assets which are held for trading (HFT) and financial assets that fail both the business model and
SPPI tests. A gain or loss on a debt investment that is subsequently measured at FVTPL is recognised in the income statement.

The company has no equity instruments.

Loans and receivables are initially recognised at fair value and subsequently held at amortised cost using the effective interest method.

Investment income
Investment income includes dividends and interest. Dividends receivable from group companies are recognised in the period in which the dividends
are declared and approved at the general meeting or paid. Interest income is recognised using the effective interest method.

Distributions
Dividend distribution to the company’s shareholders is recognised as a liability in the period in which the dividends are authorised and are no longer
at the discretion of the company.

Interest expense
Interest expense reflects the underlying cost of borrowing, based on the effective interest method and includes payments and receipts made under
derivative instruments which are amortised over the interest period to which they relate.

Investment in subsidiary undertakings
Investments in subsidiaries are held at cost less accumulated impairment losses.

Derivative financial instruments
The company’s activities expose it to the financial risks of changes in foreign exchange rates and interest rates. The company uses derivatives such
as foreign exchange forward contracts and interest rate swap contracts to hedge these exposures.

Changes in the fair value of any derivative instruments are recognised immediately in the income statement.

Borrowings
Borrowings are recognised initially at fair value, net of transaction costs. Borrowings classified as liabilities are subsequently stated at amortised
cost. The difference between the net proceeds and the redemption value is recognised in the income statement over the borrowing period using
the effective interest method.

230

Legal & General Group Plc Annual Report and Accounts 2018Financial StatementsDeferred tax
Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date, where transactions
or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date.

A net deferred tax asset is recognised as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded
as more likely than not that there will be suitable taxable profits against which to recover carried forward tax losses and from which the future
reversal of underlying timing differences can be deducted.

Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse,
based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Deferred tax is measured on an
undiscounted basis.

Deferred tax is recognised in respect of the retained earnings of overseas subsidiaries only to the extent that, at the balance sheet date, dividends
have been accrued as receivable or a binding agreement to distribute past earnings in future periods has been entered into by the subsidiary.

Foreign currencies
Transactions denominated in foreign currencies are translated into sterling at the rates of exchange prevailing at the time of the transactions.
Monetary assets and liabilities expressed in foreign currencies are translated into sterling at the rates of exchange ruling at the balance sheet date.
Non-monetary items are maintained at historic rates. Exchange gains or losses are recognised in the income statement.

Pension costs
The company participates in the group defined benefit schemes which are recognised on the Balance Sheet of Legal & General Resources Limited.
These are multi-employer defined benefit schemes for which the company’s share of the underlying assets and liabilities cannot be separately
identified. Therefore the company’s cost of participation has been treated as that of a defined contribution scheme for reporting purposes.

In addition to these schemes the company also contributes to defined contribution schemes. The company charges the costs of its pension
schemes against profit as incurred. Any difference between the cumulative amounts charged against profits and contribution amounts paid is
included as a provision or prepayment in the balance sheet.

The assets of the defined benefit schemes and the defined contribution schemes are held in separate trustee administered funds, which have been
subject to regular valuation every three years and updated by formal reviews at reporting dates by qualified actuaries.

Share-based payments
The company operates a number of share-based payment plans on behalf of its subsidiaries. The fair value of the equity instruments granted is
spread over the vesting period of the instrument and treated as a capital contribution to the respective subsidiary. The total capital contribution is
determined by reference to the fair value of the awards, excluding the impact of any non-market vesting conditions. The capital contribution to the
subsidiaries is accounted for as an increase in the investment in the parent company’s financial statements.

At each balance sheet date, the company revises its estimate of the number of equity instruments which are expected to become exercisable.
It recognises the impact of the revision of original estimate, if any, in the cost of the investment in the subsidiary and a corresponding adjustment
is made to equity over the remaining vesting period. On vesting or exercise, the difference between the accumulated capital contribution and the
actual cost to the company is transferred to retained earnings. Where new shares are issued, the proceeds received are credited to share capital
and share premium. Any capital contribution is subsequently recharged to the respective subsidiary as incurred and the corresponding cost of
investment is reduced.

2 Dividends

Ordinary dividends paid and charged to equity in the year:

– Final 2016 dividend

– Final 2017 dividend

– Interim dividend

Ordinary share dividend proposed1

1. The dividend proposed has not been included as a liability in the balance sheet.

Dividend
2018
£m

Per share
2018
p

Dividend
2017
£m

Per share
2017
p

–

658

274

932

704

–

11.05

4.60

15.65

11.82

616

–

256

872

658

10.35

–

4.30

14.65

11.05

3 Directors’ emoluments and other employee information
Full disclosures of Legal & General Group Plc directors’ emoluments are contained within those parts of the Directors’ Report on Remuneration
which are described as having been audited. At 31 December 2018 there were no remuneration payments outstanding with directors of the
company (2017: £nil). The company has no other employees (2017: nil).

231

Legal & General Group Plc Annual Report and Accounts 2018Company financial statementsFinancial Statements4 Pensions
The company participates in the following pension schemes in the UK, which are operated by the group:

• Legal & General Group Personal Pension Plan

• Legal & General Staff Stakeholder Pension Scheme

• Legal & General Group UK Pension and Assurance Fund (the Fund). The Fund was closed to new members from January 1995; last full

actuarial valuation as at 31 December 2012.

• Legal & General Group UK Senior Pension Scheme (the Scheme). The Scheme was, with a few exceptions (principally transfers from the
Fund), closed to new members from August 2000 and finally closed to new members from April 2007; last full actuarial valuation as at
31 December 2012.

These schemes operate within the UK pensions’ regulatory framework.

There were no contributions prepaid or outstanding at either 31 December 2018 or 31 December 2017 in respect of these schemes.

The Fund and Scheme were closed to future accrual on 31 December 2015. The sponsoring employer is Legal & General Resources Limited and a
deficit in respect of these schemes for the year ended 31 December 2018 of £192m (2017: £317m) is recognised on that company’s Balance Sheet.
Further information is given in Note 23 of the group’s consolidated financial statements.

5 Share-based payments
The full disclosures required by IFRS 2 are provided in the group’s consolidated financial statements (Note 33).

The total expense retained by the company in relation to share-based payments was £nil (2017: £nil).

6 Auditor’s remuneration
Remuneration receivable by the company’s auditors for the audit of the company’s financial statements is not presented. The group’s consolidated
financial statements disclose the aggregate remuneration receivable by the company’s auditors for the audit of the group’s financial statements,
which include the company’s financial statements (Note 31).

The disclosure of fees payable to the auditors and its associates for other (non-audit) services has not been made because the group’s consolidated
financial statements are required to disclose such fees on a consolidated basis.

