Legal & General : Risk management supplement 2023

Within this supplement we set out descriptions of the risks we face, further information on how our risk management framework operates and a narrative description of our appetite in relation

to our main risk areas.

1

Our risk landscape

The risks that are inherent in our business arising from:

• the products we write
• the investments we hold to meet our obligations
• the business environment in which we operate

Risk appetite

Our quantitative and qualitative expressions for the types of risk to which we are prepared to be exposed.

Alongside the minimum capital requirements that we wish to maintain and the degree of volatility of earnings we wish to avoid, we set a range of tolerances and limits for our material financial and non-financial risk exposures.

Risk management framework

Our formal framework for monitoring our risk landscape and ensuring that we are only exposed to those residual risks for which we have an appetite.

Our framework seeks to reinforce the parameters of acceptable risk taking, allowing business managers to make decisions that are consistent with our risk appetite.

Our risk management approach supports informed risk taking by our businesses."

Chris Knight

Group Chief Risk Officer

1. The products we write Insurance risk

Longevity, mortality and morbidity

The pricing of long-term life insurance business requires assumptions to be made for future trends in the life expectancy and general health of those whom we insure. There is the risk that actual experience may diverge from our assumptions, requiring an increase in reserves and reducing profits.

Life catastrophe

We also make assumptions about the likelihood of catastrophic events that could cause a widespread loss of life or disability within the pool of the lives we insure. There is the risk that future events could be more extreme than those we have assessed

in determining our reserves.

Persistency (lapse)

We are exposed to the risk that product acquisition and set up costs may not be recovered if policies lapse earlier than we anticipated within our pricing assumptions.

Product expenses

Our product pricing must also take into account of the future costs of product servicing. Deviations in actual costs present the risk of reduced product profitability.

2. The investments we hold Market risk

Investment performance

We invest in a range of investment assets, including equities, bonds and property to meet the obligations from the long-term life insurance business that we write. However, there is a risk that the income and value of these investment assets may underperform relative to required targets.

Interest rates and inflation

Interest rates and inflation can affect the value of the investment assets we hold to meet our obligations, as well as the value of the obligations themselves. These factors have an impact on profitability.

Currency

Fluctuations in exchange rates can vary both the value and income from investment assets denominated in foreign currencies, as well as the sterling profits and value of our overseas businesses.

Property

We are exposed to fluctuations in property prices through our investments in residential and commercial property development. Additionally, lifetime mortgages include a no-negative equity guarantee, which transfers an exposure to loss to Legal & General, should house price inflation fall below expectations.

Credit risk

Bond default

We hold a significant portfolio of corporate bonds to back our pension risk transfer and annuities businesses. This portfolio is diversified across a range of sectors and geographies. However, it inherently carries the risk of default, which may result in financial loss.

Property direct lending

We also hold property lending and sale and leaseback investments that are inherently exposed to the risk of default by a borrower or tenant, although we seek to protect our interests by taking security over underlying property.

Banks and the issuers of financial instruments Banking and money market counterparties, the issuers of financial instruments and the providers of settlement and custody services may default on their obligations to us. Such defaults could result in financial loss.

Reinsurance counterparties

Although not directly an investment risk, in using reinsurance in our annuity and protection businesses, we are also exposed to the risk that a reinsurer may default, impacting the payment of claims to us and other obligations, and requiring us to either seek alternative reinsurance arrangements, potentially on less advantageous terms, or bear the reinsured risks directly.

Liquidity risk

Contingent events

Low probability and typically extreme events that, if not adequately planned for, may result in unanticipated requirements for liquidity.

Collateral

Failure to hold sufficient cash or suitable liquid assets to meet collateral requirements for financial instruments may result in unplanned disposals

of assets at excessive cost.

Investment liquidity

Exposure to liquidity risk may also 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. We manage this risk by ensuring that an appropriate proportion of our funds are held in cash or other readily realisable assets to meet maturities and anticipated early withdrawals as they fall due.

3. The environment we operate in Technology

We operate in an environment where we place significant reliance on a combination of IT systems and manual processes.

Any vulnerabilities or breakdowns in our systems and processes, along with the loss of key personnel, or errors and omissions, could lead to financial loss or adversely impact our customers and reputation.

We also encounter technology-specific risks, including breaches of confidentiality, system or data integrity failures, and challenges in adapting promptly

and cost-effectively to changing environment or business requirements. Our primary focus remains on managing technology risk to ensure the ongoing competitiveness and stability of Legal & General.

Information Security and Cyber Threats

We are also exposed to information security and cyber threats. This landscape remains both complex and dynamic, with emerging and evolving risks. We manage this by continuous monitoring and implementation of robust security measures.

Compliance and Conduct

The markets in which we operate are highly regulated. Changes in regulation or legislation can require changes to our products or business processes. A breach of legislative or regulatory requirements may result in financial penalties, remediation costs and damage to our reputation.

Operational Resilience

Our operating environment requires that we ensure our important business services can be delivered within defined impact tolerances. Additionally, we must restore the Group's broader business systems and processes on a timely basis to minimise impacts and disruptions to customers and other stakeholders. Our ambition extends beyond compliance to the regulation; we aim to drive broader resilience

by setting resilience standards for across the Group and embedding a 'resilience by design' approach into our change initiatives.

