Aviva plc (AV) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our latest In Focus session, this time on our Annuities, Equity Release and Asset Origination businesses. This follows the previous In Focus sessions we've done on Canada Health & Protection and U.K. commercial lines. The purpose of these sessions is to provide you with more detailed insight into our markets and what makes them tick. We want to help you understand how we're transforming performance and building upon the momentum achieved so far to achieve sustainable long-term growth. Next to me today, we have Doug Brown, the CEO of our UK Life business; and Mark Versey, the CEO of our asset manager, Aviva Investors. I'll shortly hand over to Doug and Mark. Their presentation should last about 30 minutes and we will leave time for plenty of Q&A at the end. But before that, I'd like to highlight a few important points. As you know, we are now firmly in the operational improvement phase of our strategy. We are building upon a unique proposition of market strength with a clear strategy to drive profitable growth. This will underpin sustainable cash generation and a growing dividend. Our Annuities & Equity Release business has a key role to play in this. It represented 1/4 of the group's own funds generation in 2021 and is a key driver of long-term cash generation. We have leading positions in a market that is set to benefit from some fundamental underlying growth trends. We all know that the macro environment at the moment is volatile and evolving at pace. But it's clear that we are moving into an interest rate environment that's set to be quite different to the one seen over the last 10 years. This could drive demand in annuities and hopefully, you will see today that we have the products and the capabilities to respond to that. Of course, we do recognize the current levels of economic uncertainty may also influence the behavior of our customers in other ways too. But the diversified nature of our business means we have in-built resilience, which you will hear about further in today's session. Doug and Mark will talk you through this in more detail shortly. But let me make one further point before I hand over. We see the outlook for this business as being very positive given the underlying trends and our strong market positions, and we expect to grow this business even in the current competitive environment. But we have always been disciplined in these markets, not least in BPAs, and you should expect us to continue this discipline. We will not chase volume at the expense of margin. And with that, I will pass you over to Doug.

Thanks, Amanda, and good morning, everyone. Our Annuities & Equity Release business is a great business. We have strong ambitions and a clear strategy to achieve those ambitions. Now I've been here at Aviva for a year now, and this business is one of the reasons I was so keen to join. And there are 4 main reasons for that. Number one is this is a key cash generative business, and our investments today deliver long-term cash generations at attractive returns. Number two is that we're already a scale player with unrivaled brand strength. Thirdly, we are a top 4 player in the BPA market and aim to remain there by targeting volumes of GBP 15 billion to GBP 20 billion in total over the next 3 years. And finally, our in-house expertise is a key enabler and competitive advantage for our ambitions in this business. So let me start on Slide 6, where I can give you a better understanding of our Annuities & Equity Release business, which I run as one segment led by [ Dave Elliott ]. It is a key segment for us, and the outlook is positive given the underlying trends and our strong market positions. You can see that the business generated almost GBP 400 million of own funds generation in 2021. You can also see in the table what sits behind that number as we are giving you some additional disclosure today. And as you'll hear this morning, we have the skills and capabilities to continue winning in this space, both in Annuities & Equity Release and in our asset management business, Aviva Investors. Now I'll soon cover the BPA business, but before we do, I did want to talk to you about individual annuities and equity release, which are both large and important businesses. So let's start with individual annuities on Slide 8. I believe individual annuities will continue to be a valuable part of many people's retirement and planning with continued demand going forward. Let me explain why. Firstly, increasing interest rates and yields can make an annuity policy more attractive to customers. Secondly, the U.K. has an aging population with increased life expectancy. More and more people are coming to retirement, representing about GBP 40 billion of assets each year. But fewer of these customers are reaching retirement with the DB pension. This means that many will be looking for some guaranteed income in retirement to support their living expenses. On top of that, people are increasingly looking for advice as they tackle what is a complex decision. And as you know, this is an area where we've recently expanded our capability. And finally, but importantly, Aviva has a large back book and a growing wealth business, which includes the largest workplace pensions business in the U.K. Our great strength is our range of products that can support our customers from accumulation through to retirement and de-accumulation. Now you can see from the chart on the left that we are the largest provider of individual annuities in the market. And our market share of external annuities is around 10% which we aim to grow while delivering low-teen IRRs across the book. And let me give you some more color around how we're growing our external volumes of individual annuities in the coming years. We already have a top-tier position in the open market. Our brand strength, coupled with competitive pricing is helping us to win. We have an excellent reputation in this space and have gained market share over the past 12 months, and I'm confident that we can keep that trend going. This year, we have already adjusted pricing 13 times to offer better returns to our customers while maintaining healthy margins across the portfolio. And we continue to use the data of our 1.1 million individual annuity customers to refine our pricing sophistication. Our individual annuity business is an important part of our ambition to be able to support our customers' needs across their lifetimes. And of course, this business is also important to the group, with the large internal books generating a strong cash flow. So let's turn next to our Equity Release business on Slide 10, an area where I see real potential. 