7 Non-current assets

As at 1 January

Additions1

Transfer from/ (to) current assets

As at 31 December

Investments
in subsidiaries
2018
£m

Loans to
subsidiaries
2018
£m

7,717

748

–

8,465

720

–

(6)

714

Total
2018
£m

8,437

748

(6)

9,179

Investments
in subsidiaries
2017
£m

Loans to
subsidiaries
2017
£m

7,252

465

–

7,717

–

701

720

Total
2017
£m

7,271

465

701

8,437

1. Additions represent capital injections into group undertakings.

Full disclosure of the company’s investments in subsidiary undertakings is contained in Note 42 of the group’s consolidated financial statements.

8 Receivables

Amounts owed by group undertakings1

Corporation tax

Deferred tax

Other debtors

Receivables

2018
£m

1,276

1,364

2017
£m

1,427

110

1,612

1. Amounts owed by group undertakings are repayable at the request of either party and include a £961m (2017: £1,083m) interest bearing balance with a current interest

rate of LIBOR-12.5 bps.

9 Payables: amounts falling due after more than one year

Subordinated borrowings

Amounts owed to group undertakings1

Payables: amounts falling due after more than one year

Note

2018
£m

3,333

626

3,959

2017
£m

2,879

622

3,501

1. Amounts owed to group undertakings falling due after more than one year are unsecured and include £601m (2017: £601m) of interest bearing balances with current

interest rates between 5.71% and 6.12% (2017: 5.71% and 6.12%).

232

Legal & General Group Plc Annual Report and Accounts 2018Financial Statements10 Payables: amounts falling due within one year

Amounts owed to group undertakings1

Accrued interest on subordinated borrowings

Other payables

Payables: amounts falling due within one year

Note

2018
£m

111

138

2017
£m

150

1. Amounts owed to group undertakings falling due within one year are interest free and repayable at the request of either party.

11 Derivative assets and liabilities

Forward foreign exchange contracts – held for trading

Currency Swap contracts – held for trading

Derivative assets and liabilities

Forward foreign exchange contracts – held for trading

Currency Swap contracts – held for trading

Derivative assets and liabilities

Contract/
notional
amount
2018
£m

358

1,099

Contract/
notional
amount
2017
£m

1,099

The descriptions of each type of derivative are given in Note 12 of the group consolidated financial statements.

12 Borrowings

Subordinated borrowings2

5.875% Sterling undated subordinated notes (Tier 2)

10% Sterling subordinated notes 2041 (Tier 2)

5.5% Sterling subordinated notes 2064 (Tier 2)

5.375% Sterling subordinated notes 2045 (Tier 2)

5.25% US Dollar subordinated notes 2047 (Tier 2)

5.55% US Dollar subordinated notes 2052 (Tier 2)

5.125% Sterling subordinated notes 2048 (Tier 2)

Carrying
amount
20181
£m

405

312

589

603

659

387

399

Coupon
rate
2018
%

5.88

10.00

5.50

5.38

5.25

5.55

5.13

Fair
value
20181
£m

409

366

569

627

612

356

401

Total subordinated borrowings

3,354

3,340

Carrying
amount
20171
£m

408

311

589

603

628

369

–

2,908

1. Includes accrued interest on subordinated borrowings of £21m (2017: £29m), including the impact of hedging arrangements.
2. Further details on the Subordinated borrowings of the company are provided in Note 22 of the group’s consolidated financial statements.

Fair values

Assets
2018
£m

–

Fair values

Assets
2017
£m

–

Coupon
rate
2017
%

5.88

10.00

5.50

5.38

5.25

5.55

–

Liabilities
2018
£m

–

Liabilities
2017
£m

–

119

Fair
value
20171
£m

428

397

710

694

679

397

–

3,305

13 Share capital and share premium
A summary of the company’s ordinary share capital, share premium and options over the company’s ordinary share capital are disclosed in Note 34
of the group’s consolidated financial statements.

233

Legal & General Group Plc Annual Report and Accounts 2018Company financial statementsFinancial StatementsDirectors’ report

The Directors’ report required under the Companies Act 2006
comprises this Directors’ report, and certain other disclosures in
the Strategic Report and the Notes to the group consolidated
financial statements, including:

Other than the above, the directors have no current intention of issuing
further share capital and no issue will be made which would effectively
alter control of the company without prior approval of shareholders in
a general meeting.

Interests in voting rights
Information on major interests in shares provided to the company
under the Disclosure Guidance and Transparency Rules (DTR) of the
UK Listing Authority is published via a Regulatory Information Service
and on the company’s website: legalandgeneralgroup.com. As at
31 December 2018, the company had been advised of the following
significant direct and indirect interests in the issued share capital of
the company:

Number
of ordinary
shares of 2.5p

Capital Group Companies Inc.

353,497,431

BlackRock Inc.

Invesco Ltd

298,315,445

297,898,241

Total
interest
in issued
share capital

Indirect

% of
capital1

5.93

5.00

4.99

1. Using the voting rights figure as at 31 December 2018, as announced to the

London Stock Exchange on 2 January 2019, of 5,960,768,234.

No material changes to the interests have been disclosed between
31 December 2018 and 5 March 2019.

Dividend
The company may, by ordinary resolution in a general meeting,
declare dividends in accordance with the respective rights of the
members, but no dividend can exceed the amount recommended by
the Board. The directors propose a final dividend for the year ended
31 December 2018 of 11.82 pence per ordinary share which, together
with the interim dividend of 4.60 pence per ordinary share paid to
shareholders on 27 September 2018, will make a total dividend for
the year of 16.42 pence (2017: 15.35 pence). Subject to shareholder
approval at the AGM, the final dividend will be paid on 6 June 2019
to shareholders on the share register on 26 April 2019 provided that
the Board of directors may cancel payment of the dividend at any
time prior to payment in accordance with the Articles of Association,
if it considers it necessary to do so for regulatory capital purposes.

Related party transactions
Details of related party transactions are set out in Note 38 to the
group consolidated financial statements.

• an outline of important events that have occurred during the year

(pages 12 to 31)

• an indication of likely future developments (pages 12 to 31)

• employee engagement (page 36)

• post-balance sheet events (Note 41)

• directors’ biographies (pages 52 and 53)

Articles of Association
The company’s Articles of Association may only be amended
by a special resolution at a general meeting of shareholders.
The company’s Articles of Association were last amended at
its AGM held on 26 May 2016.

Conflicts of interest
In accordance with the Companies Act 2006, the Board has adopted a
policy and procedure for the disclosure and authorisation (if appropriate)
of conflicts of interest, and these have been followed during 2018.

Powers of directors
The directors (as detailed on pages 52 and 53) may exercise all powers
of the company subject to applicable legislation and regulation and the
company’s Articles of Association.

Appointment and replacement of directors
With regards to the appointment and replacement of directors, the
company is governed by its Articles of Association, the Companies Act
2006 and related legislation. Directors may be appointed by an ordinary
resolution of the company or by the Board, in each case subject to the
provisions of the company’s Articles of Association. The company may,
by way of special resolution, remove any director before the expiration
of his or her period of office. The company’s Articles of Association
(in line with the UK Corporate Governance Code) require all the directors
to retire from office at each Annual General Meeting of the company.

