Scottish Widows Group

1 Scottish Widows Group is responsible for the maintenance and integrity of the website on which this SFCR and the accompanying auditor s report are published. The legislation in the UK governing the preparation and dissemination of the SFCR may differ from legislation in other jurisdictions. Scottish Widows Group solvency and financial Condition report 31 December 2016 Scottish Widows Group 2 Statement of Directors Responsibilities 4 Independent Auditor s report 5 Summary 11 A. Business and Performance 14 Business 14 Group Profit 19 Underwriting Performance 19 Investment Performance 21 Performance of other activities 22 Any other information 22 B. System of Governance 26 General information on the system of governance 26 Fit and proper requirements 43 Risk management system including the own risk and solvency assessment 44 Internal control system 52 Internal audit function 54 Actuarial function 56 Outsourcing 57 Any other information 60 C.

2 Risk Profile 61 Underwriting risk 65 Market risk 68 Credit risk 71 Liquidity risk 72 Operational risk 75 Other material risks 78 Stress Testing and Scenario Analysis 81 Prudent Person Principle 82 Material Information 82 D. Valuation for solvency Purposes 83 Assets 83 Technical provisions 93 Other liabilities 108 Alternative methods for valuation 113 Scottish Widows Group 3 Other information 113 E. Capital Management 115 Own Funds 116 solvency Capital Requirement and Minimum Capital Requirement 127 Use of the duration-based equity risk sub-module in the calculation of the SCR 130 Differences between the Standard Formula and the Internal Model 130 Non-compliance with the MCR and SCR 136 Any other information 136 Appendix A: Technical Provisions - Assumptions for SWL 137 Appendix B: Structure Chart 142 Appendix C: Subsidiaries and related undertakings 143 Appendix D1: 147 Quantitative Reporting Templates: Scottish Widows Limited 147 Appendix D2: 159 Quantitative Reporting Templates: Lloyds Bank General Insurance Limited 159 Quantitative Reporting Templates: St.

3 Andrew s Insurance plc 170 Quantitative Reporting Templates: Scottish Widows Group Limited 181 Scottish Widows Group 4 Statement of Directors Responsibilities This solvency and financial Condition report ( SFCR ) presents information in the format prescribed by the Prudential Regulation Authority ( PRA ) Rulebook and applicable solvency II European regulations and guidelines. It includes disclosures in relation to business performance, governance, risk profile, solvency and capital management and in doing so sets out the financial position of Scottish Widows Group Limited and its insurance subsidiaries following the introduction of solvency II. Scottish Widows Group Limited ( SWG ) has received permission from the PRA to publish a single SFCR.

4 This report therefore contains the required information for SWG and its three insurance subsidiaries, Scottish Widows Limited ( SWL ), Lloyds Bank General Insurance Limited ( LBGIL ) and St Andrew s Insurance plc ( StAI ), referred to within the report as the Insurance Group . The SFCR will be produced on an annual basis. The applicable European regulations provide that, in this first year of application, comparatives are not required. Comparatives will therefore be available in the report from the year ended 31 December 2017. The Directors are responsible for preparing this solvency and financial Condition report in accordance with the Prudential Regulatory Authority (PRA) Rulebook and solvency II European regulations and guidelines.

5 In compliance with the PRA Rulebook for solvency II firms, Rule (2) and Rule (1) of the Reporting Part, Scottish Widows Group Limited has in place a set of procedures ensuring the ongoing appropriateness of any information disclosed. Each of the Directors, whose names and functions are listed in the Board of Directors section of the Scottish Widows Group Limited report & Accounts, confirm that, to the best of their knowledge: (a) Throughout the financial year in question, the Group and its solo insurance undertakings have complied in all material respects with the requirements of the PRA rules and solvency II Regulations as applicable; and (b) It is reasonable to believe that, at the date of the publication of the solvency and financial Condition report , the Group and its solo insurance undertakings continue so to comply, and will continue so to comply in future.

6 By Order of the Board Mike Harris Finance Director 27 June 2017 Scottish Widows Group 5 Independent Auditor s report report of the external independent auditors to the Directors of Scottish Widows Group Limited ( the Company ) pursuant to Rule (2) of the External Audit Part of the PRA Rulebook applicable to solvency II firms report on the Audit of the relevant elements of the Single Group -Wide solvency and financial Condition report Opinion Except as stated below, we have audited the following documents prepared by the Company as at 31 December 2016: The Valuation for solvency purposes and Capital Management sections of the Single Group -Wide solvency and financial Condition report of the Company as at 31 December 2016, ( the Narrative Disclosures subject to audit ); and Group templates , , and ( the Group Templates subject to audit ).

7 Company templates , , , , and in respect of Scottish Widows Limited, Lloyds Bank General Insurance Limited and St Andrews Insurance plc ( the Group members ) ( the Company Templates subject to audit ). The Narrative Disclosures subject to audit, the Group Templates subject to audit and the Company Templates subject to audit are collectively referred to as the relevant elements of the Single Group -Wide solvency and financial Condition report . We are not required to audit, nor have we audited, and as a consequence do not express an opinion on the Other Information which comprises: Information contained within the relevant elements of the Single Group -Wide solvency and financial Condition report set out above which are, or derive from the solvency Capital Requirement, as identified in the Appendix to this report ; The Summary , Business and performance , System of governance and Risk profile elements of the Single Group -Wide solvency and financial Condition report ; Group templates , and ; Company templates , , and.

8 Information calculated in accordance with the previous regime used in the calculation of the transitional measure on technical provisions, and as a consequence all information relating to the transitional measure on technical provisions as set out in the Appendix to this report ; The written acknowledgement by management of their responsibilities, including for the preparation of the Single Group -Wide solvency and financial Condition report ( the Responsibility Statement ); Information which pertains to an undertaking that is not a solvency II undertaking and has been prepared in accordance with PRA rules other than those implementing the solvency II Directive or Scottish Widows Group 6 in accordance with an EU instrument other than the solvency II regulations ( the sectoral information ) as identified in the Appendix to this report .

9 To the extent the information subject to audit in the relevant elements of the Single Group -Wide solvency and financial Condition report includes amounts that are totals, sub-totals or calculations derived from the Other Information, we have relied without verification on the Other Information. In our opinion, the information subject to audit in the relevant elements of the Single Group -Wide solvency and financial Condition report of the Company as at 31 December 2016 is prepared, in all material respects, in accordance with the financial reporting provisions of the PRA Rules and solvency II regulations on which they are based, as modified by relevant supervisory modifications, and as supplemented by supervisory approvals and determinations.

10 Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (ISAs (UK & I)), International Standard on Auditing (UK) 800 and International Standard on Auditing (UK) 805, and applicable law. Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the relevant elements of the Single Group -Wide solvency and financial Condition report section of our report . Emphasis of Matter - Basis of Accounting We draw attention to the Valuation for solvency purposes and Capital Management of the Single Group -Wide solvency and financial Condition report , which describe the basis of accounting.