22 years ago, Aviva was one of the first to offer this kind of product and today, we are the largest lender in the market by size of loan book. Over those years, we has built up market-leading sophistication and the in-depth property expertise that you would expect from a company successfully operating in this space. These are 2 critical factors for success. The equity release market is growing again following a period of slowdown during COVID. And the long-term forecast is strong with mid-high single-digit growth projected. So what are some of the things driving this growth? Well, we know that the average pension pots at the end of 2021 were quite low at 70,000. And this results in a total annual shortfall in pensioners income of GBP 48 billion. Many of these customers will look to equity release as a means of supplementing income when they reach retirement. Other drivers include the ability to pay off large debts or transfer wealth between generations, all while remaining in their own home. And we know this is important as the data shows that more than 70% of over 45 year olds want to live in their current property as long as possible. So I expect to see double-digit growth in lending in Aviva over the next 3 years, and I believe we are well placed to capture this growth for 4 reasons. One, we have exceptional tNPS scores and an award-winning proposition as well as a brand that resonates strongly with customers in this segment. Two, we are broadening our distribution reach. Increasingly, more customer lending is taking place through in-house or tied advisers, an area where Aviva has not played extensively before. So we're changing that and have now established a direct offering. Three, we're also continuing to invest in improving our pricing capability and our digital front end to drive longer-term growth. And finally, the fourth reason is simplicity. The market has over 400 products. We have a single product that flexes to a range of needs. Customers like that and so do advisers. So equity release is a socially valuable product that helps many of our customers achieve their ambitions in later life. But this business also plays an important role for the group as it forms another part of our holistic retirement offering, contributing profits and cash to the group. And importantly, as an asset class, it is a natural fit for our annuities business given its longer duration. Through securitization, we're able to make these assets matching adjustment compliant from a Solvency II perspective. So let me sum up on equity release. It's a great asset class to be in for Aviva and contributes to our customer retirement proposition. We are a significant player, we know the market well with a long track record. And our brand, expertise and experience, coupled with the broadening of our distribution footprint will ensure we continue as a leader in this area. So let's look at BPA business in more depth. And to recap, BPA allows pension trustees to secure their future obligations to defined benefit scheme members, and we are seeing increased appetite from trustees to do so. On Slide 13, you can see that the BPA market has seen material growth over the last 5 years. And whilst we have been selective in our participation, we have the capabilities to win in this growing market. And looking forward, there is still a material opportunity to write BPAs for many years. There's an estimated GBP 2.3 trillion of private sector DB liabilities, of which only about 13% has come to the market. And over the next 3 to 5 years, we expect a market of around GBP 30 billion to GBP 50 billion per annum as pension trustees look to derisk their obligations. And as you can see on the left of the slide, we've written around GBP 16 billion of new business premiums over the past 3 years, which positions us as a top 4 player. And I would point out that BPA volumes are lumpy in nature. So the amount we write relative to peers in any given year may fluctuate a little. That's what happened in 2021 and isn't reflective of where we expect to sit overall. Now one of Aviva's strengths is our capability to compete across the market. And I want to start with our brand, which we know plays well with employers, trustees, consultants and members. It opens doors and secures quality deal flow. We also have flexible U.K.-based in-house administration capability. This enables management of complicated scheme benefits and appeals to trustees. We're disciplined on pricing, and we'll only look to grow if we can write business that meets strong financial criteria, which we assess based on the lifetime economic value. This gives us a balance of securing sales growth while also generating attractive returns. Next, our risk management framework ensures we only take on risk when we are appropriately rewarded for it, and I'll talk more about this later. And finally, it's important to recognize our asset origination capabilities. One of our great strengths is our partnership with Aviva Investors, as it means we have the right assets available to support the business and generate strong returns. And Aviva Investors is a leader in the ESG space. This resonates with employers, trustees, members and staff and is often an important factor in winning deals in a competitive market. Since 2016, our appetite to write BPAs has increased, as you can see on the chart at the bottom of Slide 15. We have developed our asset origination and reinsurance capability, allowing us to grow our share of the market to become a top 4 player. We have expanded our expertise, and this has enabled us to enter the larger deal market where we