Share capital
As at 31 December 2018, the company’s issued share capital
comprised 5,960,768,234 ordinary shares each with a nominal value of
2.5 pence. Details of the ordinary share capital can be found in Note 34
to the group consolidated financial statements.

At the 2018 AGM, the company was granted authority by shareholders
to purchase up to 595,873,486 ordinary shares, being 10% of the
issued share capital of the company as at 31 March 2018. In the year
to 31 December 2018, no shares were purchased by the company.
This authority will expire at the 2019 AGM. As such, a resolution is
proposed in the Notice of AGM seeking shareholder approval to
renew this authority.

At the 2018 AGM, the directors were given the power to allot shares up
to an amount of £49,656,123, being 33% of the issued share capital of
the company as at 31 March 2018. This authority will also expire at the
2019 AGM. As such, a resolution is proposed in the Notice of AGM
seeking shareholder approval to renew this authority.

Further resolutions are proposed, as set out in the Notice of AGM, that
will, if approved by shareholders, authorise the directors to issue shares
up to the equivalent of 10% of the company’s issued share capital as at
31 March 2019 for cash without offering the shares first to existing
shareholders in proportion to their holdings.

Detailed explanatory notes to these resolutions are set out in the
Notice of AGM.

234

Other informationLegal & General Group Plc Annual Report and Accounts 2018Directors’ report

Rights and obligations attaching to shares
The rights and obligations relating to the company’s ordinary shares
are set out in the Articles of Association. A copy of the Articles of
Association can be requested from the Company Secretary at the
company’s registered office.

Holders of ordinary shares are entitled to attend, speak and vote at
general meetings. In a vote on a show of hands, every member present
in person or every proxy present, who has been duly appointed by a
member, will have one vote and on a poll every member present in
person or by proxy shall have one vote for every ordinary share held.
These rights are subject to any special terms as to voting upon which
any shares may be issued or may at the relevant time be held and to any
other provisions of the company’s Articles of Association. Under the
Companies Act 2006 and the Articles of Association, directors have the
power to suspend voting rights and, in certain circumstances, the right
to receive dividends in respect of shares where the holder of those
shares fails to comply with a notice issued under section 793 of the
Companies Act 2006.

The Board can decline to register a transfer of any share which is not a
fully paid share. In addition, registration of a transfer of an uncertificated
share may be refused in the circumstances set out in the uncertificated
securities rules and where the number of joint holders exceeds four.
The Board may also refuse to register the transfer of a certificated
share unless:

(a) the instrument of transfer is duly stamped and is left at the company’s
registered office or such other place as the Board may from time to
time determine, accompanied by the certificate for the share to
which it relates and such evidence as the Board may reasonably
require to show the right of the transfer or to make the transfer;

(b) the instrument of transfer is in respect of only one class of share;

and

Subject to the provisions of the Companies Act 2006, all or any of the
rights attaching to an existing class of shares may be varied from time
to time, either with the consent in writing of the holders of not less
than three-quarters in nominal value of the issued shares of that class
(excluding any treasury shares) or with the sanction of a special
resolution passed at a separate general meeting of the holders of
those shares.

Shares acquired through the employee share schemes rank equally
with all other ordinary shares in issue. Zedra Trust Company (Guernsey)
Limited, as trustee of the Legal & General Employees’ Share Ownership
Trust, held 0.42% of the issued share capital of the company as at
5 March 2019 in trust for the benefit of the executive directors, senior
executives and employees of the group. This includes shares held as
nominee on behalf of Legal & General Share Scheme Trustees Limited,
as trustee of the Legal & General Employee Share Trust which was
wound up in 2017. The trustee of Legal & General Employees’ Share
Ownership Trust has waived the right of that trust to receive dividends
on unallocated shares it holds. The voting rights in relation to these
shares are exercised by the trustee. The trustee may vote or abstain
from voting, or accept or reject any offer relating to shares, in any way it
sees fit, without incurring any liability and without being required to give
reasons for its decision. Under the rules of the Legal & General Group
Employee Share Plan (the ‘Plan’), eligible employees are entitled to
acquire shares in the company. Plan shares are held in trust for
participants by Link Market Services Trustees Limited, which held
0.24% of the issued share capital of the company as at 5 March 2019.
Voting rights are exercised by the trustees on receipt of the participants’
instructions. If a participant does not submit an instruction to the
trustees, no vote is registered. In addition, the trustees do not vote
on any unawarded shares held under the Plan as surplus assets.

The company is not aware of any agreements between shareholders
which may result in restrictions on the transfer of securities and/or
voting rights.

Change of control
There are no agreements between the company and its directors or
employees providing for compensation for loss of office or employment
(whether through resignation, purported redundancy or otherwise) in
the event of a takeover bid, except for those relating to normal notice
periods. The rules of the company’s share plans contain provisions
under which options and awards to participants, including executive
directors, may vest on a takeover or change of control of the company
or transfer of undertakings. The company has a committed £1 billion
bank syndicated credit facility which is terminable if revised terms
cannot be agreed with the syndicate of banks in a 30-day period
following a change of control. As at 5 March 2019, the company has no
borrowings under this facility. There are no change of control conditions
in the terms of any of the company’s outstanding debt securities. The
terms of the company’s agreements with its banking counterparties,
under which derivative transactions are undertaken, include in some
instances the provision for termination of transactions upon takeover/
merger depending on the rating of the merged entity. There are no other
committed banking arrangements either drawn or undrawn that
incorporate any change of control conditions.

Use of financial instruments
Information on the group’s risk management process is set out on
pages 44 to 49. More details on risk management and the financial
instruments used are set out in Notes 15 to 17 of the group consolidated
financial statements.

Indemnities
The company has agreed to indemnify, to the extent permitted by
law, each of the directors against any liability incurred by a director
in respect of acts or omissions arising in the course of their office.
Qualifying pension scheme indemnities (as defined in section 235 of
the Companies Act 2006) have been granted, to the extent permitted
by law, to certain trustees of the company’s pension schemes. The
indemnities were in force throughout 2018 and remain so. Copies of
the deeds of indemnity are available for inspection at the company’s
registered office and will also be available at the AGM.

Requirements of Listing Rule 9.8.4
Information to be included in the annual report and accounts under
Listing Rule 9.8.4 may be found as follows:

Relevant Listing Rule

LR 9.8.4R (12)

LR 9.8.4R (13)

Page

235

Legal & General Group Plc Annual Report and Accounts 2018Other informationOther information

Political donations
No political donations were made during 2018.

Forward-looking statements
The Directors’ report is prepared for the members of the company and
should not be relied upon by any other party or for any other purpose.
Where the Directors’ report includes forward-looking statements,
these are made by the directors in good faith based on the information
available to them at the time of their approval of this report. Such
statements should be treated with caution due to the inherent
uncertainties underlying such forward-looking statements.

Insurance
The company has arranged appropriate directors’ and officers’ liability
insurance for directors. This is reviewed annually.