Third parties

We collaborate with outsource providers and essential supplier services to deliver our business services. The failure of a service provider to meet expected and agreed standards due to poor performance or financial issues could result

in financial loss or harm to our reputation.

Health and Safety

Where we directly engage in housebuilding and commercial property development activities, or act as the operator of retirement villages and affordable homes, we may also be exposed to construction risk, including health and safety, project delivery and other liability risks.

People

We depend on the knowledge and expert judgement of our people. The failure to recruit, retain and effectively manage a workforce with the right skills, behaviours and culture alignment may impact our ability to deliver the group's business and strategic objectives.

Climate-related risk

The deterioration of the health of ecosystems on which we and all other species depend is the biggest challenge our generation faces. The potential physical impacts resulting from the changing climate, along with the necessary mitigating actions, have wide-ranging impacts. While we cannot predict exactly how the world will respond to climate change, we know that the changes required are profound, introducing additional uncertainty.

The risks arising from climate change that we are exposed to fall into three broad categories:

• Transition risk: impacts on asset valuation and the economy from the process of transitioning towards a low-carbon economy
• Physical risk: impacts on asset holdings or changes to insurance liabilities as a result of more frequent and severe weather events and longer-term shifts in climate
• Corporate risk: impacts on the Group from exposure regulatory censure, climate-rated litigation risks, or adverse customer perception to the Group.
  There are potentially material correlations between all the above risks, with a single event leading to losses on multiple risk types.
  These correlations are difficult to estimate though they would tend to be more acute as the underlying risk scenarios become more extreme.

Market risk

We have an appetite for market risk within our pension risk transfer and annuities businesses, and our shareholder funds, where we are rewarded for taking exposure to the risk. In particular, we have an appetite for selected risks associated with equity, bond and property investments as the asset class may provide higher investment returns relative to the risk-free rate over the medium-term and enable the optimisation of risk-adjusted returns.

We have limited tolerance, however, for significant losses or volatility from these market risks and so we seek to set clear investment risk limits which must be adhered to by our businesses. We also have limited tolerance for significant mismatches

in interest rates where asset cash flows are expected to cover liability cash flows over a long term horizon, and risks arising from fluctuations in inflation. Where hedging instruments exist, we seek to remove both these risks. Similarly, we have a limited tolerance for developed country currency risk relative to the base currency of our investment assets and will selectively hedge these currency risks.

Credit risk

We have an appetite for selected credit risk to the extent that accepting this risk enables us to optimise policyholder and Group risk-adjusted returns. In particular, default risk is an inherent factor in bond investments. However, we have limited tolerance for significant losses from single or interrelated

counterparty failures, and therefore set credit rating-based exposure limits for investment portfolios as well as limits on exposures to specific sectors and single counterparties, and trade out positions if appropriate.

We also have an appetite for property lending counterparty risk where we can assess the risk of default on loan repayments, by taking the risk we are able to optimise Group risk-adjusted returns, including those derived through a diversification of credit risk. We have limited tolerance, however, for significant loss from the failure of property lending counterparties and require that lending

is subject to formal underwriting and secured on physical property assets.

We recognise that there is an inherent risk of reinsurer default. However, we have limited tolerance for significant financial loss or operational disruption from a reinsurer default event and we will seek to set and monitor credit risk-derived exposure limits for each reinsurance counterparty with which we do business.

We have limited tolerance for the risk of default by banking and money market counterparties, the issuers of derivative financial instruments, or the providers of settlement and custody services, and will seek to actively manage all such exposures against our defined counterparty exposure limits.

Insurance risk

We have an appetite for longevity, mortality and morbidity risk where we expect to add value by accepting such risks, and have the capability to assess, price for and monitor trends in the risks assumed.

We have a low tolerance for not achieving our target reward for risk as a result of policies lapsing at

a faster rate than that anticipated. Similarly, we have a low tolerance for negative variances on product expense assumptions. We seek to manage both these risks by investigations and monitoring experience and reflect the conclusions in our product design and reserving strategies.

We have limited tolerance for an accumulation of catastrophe risk by geographic location and will seek to use a combination of underwriting, geographic concentration limits and reassurance to manage such exposures.

Liquidity risk

We do not seek exposure to liquidity risk, but accept that a degree of exposure will arise as a consequence of the markets in which we operate, the products that we write and through the execution of investment management strategies. We seek to ensure that we meet our obligations as they fall due and avoid incurring material losses on forced asset sales

in order to meet those obligations.

At Group level, we seek to maintain sufficient liquid assets and standby facilities to meet a prudent estimate of the group's cash outflows, as identified through annual planning processes.

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. Given the illiquid nature of our 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.

Operational risk

We accept a degree of exposure to operational risk where exposures arise as a result of core strategic activity. However, we have very limited appetite for large operational losses due to the likely customer impact, reputational damage and opportunity costs.

We aim to implement effective controls to reduce operational risk exposures except where the costs of such controls exceed the expected benefits.

We have no tolerance for property-related safety risks and seek to closely manage our exposures.