now trade on transactions of up to around GBP 1 billion. Our ambition is to write GBP 15 billion to GBP 20 billion over the next 3 years, which we expect will include further tranches of our staff pension scheme. And once written, our BPA business is cash generative. Perhaps most importantly, this more than offsets the natural runoff we see from the internally generated individual annuities. Moving to Slide 16. The BPA market is attractive as it enables us to grow the cash generated by the group. We typically see our initial investment paid back in 4 to 6 years, at which point, we continue to generate strong cash returns with total return of approximately 3 to 4x the initial investment. Our volume target of GBP 15 billion to GBP 20 billion over the next 3 years has been set in accordance with our group's capital allocation budgets. And the initial capital stream from writing new business is around 3% to 4% of the premiums, which enables us to generate a low-teens IRR. I've included an example on the right-hand side of Slide 16 of the runoff to give you a bit more color on the cash profile we typically see. All premiums are received on day 1 and available to invest in the assets to provide a long-term return to support our annuity business. At outset, we set up reserves sufficient to cover the pension obligations we have taken on from the scheme, discounted, but assuming we only earn the Solvency II matching adjustment generated from our assets. We also hold additional solvency capital, cover the risk we take at a 1 and 200 level under Solvency II, a management buffer over statutory capital and an additional Solvency II risk margin for non-hedgeable risks. This leads to a capital strain on day 1, which you can see in the first bar. Over time, we expect to earn a higher investment than the Solvency II matching adjustment, and the prudent solvency risk capital and risk margin will unwind as our risk run off. So in each future year, we will expect to generate capital surplus after paying the annuity payments required under the scheme. This will repay the strain in around 4 to 6 years and provide significant additional cash in the future years. And through maintaining this discipline and only writing business that meets our financial targets assessed on the lifetime economic value, we have generated a significant level of additional value for Aviva, offering attractive capital returns and supporting the long-term cash generation for the group. So let's move on to a subject that is close to many people's hearts, and that's financial reporting. There are multiple approaches used to report VNB across the market. So I thought it would be helpful to recap our methodology. Unlike some of our peers, our approach is prudent and doesn't give credit for all the future profits we expect to generate. Instead, it recognizes just the in-year Solvency II own funds generated from new business. When Solvency II was introduced, our Solvency II VNB metric was designed as a simple and objective measure to disclose across the whole Aviva Group. But it is important to recognize what this means for our annuity business, where there are areas of prudence in Solvency II that emerge in the future. First, we only capture in VNB the Solvency II matching adjustment from the assets invested in that period or year. We don't capture in the VNB the benefits of future optimization of those assets nor do we capture the expected outperformance of those assets relative to the day 1 matching adjustment assumption. I believe this is an appropriately prudent approach. Second, the own funds impact includes a drag from the risk margin, which is set up on day 1 and would be expected to unwind and release to shareholders over time. So what you see in our numbers is that the VNB is relatively low at the point of reporting, but with positive own funds generation coming through over time as the asset mix is optimized and that prudence is unwound. For a typical year's new business, this comes out at approximately GBP 30 million to GBP 40 million of additional OFG each year. It's also important to remember that all the returns we generate from equity release are not reflected in our BPA VNB margin either. And if adjusted for all these items, we would see a reporting margin in the high-single digits as shown by the dark blue bar on the right-hand side of the chart. So moving on to Slide 18 next in risk management. As you'd expect from Aviva, we have a robust framework in place to ensure we take a disciplined approach whilst ensuring we generate attractive returns. I will highlight just a few key points. Reinsurance is a key part of the success of our BPA business, and we have built strong capabilities and relationships, working with multiple reinsurers to give us access to the best solutions. These arrangements have been developed to support our BPA business. And in turn, the scale and expertise acquired has helped enhance our position in the individual annuity market. We use reinsurance as an important tool to manage capital allocation for new business, particularly on longevity risk, which reduces the capital strain by around 2/3 while enhancing returns. We also utilize asset reinsurance, allowing us to reinsure the credit risk as well as longevity risk when economically it makes sense for us to do so. This helps us further to diversify the portfolio giving access to additional growth and generating profits from upfront origination of BPA liabilities as well as reducing initial capital strain. And more generally, on credit risk, our disciplined management of the assets enables us to generate returns in excess of the matching adjustment, which provides that extra value upside, which is not captured in the VNB. In addition, our in-house asset origination from Aviva Investors allows us to capture more of the end-to-end value chain, and it is essential to have a diverse, high-quality portfolio to reduce capital requirements and credit risk. And what's great is that we have that. And Mark and I work closely together to keep improving those synergies. So this gives me a good segue into what I want to talk about next, and that's our asset