Greenhouse gas disclosures (GHG)
Global GHG emissions Data

tCO2e Emissions from

Scope 1

Scope 2

Total
From renewable tariff

Scope 3 – Business travel

Total CO2 (scope 1,2,3)

Jan–Dec
2018

Jan–Dec
2017

12,446.82

8,655.05

28,981.83

32,573.30

24,428.85

30,392.44

7,315.52

3,568.54

(based on the scope of Legal & General’s UK CRC
energy efficiency scheme disclosed emissions,
overseas property emissions and
reported travel emissions)

Intensity ratio: kgCO2e
Emissions per policy

Fugitive emissions

48,744.17

44,796.89

4.27

856

3.99

1,591.31

Please refer to our CSR report for further breakdown and analysis of emissions.

Methodology
We have reported on the emission sources required under the
Companies Act 2006 Strategic Report and Directors’ Report
Regulations 2013.

We have used the GHG reporting protocol to calculate our GHG
emissions and applied the emission factors from the UK Government’s
GHG Conversion Factors for Company Reporting 2018.

Disability
Our policies support the employment, promotion and career
development of disabled persons, as well as supporting employees
who become disabled during the course of their employment. We make
reasonable adjustments, as required under the Equality Act 2010, for
disabled employees, including seeking redeployment in the event that
reasonable adjustments are not possible. We offer appropriate training,
including training in relation to equality, and will make adjustments to
this training where required.

Independent auditors
Following a tender process in 2016, KPMG LLP were appointed as the
Company’s external auditor commencing with the 2018 financial year
and its appointment was approved by shareholders at the 2018 Annual
General Meeting. Resolutions to reappoint KPMG LLP as auditor of the
company and to authorise the directors to determine its remuneration
are to be proposed at the forthcoming Annual General Meeting.

Directors’ interests
The Directors’ report on remuneration on pages 72 to 101 provides
details of the interests of each director, including details of current
incentive schemes and long-term incentive schemes, the interests of
directors in the share capital of the company and details of their share
interests, as at 6 March 2019.

Annual general meeting
The Company’s AGM will be held on Thursday, 23 May 2019 at 11am
at The British Medical Association, BMA House, Tavistock Square,
Bloomsbury, London, WC1H 9JP.

Statement of directors’ responsibilities
The directors are responsible for preparing the Annual Report and
Accounts, including the Directors’ report on remuneration and the
financial statements, in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for
each financial year. Under that law the directors have prepared the
group financial statements in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the European Union (EU),
and the company financial statements in accordance with United
Kingdom (UK) Generally Accepted Accounting Practice (GAAP) (UK
Accounting Standards, comprising FRS 101 ‘Reduced Disclosures
Framework’, and applicable law). Under company law, the directors
must not approve the financial statements unless they are satisfied that
they give a true and fair view of the state of affairs of the group and the
company and of the profit or loss of the group and the company for that
period. In preparing these financial statements, the directors are
required to:

• select suitable accounting policies and then apply them consistently;

• state whether applicable IFRSs as adopted by the EU have been
followed for the group financial statements and UK Accounting
Standards, comprising FRS 101, have been followed for the company
financial statements, subject to any material departures disclosed and
explained in the financial statements;

• make judgements and accounting estimates that are reasonable,

relevant, reliable and prudent;

• assess the group’s and company’s ability to continue as a going

concern and whether the use of the going concern basis is
appropriate, as well as disclose, if applicable, matters relating to going
concern; and

• prepare the financial statements on the going concern basis unless
it is inappropriate to presume that the group and the company will
continue in business.

The directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the group and the company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the group and the company and enable them to
ensure that the financial statements and the Directors’ report on
remuneration comply with the Companies Act 2006, as regards to the
group financial statements and Article 4 of the IAS Regulation.

They are also responsible for such internal control as they determine
is necessary to enable the preparation of financial statements that are
free from material misstatements, whether due to fraud or error.

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Legal & General Group Plc Annual Report and Accounts 2018Directors’ report

The directors are also responsible for safeguarding the assets of the
group and the company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the
group’s and the company’s website. Legislation in the UK governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.

The directors consider that the Annual Report and Accounts, taken as a
whole, is fair, balanced and understandable and provides the information
necessary for shareholders to assess the group’s and the company’s
position and performance, business model and strategy.

Each of the directors who held office at the date this report was
approved, whose names and functions are listed in the Board of
directors section, confirm that, to the best of their knowledge:

• the company’s financial statements, which have been prepared in
accordance with UK GAAP (UK Accounting Standards, comprising
FRS 101 ‘Reduced Disclosures Framework’ and applicable law),
give a true and fair view of the assets, liabilities, financial position
and profit of the company

• the group financial statements, which have been prepared in

accordance with IFRSs as adopted by the EU, give a true and fair view
of the assets, liabilities, financial position and profit of the group

• the Strategic report includes a fair review of the development and
performance of the business and the position of the group and the
company, together with a description of the principal risks and
uncertainties that it faces

Fair, balanced and understandable
In accordance with the principles of the 2016 UK Corporate Governance
Code, we have processes and procedures in place to ensure that the
information presented in the annual report is fair, balanced and
understandable. We describe these processes and procedures on
page 58.

On the advice of the Audit Committee, the Board considers that the
annual report, as a whole is fair, balanced and understandable, and
provides the information necessary for shareholders to assess the
group’s position, performance, business model and strategy.

Critical accounting estimates, key judgements and significant
accounting policies
Our critical accounting estimates, key judgements and significant
accounting policies conform with IFRS and are set out on page 122
of the consolidated financial statements. The directors have reviewed
these policies and applicable estimation techniques and have confirmed
them to be appropriate for the preparation of the 2018 consolidated
financial statements.

Disclosure of information to auditors
As far as each of the directors in office at the date of this director’s
report is aware, there is no relevant audit information (as defined by
section 418 (3) of the Companies Act 2006) of which the company’s
auditors are unaware, and each such director has taken all the steps that
he or she ought to have taken as a director to make himself or herself
aware of any relevant audit information and to establish that the
company’s auditors are aware of that information.

Going concern
The Strategic report on pages 1 to 49 of this report includes information
on the group’s structure and business principles, the performance of the
business areas, the impact of regulation and principal risks and
uncertainties.

The group’s performance detailed on page 1 includes information on
the group’s financial results, financial outlook, cash flow and net debt
and balance sheet position. The consolidated financial statements
include information on the group’s financial investments and investment
property (Note 11), derivatives (Note 12), cash and cash equivalents
(Note 14), asset risk (Note 7), market, credit and insurance risks (Notes
15 to 17) and borrowings (Note 22).

In line with IAS 1 ‘Presentation of financial statements’, and revised FRC
guidance on ‘risk management, internal control and related financial and
business reporting’, management has taken into account all available
information about the future for a period of at least, but not limited to,
12 months from the date of approval of the financial statements when
assessing the group’s ability to continue as a going concern.

Details of the main risks affecting the group and how we manage and
mitigate them are set out in ‘Managing risks’ on pages 44 to 49.