Climate-related risk

We accept a degree of exposure to climate change related risk, but we manage our business to align with the mitigation of climate change beyond the 1.5% 'Paris' objective and to be resilient to the risks of different climate outcomes.

We have also set ourselves ambitious climate goals as we recognize that actions taken today can influence the likelihood of different climate outcomes, and impact on future risk exposure.

We have limited tolerance for:

• the climate-related physical, transition and reputational risks associated with our investments, whilst recognizing that some investment assets with these risks are currently a necessary part of our inclusive capitalism strategy
• not delivering on our expected decarbonisation of our business and investment portfolios

We deploy a 'three lines of defence' risk governance model:

• business divisions are responsible for risk taking within the parameters of our risk appetite and accountable for managing risks in line with our risk policies
• risk functions led by the Group Chief Risk Officer provide objective challenge and guidance on risk matters
• Group Internal Audit provide independent assurance on the effectiveness of business risk management and the overall operation of the risk framework.

The core elements of our risk management framework are set out below.

Risk appetite

The group's risk appetite statement sets out our overall attitude to risk, and the ranges and limits of acceptable risk taking. The Group Board's Risk Committee leads an annual review of the group's risk appetite, assessing the continued appropriateness of our key measures and tolerances relative to the risk exposures of the Group. Additionally, as part

of the annual planning cycle, assessment is made of the level of risk taking proposed in the Group plan and the capacity for risk taking within the overall appetite framework.

The Group's risk appetite is approved by the Group Board on the recommendation of the Risk Committee and the Group Chief Executive Officer. The regular management information received by the Group Board and the Group Risk Committee includes our risk appetite dashboard setting out actual positions relative to the key targets and limits set in our

risk appetite.

Risk taking authorities

We cascade the parameters of our risk appetite

to our business managers through 'risk and capital mandates', empowering managers to make decisions that are consistent with our appetite for risk.

Our mandates articulate the product types and features that may be written; the asset classes that may be held; the target capital positions and ranges of earnings' volatility within which the overall profile of risks should be managed; and tolerances for specific risk exposures. Activities that would result in a business operating outside agreed parameters requires formal approval.

Risk policies

Risk control

We set formal policies for the management of market, insurance, credit, liquidity and operational risks. The policies specify our overall strategies for ensuring each risk type is managed in line with our risk appetite and the minimum control standards that should be applied in managing our significant risk exposures.

Risk mitigation

We deploy a range of risk management techniques to manage and mitigate risks, so as to control risk exposures in line with our risk limits. For example, we use derivative instruments to hedge unrewarded risks as part of our asset liability management activity; and reinsurance programmes to transfer significant aggregations and concentrations

of insurance risk exposures.

Our framework of controls includes documented underwriting policies and structured delegated pricing and underwriting authorities. It also includes investment policies which take into account the nature of our liabilities, guarantees and other embedded options given to policyholders.

Risk appetite

continued

7

Risk identification and assessment

Review process

We operate a risk identification and assessment process under which all our businesses regularly consider changes in the profile of existing and emerging risks. The assessment process evaluates the risks that are inherent in our products as well as those that are presented from changes in the environments that we operate in.

Scenario planning

We undertake scenario analysis of emerging and uncertain future events to assess possible outcomes and to develop proactive management responses.

Own risk and solvency assessment (ORSA) Our risk identification and assessment process forms part of our broader ORSA process, our ongoing assessment of the risks to which Legal & General

is exposed and an evaluation of the sufficiency

of resources to sustain the business strategy over the horizon of the Group plan.

Risk management information

Our risk management information framework

is structured to report on and support the review of ongoing and emerging risks and assess actual risk positions relative to the risk limits and targets that we set.

The Group Chief Risk Officer also provides objective challenge and guidance on a range of risk matters to business managers, including the risks implicit in product developments, business transactions and new asset classes, and strategies for managing risks in line with the group's overall risk appetite.

Risk committees

The Group Board has ultimate responsibility for the group's risk management framework. The Group Board's Risk Committee, supported by the Group Chief Risk Officer, serves as the focal point for risk management activities. Details of the operation of the Risk Committee are set out in the full 2023 annual report.

Beneath the Risk Committee is a structure of formal risk oversight committees providing more focused review and challenge of specific risks to the Group, and reviewing the effectiveness of frameworks

in place to manage those risks.

Culture and reward

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

We have a well-established culture and reward process reflected in executive's remuneration.

Registered office:

One Coleman Street,

London EC2R 5AA

T 020 3124 2000

F 020 3124 2500 legalandgeneralgroup.com

Legal & General Group Plc is a holding company, subsidiary undertakings of which are authorised and regulated by the Financial Conduct Authority and/or Prudential Regulation Authority, as appropriate.

Risk oversight

The Group Chief Risk Officer and his team, who are independent of the business line, support the Group Board and its Risk Committee in articulating acceptable risk taking and ensuring the effective operation of our risk and capital framework.

This includes ongoing assessment of the group's capital requirements to confirm that they meet regulatory solvency requirements.

Voice survey

We listen to our people through the Voice survey, fostering a diverse, inclusive and positive environment.