Having assessed the main risks and other matters discussed in
connection with the Group Board viability statement set out on page 47,
in accordance with the 2016 UK Corporate Governance Code and the
FRC guidance, the directors considered it appropriate to adopt the going
concern basis of accounting when preparing the financial statements.

The Directors’ report and Strategic report were approved by the Board,
and signed on their behalf.

By order of the Board

G J Timms
Company Secretary

237

Legal & General Group Plc Annual Report and Accounts 2018Other informationShareholder information

Annual General Meeting
The 2019 AGM will be held on Thursday, 23 May 2019 at 11am at
The British Medical Association, BMA House, Tavistock Square,
Bloomsbury, London, WC1H 9JP. The AGM provides the Board with
the opportunity to meet shareholders. The Board regards the AGM as
an important opportunity to communicate directly with private investors.
The Notice of Meeting and all other details for the AGM are available at:
legalandgeneralgroup.com (the website).

To register for the Share Portal just visit landgshareportal.com.
You will need is your Investor Code, which can be found on your share
certificate or by contacting Link Asset Services.

Customer support centre
Alternatively, you can contact Link Customer Support Centre
which is available to answer any queries you have in relation to
your shareholding:

Dividend information
Dividend per share
This year the directors are recommending the payment of a final
dividend of 11.82 pence per share. If you add this to your interim
dividend of 4.60 pence per share, the total dividend recommended
for 2018 will be 16.42 pence per share (2017: 15.35 pence per share).
The key dates for the payment of dividends are set out in the
important dates section on page 239.

Communications
Internet
Information about the company, including details of the current share
price, is available on the website, legalandgeneralgroup.com.

Investor relations
Private investors should contact the Registrar with any queries.
Institutional investors can contact the investor relations team by email:
investor.relations@group.landg.com.

Financial reports
The company’s financial reports are available on the website.
The Annual Report and Accounts are sent to those shareholders
who have elected to receive paper copies. Alternatively, shareholders
may elect to receive notification by email by registering on
landgshareportal.com. If you receive more than one copy of our
communications, it could be because you have more than one record
on the share register. To avoid duplicate mailings, please contact the
Registrar, who can arrange for your accounts to be amalgamated.

Registrar
Link Asset Services is the Registrar and offer many services to make
managing your shareholding easier and more efficient.

Share Portal
The Share Portal is a secure online site where you can manage your
shareholding quickly and easily. You can:

• view your holding and get an indicative valuation

• change your address

• arrange to have dividends paid into your bank account

• request to receive shareholder communications by email

rather than post

• view your dividend payment history

• make dividend payment choices

• buy and sell shares and access a wealth of stock market news

and information

• register your proxy voting instruction

• download a stock transfer form.

By phone – 0371 402 3341*

By email – landgshares@linkgroup.co.uk

By post – Link Asset Services, The Registry,
34 Beckenham Road, Beckenham, Kent BR3 4TU

Sign up to electronic communications
Help us save paper and get your shareholder information
quickly and securely by signing up to receive your shareholder
communications by email.

Registering for electronic communications is very straightforward.
Just visit landgshareportal.com. All you need is your Investor Code,
which can be found on your share certificate or dividend confirmation.

Corporate sponsored nominee
The corporate sponsored nominee allows you to hold shares in the
company without the need for a share certificate and enables you to
benefit from shorter market settlement periods. Individual shareholders
hold their Legal & General shares in a nominee holding registered in the
name of Link Market Services Trustees Limited. To join or obtain further
information, contact the Registrar. You will be sent a booklet outlining
the terms and conditions under which your shares will be held.

Dividend payment options
Re-invest your dividends
Link’s Dividend Re-investment Plan offers a convenient way for
shareholders to build up their shareholding by using dividend money to
purchase additional shares. The plan is provided by Link Asset Services,
a trading name of Link Market Services Trustees Limited which is
authorised and regulated by the Financial Conduct Authority.

For more information and an application pack, please
call 0371 402 3341.* Alternatively you can email
landgshares@linkgroup.co.uk or log on to landgshareportal.com.

It is important to remember that the value of shares and income from
them can fall as well as rise and you may not recover the amount of
money you invest. Past performance should not be seen as indicative
of future performance. This arrangement should be considered as part
of a diversified portfolio.

Arrange to have your dividends paid direct into your bank account
The advantages are:

• your dividend reaches your bank account on the payment date

• it is more secure – cheques can sometimes get lost in the post

• you don’t have the inconvenience of depositing a cheque

• it helps reduce cheque fraud.

238

Other informationLegal & General Group Plc Annual Report and Accounts 2018Shareholder information

If you have a UK bank account you can sign up for this service on the
Share Portal (by clicking on ‘your dividend options’ and following the
on-screen instructions) or by contacting the Customer Support Centre.

Choose to receive your next dividend in your local currency
If you live outside the UK, Link has partnered with Deutsche Bank to
provide you with a service that will convert your sterling dividends into
your local currency at a competitive rate. You can choose to receive
payment directly into your local bank account or, alternatively, you can
be sent a currency draft.

You can sign up for this service on the Share Portal (by clicking on
‘your dividend options’ and following the on-screen instructions) or
by contacting the Customer Support Centre.

For further information contact Link
By phone – UK – 0371 402 3341*
By email – shareportal@linkgroup.co.uk

Buy and sell shares
A simple and competitively priced service to buy and sell shares is
provided by Link Asset Services. There is no need to pre-register
and there are no complicated application forms to fill in. By visiting
linksharedeal.com you can also access a wealth of stock market
news and information free of charge.

For further information on this service, or to buy and sell shares,
visit linksharedeal.com or call 0371 664 0445.**

This is not a recommendation to buy and sell shares and this service
may not be suitable for all shareholders. The price of shares can go
down as well as up and you are not guaranteed to get back the amount
you originally invested. Terms, conditions and risks apply.

Link Asset Services is a trading name of Link Market Services Trustees
Limited, which is authorised and regulated by the Financial Conduct
Authority. This service is only available to private shareholders resident
in the European Economic Area, the Channel Islands or the Isle of Man.

* Calls are charged at the standard geographic rate and will vary by provider.

Calls from outside the UK will be charged at the applicable international rate.
Lines are open 9am to 5.30pm, Monday to Friday excluding public holidays in
England and Wales.

** Calls are charged at the standard geographic rate and will vary by provider.

Calls from outside the UK will be charged at the applicable international rate.
Lines are open 8am to 4.30pm Monday to Friday excluding public holidays in
England and Wales.

Important dates:
25 April 2019

15 May 2019

23 May 2019

6 June 2019

• Ex-dividend date (final dividend)

• Last day for DRIP elections

• Annual General Meeting

• Payment of final dividend for 2018

(to members registered on 26 April 2019)

7 August 2019

• Half-year results 2019

15 August 2019

• Ex-dividend date (interim dividend)

26 September 2019

• Payment of interim dividend for 2019

(to members registered on 16 August 2019)

Share fraud warning
Fraudsters use persuasive and high-pressure tactics to lure investors
into scams. They may offer to sell shares that turn out to be worthless
or non-existent, or to buy shares at an inflated price in return for an
upfront payment. While high profits are promised, if you buy or sell
shares in this way you will probably lose your money.

How to avoid share fraud
Have you been:

• contacted out of the blue;

• promised tempting returns and told the investment is safe;

• called repeatedly; or

• told the offer is only available for a limited time?

If so, you might have been contacted by fraudsters.

1. Reject cold calls

If you’ve been cold called with an offer to buy or sell shares, chances
are it’s a high risk investment or a scam. You should treat the call with
extreme caution. The safest thing to do is to hang up.

2. Check the firm on the FS register at fca.org.uk/register

The Financial Services Register is a public record of all the firms
and individuals in the financial services industry that are regulated
by the FCA.

3. Get impartial advice

Think about getting impartial financial advice before you hand over
any money. Seek advice from someone unconnected to the firm that
has approached you.

If you suspect that you have been approached by fraudsters, please tell
the FCA using the share fraud reporting form at fca.org.uk/scamsmart
where you can find out more about investment scams. You can also call
the FCA Consumer Helpline on 0800 111 6768.

If you have lost money to investment fraud, you should report it to
Action Fraud on 0300 123 2040 or online at actionfraud.police.uk.

If you deal with an unauthorised firm, you will not be eligible to receive
payment under the Financial Services Compensation Scheme.

Find out more at fca.org.uk/scamsmart.

General information
Capital gains tax: for the purpose of calculating UK capital gains tax,
the market value on 31 March 1982 of each share was 7.996 pence
after adjusting for the 1986 capitalisation issue and the 1996 and 1999
sub-divisions, but not reflecting any rights taken up under the 2002
rights issue.

Close company provisions: The company is not a close company
within the terms of the Corporation Tax Act 2010.

Registered office: One Coleman Street, London EC2R 5AA.
Registered in England and Wales, No. 01417162.

Shareholder offer line: For details of shareholder offers on
Legal & General products, call 0800 107 6830.

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Legal & General Group Plc Annual Report and Accounts 2018Other informationOther information

Alternative Performance Measures

An alternative performance measure (APM) is a financial measure of
historic or future financial performance, financial position, or cash flows,
other than a financial measure defined under IFRS or the regulations of
Solvency II. APMs offer investors additional information on the company’s
performance and the financial effect of ‘one-off’ events, and the group
uses a range of these metrics to provide a better understanding of its
underlying performance. The APMs used by the group are listed in this
section, along with their definition/explanation, their closest IFRS
measure and reference to the reconciliations to those IFRS measures.

Group adjusted operating profit (previously labelled as
‘operating profit’)
Definition
Group adjusted operating profit measures the pre-tax result excluding
the impact of investment volatility, economic assumption changes
and exceptional items. It, therefore, reflects longer-term economic
assumptions for the group’s insurance businesses and shareholder
funds, except for LGC’s trading businesses (which reflects the IFRS
profit before tax) and LGA non-term business (which excludes
unrealised investment returns to align with the liability measurement
under US GAAP). Variances between actual and smoothed investment
return assumptions are reported below group adjusted operating profit,
as well as any differences between investment return on actual assets
and the long-term asset mix. Exceptional income and expenses which
arise outside the normal course of business in the period, such as
merger and acquisition and start-up costs, are also excluded from
group adjusted operating profit.

Group adjusted operating profit was previously described as
‘operating profit’. In order to maintain a consistent understanding of
the group’s performance the term ‘operating profit’ will continue to
be used throughout the annual report and accounts as a substitute
for group adjusted operating profit.

Closest IFRS measure
Profit before tax attributable to equity holders.

Assets under Management (AUM)
Definition
Funds which are managed by our fund managers on behalf of investors.
It represents the total amount of money investors have trusted with our
fund managers to invest across our investment products.

Closest IFRS measures
• Financial investments

• Investment property

• Cash and cash equivalents.

Reconciliation
Note 37 – Reconciliation of Assets under management to Consolidated
Balance Sheet financial investments, investment property and cash and
cash equivalents.

Net release from operations
Definition
Release from operations plus new business surplus /(strain). Net release
from operations was previously referred to as net cash, and includes the
release of prudent margins from the back book, together with the
premium received less the setup of prudent reserves and associated
acquisition costs for new business.

Closest IFRS measure
Profit before tax attributable to equity holders.

Reconciliation
Note 2 – Supplementary operating profit information – sections (i) and (ii).

Adjusted profit before tax attributable to equity holders
(previously labelled as ‘profit before tax attributable to
equity holders’)
Definition
The APM measures profit before tax attributable to shareholders
incorporating actual investment returns experienced during the year and
the pre-tax results of discontinued operations.

Reconciliation
Note 2 – Supplementary operating profit information – section (i).

Closest IFRS measure
Profit before tax attributable to equity holders.

Reconciliation
Note 2 – Supplementary operating profit information – section (i).

Return on Equity (ROE)
Definition
ROE measures the return earned by shareholders on shareholder capital
retained within the business. ROE is calculated as IFRS profit for the
year attributable to equity holders divided by average IFRS shareholders’
funds (by reference to opening and closing shareholders’ funds as
provided in the IFRS consolidated statement of changes in equity for the
period).

Closest IFRS measure
Calculated using:

• Profit attributable to equity holders

• Equity attributable to owners of the parent.

Reconciliation
Calculated using profit attributable to equity holders of £1,827m (2017:
£1,891m) and average equity attributable to the owners of the parent of
£8,048 m (2017: £7,394m).

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Other informationLegal & General Group Plc Annual Report and Accounts 2018Glossary

Ad valorem fees
Ongoing management fees earned on assets under management,
overlay assets and advisory assets as defined below.

Adjusted profit before tax attributable to equity holders*
Refer to the alternative performance measures section.

Advisory assets
These are assets on which Global Index Advisors (GIA) provide advisory
services. Advisory assets are beneficially owned by GIA’s clients and all
investment decisions pertaining to these assets are also made by the
clients. These are different from Assets under Management (AUM)
defined below.

Annual premium
Premiums that are paid regularly over the duration of the contract such
as protection policies.

Annual premium equivalent (APE)
A standardised measure of the volume of new life insurance business
written. It is calculated as the sum of (annualised) new recurring
premiums and 10% of the new single premiums written in an annual
reporting period.

Annuity
Regular payments from an insurance company made for an agreed
period of time (usually up to the death of the recipient) in return for
either cash lump sum or a series of premiums which the policyholder
has paid to the insurance company during their working lifetime.

Assets under administration (AUA)
Assets administered by the group which are beneficially owned by
clients and are, therefore, not reported on the Consolidated Balance
Sheet. Services provided in respect of assets under administration are
of an administrative nature, including safekeeping, collecting investment
income, settling purchase and sales transactions and record keeping.

Assets under management (AUM)*
Refer to the alternative performance measures section.

Back book acquisition
New business transacted with an insurance company which allows
the business to continue to utilise Solvency II transitional measures
associated with the business.

Bundled DC solution
Where investment and administration services are provided to a
scheme by the same service provider. Typically, all investment and
administration costs are passed onto the scheme members.

Bundled pension schemes
Where the fund manager bundles together the investment provider role
and third-party administrator role, together with the role of selecting
funds and providing investment education, into one proposition.

CAGR
Compound Annual Growth Rate

Combined operating ratio (COR)
The COR is a measure of the underwriting profitability of the general
insurance business. It is calculated as the sum of the net incurred
claims, expenses and net commission, divided by the net earned
premium for the period.

Credit rating
A measure of the ability of an individual, organisation or country to repay
debt. The highest rating is usually AAA and the lowest Unrated. Ratings
are usually issued by a credit rating agency (e.g. Moody’s or Standard &
Poor’s) or a credit bureau.

Deduction and aggregation (D&A)
A method of calculating group solvency on a Solvency II basis, whereby
the assets and liabilities of certain entities are excluded from the group
consolidation. The net contribution from those entities to group Own
Funds is included as an asset on the group’s Solvency II balance sheet.
Regulatory approval has been provided to recognise the (re)insurance
subsidiaries of LGI US on this basis.

Defined benefit pension scheme (DB scheme)
A type of pension plan in which an employer/sponsor promises a
specified monthly benefit on retirement that is predetermined by a
formula based on the employee’s earnings history, tenure of service and
age, rather than depending directly on individual investment returns.

Defined contribution pension scheme (DC scheme)
A type of pension plan where the pension benefits at retirement are
determined by agreed levels of contributions paid into the fund by the
member and employer. They provide benefits based upon the money
held in each individual’s plan specifically on behalf of each member.
The amount in each plan at retirement will depend upon the investment
returns achieved and on the member and employer contributions.

Derivatives
Derivatives are not a separate asset class, but are contracts usually
giving a commitment or right to buy or sell assets on specified
conditions, for example on a set date in the future and at a set price.
The value of a derivative contract can vary. Derivatives can generally
be used with the aim of enhancing the overall investment returns of
a fund by taking on an increased risk, or they can be used with the
aim of reducing the amount of risk to which a fund is exposed.

Direct investments
Direct investments, which generally constitute an agreement with
another party and represent an exposure to untraded and often less
volatile asset classes. Direct investments also include physical assets,
bilateral loans and private equity, but exclude hedge funds.

Dividend cover
Dividend cover measures how many times over the net release
from operations in the year could have paid the full year dividend.
For example, if the dividend cover is 3, this means that the net release
from operations was three times the amount of dividend paid out.

* These items represent an alternative performance measure (APM)

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Legal & General Group Plc Annual Report and Accounts 2018Other informationOther information

Earnings per share (EPS)
EPS is a common financial metric which can be used to measure
the profitability and strength of a company over time. It is the total
shareholder profit after tax divided by the number of shares
outstanding. EPS uses a weighted average number of shares
outstanding during the year.

Index tracker (passive fund)
Index tracker funds invest in most or all of the same shares, and in
a similar proportion, as the index they are tracking, for example the
FTSE 100 index. Index tracker funds aim to produce a return in line
with a particular market or sector, for example, Europe or technology.
They are also sometimes known as ‘tracker funds’.

Eligible Own Funds
Eligible Own Funds represents the capital available to cover the group’s
Solvency II Capital Requirement. Eligible Own Funds comprise the
excess of the value of assets over liabilities, as valued on a Solvency II
basis, plus high quality hybrid capital instruments, which are freely
available (fungible and transferable) to absorb losses wherever they
occur across the group. Eligible Own Funds (shareholder view basis)
excludes the contribution to the group’s solvency capital requirement
of with-profits fund and final salary pension schemes.

Employee engagement index
The Employee engagement index measures the extent to which
employees are committed to the goals of Legal & General and are
motivated to contribute to the overall success of the company, whilst
working with their manager to enhance their own sense of development
and wellbeing.

ETF
LGIM’s European Exchange Traded Fund platform.

Euro Commercial paper
Short term borrowings with maturities of up to one year typically issued
for working capital purposes.

FVTPL
Fair value through profit or loss. A financial asset or financial liability
that is measured at fair value in the Consolidated Balance Sheet reports
gains and losses arising from movements in fair value within the
Consolidated Income Statement as part of the profit or loss for the year.

Full year dividend
Full year dividend is the total dividend per share declared for the year
(including interim dividend but excluding, where appropriate, any
special dividend).

Generally accepted accounting principles (GAAP)
These are a widely accepted collection of guidelines and principles,
established by accounting standard setters and used by the accounting
community to report financial information.

Gross written premiums (GWP)
GWP is an industry measure of the life insurance premiums due and
the general insurance premiums underwritten in the reporting period,
before any deductions for reinsurance.

Group adjusted operating profit*
Refer to the alternative performance measures section.

ICAV – Irish Collective Asset-Management Vehicle
A legal structure investment funds, based in Ireland and aimed at
European investment funds looking for a simple, tax-efficient
investment vehicle.

International Financial Reporting Standards (IFRS)
These are accounting guidelines and rules that companies and
organisations follow when completing financial statements. They are
designed to enable comparable reporting between companies, and they
are the standards that all publicly listed groups in the European Union
(EU) are required to use.

Key performance indicators (KPIs)
These are measures by which the development, performance or
position of the business can be measured effectively. The Group Board
reviews the KPIs annually and updates them where appropriate.

LGA
Legal & General America.

LGAS
Legal and General Assurance Society Limited.

LGC
Legal & General Capital.

LGI
Legal & General Insurance.

LGI new business
New business arising from new policies written on retail protection
products and new deals and incremental business on group
protection products.

LGIA
Legal & General Insurance America.

LGIM
Legal & General Investment Management.

LGR
Legal & General Retirement, which includes Legal & General Retirement
Institutional (LGRI) and Legal & General Retirement Retail (LGRR).

LGR new business
Single premiums arising from annuity sales and back book acquisitions
(including individual annuity and pension risk transfer), the volume of
lifetime mortgage lending and the notional size of longevity insurance
transactions, based on the present value of the fixed leg cash flows
discounted at the LIBOR curve.

* These items represent an alternative performance measure (APM)

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Liability driven investment (LDI)
A form of investing in which the main goal is to gain sufficient assets to
meet all liabilities, both current and future. This form of investing is most
prominent in final salary pension plans, whose liabilities can often reach
into billions of pounds for the largest of plans.

Pension risk transfer (PRT)
PRT represents bulk annuities bought by entities that run final salary
pension schemes to reduce their responsibilities by closing the
schemes to new members and passing the assets and obligations
to insurance providers.

Lifetime mortgages
An equity release product aimed at people aged 60 years and over.
It is a mortgage loan secured against the customer’s house. Customers
do not make any monthly payments and continue to own and live in
their house until they move into long-term care or on death. A no
negative equity guarantee exists such that if the house value on
repayment is insufficient to cover the outstanding loan, any shortfall
is borne by the lender.

Matching adjustment
An adjustment to the discount rate used for annuity liabilities in
Solvency II balance sheets. This adjustment reflects the fact that the
profile of assets held is sufficiently well-matched to the profile of the
liabilities, that those assets can be held to maturity, and that any excess
return over risk-free (that is not related to defaults) can be earned
regardless of asset value fluctuations after purchase.

Mortality rate
Rate of death, influenced by age, gender and health, used in pricing and
calculating liabilities for future policyholders of life and annuity products,
which contain mortality risks.

Net release from operations*
Refer to the alternative performance measures section.

New business surplus/(strain)
The net impact of writing new business on the IFRS position, including
the benefit/cost of acquiring new business and the setting up of
reserves, for UK non profit annuities, workplace savings, protection and
savings, net of tax. This metric provides an understanding of the impact
of new contracts on the IFRS profit for the year.

Open architecture
Where a company offers investment products from a range of other
companies in addition to its own products. This gives customers a wider
choice of funds to invest in and access to a larger pool of money
management professionals.

Overlay assets
Overlay assets are derivative assets that are managed alongside the
physical assets held by LGIM. These instruments include interest rate
swaps, inﬂation swaps, equity futures and options. These are typically
used to hedge risks associated with pension scheme assets during the
derisking stage of the pension life cycle.

Platform
Online services used by intermediaries and consumers to view and
administer their investment portfolios. Platforms usually provide
facilities for buying and selling investments (including, in the UK,
products such as Individual Savings Accounts (ISAs), Self-Invested
Personal Pensions (SIPPs) and life insurance) and for viewing an
individual’s entire portfolio to assess asset allocation and risk exposure.

Present value of future new business premiums (PVNBP)
PVNBP is equivalent to total single premiums plus the discounted
value of annual premiums expected to be received over the term of
the contracts using the same economic and operating assumptions
used for the new business value at the end of the financial period.
The discounted value of longevity insurance regular premiums and
quota share reinsurance single premiums are calculated on a net of
reinsurance basis to enable a more representative margin figure.
PVNBP, therefore, provides an estimate of the present value of the
premiums associated with new business written in the year.

Purchased interest in long-term business (PILTB)
An estimate of the future profits that will emerge over the remaining
term of life and pensions policies that have been acquired via a
business combination.

Real assets
Real assets encompass a wide variety of tangible debt and equity
investments, primarily real estate, infrastructure and energy. They have
the ability to serve as stable sources of long term income in weak
markets, while also providing capital appreciation opportunities in
strong markets.

Release from operations
The expected release of IFRS surplus from in-force business for the
UK non-profit Insurance and Savings and LGR businesses, the
shareholders’ share of bonuses on with-profits business, the post-tax
operating profit on other UK businesses, including the medium-term
expected investment return on LGC invested assets, and dividends
remitted from LGA. Release from operations was previously referred
to as operational cash generation.

* These items represent an alternative performance measure (APM)

243

Legal & General Group Plc Annual Report and Accounts 2018Other informationSolvency II surplus
The excess of Eligible Own Funds on a regulatory basis over the
Solvency Capital Requirement. This represents the amount of capital
available to the company in excess of that required to sustain it in a
1-in-200 year risk event.

Solvency Capital Requirement (SCR)
The amount of Solvency II capital required to cover the losses occurring
in a 1-in-200 year risk event.

Total shareholder return (TSR)
TSR is a measure used to compare the performance of different
companies’ stocks and shares over time. It combines the share
price appreciation and dividends paid to show the total return to
the shareholder.

Transitional Measures on Technical Provisions (TMTP)
This is an adjustment to Solvency II technical provisions to bring them
into line with the pre-Solvency II equivalent as at 1 January 2016 when
the regulatory basis switched over, to smooth the introduction of the
new regime. This will decrease linearly over the 16 years following
Solvency II implementation but may be recalculated to allow for
changes impacting the relevant business, subject to agreement
with the PRA.

Unbundled DC solution
When investment services and administration services are supplied
by separate providers. Typically, the sponsoring employer will cover
administration costs and scheme members the investment costs.

With-profits funds
Individually identifiable portfolios where policyholders have a
contractual right to receive additional benefits based on factors such
as the performance of a pool of assets held within the fund, as a
supplement to any guaranteed benefits. An insurer may either have
discretion as to the timing of the allocation of those benefits to
participating policyholders or may have discretion as to the timing
and the amount of the additional benefits.

Yield
A measure of the income received from an investment compared to the
price paid for the investment. It is usually expressed as a percentage.

Other information

Return on Equity (ROE)*
Refer to the alternative performance measures section.

Risk appetite
The aggregate level and types of risk a company is willing to assume
in its exposures and business activities in order to achieve its
business objectives.

Single premiums
Single premiums arise on the sale of new contracts where the terms
of the policy do not anticipate more than one premium being paid over
its lifetime, such as in individual and bulk annuity deals.

Solvency II
Taking effect from 1 January 2016, the Solvency II regulatory regime is
a harmonised prudential framework for insurance firms in the EEA. This
single market approach is based on economic principles that measure
assets and liabilities to appropriately align insurers’ risk with the capital
they hold to safeguard the policyholders’ interest.

Solvency II capital coverage ratio
The Eligible Own Funds on a regulatory basis divided by the group
Solvency Capital Requirement. This represents the number of times
the SCR is covered by Eligible Own Funds.

Solvency II capital coverage ratio (proforma basis)
The proforma basis Solvency II SCR coverage ratio incorporates the
impacts of a recalculation of the Transitional Measures for Technical
Provisions and the contribution of with-profits funds and our defined
benefit pension schemes in both Own Funds and the SCR in the
calculation of the SCR coverage ratio.

Solvency II capital coverage ratio (shareholder view basis)
In order to represent a shareholder view of group solvency position,
the contribution of with-profits funds and our defined benefit pension
schemes is excluded from both the group’s Own Funds and the group’s
solvency capital requirement, by the amount of their respective
solvency capital requirements, in the calculation of the SCR coverage
ratio. This incorporates the impacts of a recalculation of the Transitional
Measures for Technical Provisions based on end of period economic
conditions. The shareholder view basis does not reflect the regulatory
capital position as at 31 December 2018. This will be submitted to the
PRA in April 2019.

Solvency II new business contribution
Reflects present value at the point of sale of expected future Solvency II
surplus emerging from new business written in the period using the risk
discount rate applicable at the end of the reporting period.

Solvency II Risk Margin
An additional liability required in the Solvency II balance sheet, to
ensure the total value of technical provisions is equal to the current
amount a (re)insurer would have to pay if it were to transfer its insurance
and reinsurance obligations immediately to another (re)insurer. The value
of the risk margin represents the cost of providing an amount of Eligible
Own Funds equal to the Solvency Capital Requirement (relating to
non-market risks) necessary to support the insurance and reinsurance
obligations over the lifetime thereof.

* These items represent an alternative performance measure (APM)

244

Legal & General Group Plc Annual Report and Accounts 2018Registered office:
One Coleman Street,
London EC2R 5AA

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legalandgeneralgroup.com

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