portfolio. And on the left-hand side of Slide 20, you can see our investment strategy key focus areas. I will talk about each over the coming slides, but I thought it's worth focusing on the asset mix first. We run a cash flow-driven investment strategy and the long-term annuity cash flows allow us to capture illiquidity premium. You'll see on the right-hand side of Slide 20, that of all the U.K. annuity providers, our real asset weight is one of the highest in the market at just below 50%. This is because we built our private asset capabilities over many years, both within the annuity business and at Aviva Investors. This private asset portfolio delivers an illiquidity premium year in and year out for Aviva shareholders. More generally, I think it's interesting that Aviva was an early mover among annuity players into private assets and ESG investing, probably the 2 hottest areas now in the institutional asset market. And we now have expertise and value embedded in the annuity portfolio from the assets we've invested in over the years. On Slide 21, you can see the projected cash flow profile of our annuity assets and liabilities in broad terms. This is very much a cash flow-driven investment strategy with the blend of public and private assets across all terms. And we also use swaps to fill any gaps in our cash flows and to manage our inflation risk. And let me give you some more detail around our high-quality portfolio on Slide 22. It's crucial that our portfolio is robust to stresses and that we can rely on the asset cash flows that we showed in the previous slide to ensure we can pay our customers' pensions. So you'll see here the diverse nature of the portfolio across multiple sectors, multiple classes and its high credit quality. This is a low-risk portfolio, and you can also see on the right, the low LTVs and low losses in our commercial mortgage book. Our annuity fund has also invested GBP 20 billion into U.K. social infrastructure, spanning a whole range of sectors, giving us great diversification. And I know Mark will go into more detail on this shortly. However, we are absolutely committed as a group to continuing to invest significantly in the development of the U.K.'s infrastructure and its path to net zero. There are 2 key takeaways I'd like to leave you with on our investment approach. One, it is diversified; and two, it is dynamic. And looking at diversification first, Aviva has great experience in U.K. public and private markets, and we've traditionally concentrated our annuity portfolio in the U.K. and this has served us very well. It is still a major focus as we play a significant role in financing the social infrastructure and net zero transformation of the U.K. economy. But we have been actively investing abroad over the last few years, which diversifies our exposure to the U.K. In public assets, we have invested about GBP 5 billion outside the U.K. in the last 4 years, reducing our exposure to the relatively small number of big U.K. issuers and allowing us to select from a wider pool of opportunities globally. The largest chunk of this, as you might expect, has been in the U.S. but we're also now at around GBP 1 billion in emerging market debt. We have also become much more opportunistic in our developed market sovereign and sub-sovereign assets outside the U.K., but it's not just public assets. We've been investing in European infrastructure, particularly renewables and transport and long lease property, which provides strong inflation-linked income streams. And we've steadily built up our U.S. and Canadian infrastructure and U.S. commercial mortgages. Now market conditions have and will be variable, and so it's important to be flexible and dynamic in our investment decisions. And a good illustration of this is in the split of our new business assets between private credit and public credit over the last few years. You can see that we've added more to public credit when spreads were wide, and we allocated more to private credit when public credits were unusually low, notably in 2021. And we also run an asset warehouse where we can keep assets unmatched to liabilities until we find the right BPA deal. So we're not forced to buy assets or take on liabilities if the timing is wrong. So that concludes my section of the presentation. I've had a great first year at Aviva, and I hope I've given you a good insight into why I believe we have an excellent Annuities & Equity Release franchise, well positioned to generate strong growth and strong returns for Aviva. And with that, I'll hand over to Mark.

Thanks, Doug, and good morning, everyone. As I look at this list of recent awards, I feel a real sense of pride of what we've achieved at Aviva Investors. But I'm under no illusion that these accolades are easy to obtain. It's a very competitive market, and we need to stay ahead of the pack. So today, I want to talk to you about our asset origination and how our scale, flexibility, agility and sustainable thinking will do exactly that. As I'm sure many of you know, Aviva Investors is a core part of Aviva. We are a global asset manager that combines strong investment capabilities and sustainable investing to deliver wealth and retirement outcomes. We have GBP 250 billion of assets under management across a range of asset classes. But today, I'll be talking about our GBP 47 billion real assets business. We are one of the largest real asset investors in Europe covering real estate, infrastructure, private corporate debt, structured finance and nature-based investments on behalf of Aviva and more than 100 external clients from the National Grid Pension Scheme to the Japan Post Insurance Company. In a world of increasing inflation and rising interest rates, we expect the demand for real assets to more than double over the next 5 years. Given the money is typically allocated to real assets for the long term and with asset management fees higher than enlisted fixed income and traditional equity markets, we have a strong commercial opportunity. We have over 200 people working in this area, including the #1 institutional infrastructure debt team, the U.K.'s largest long-income real estate team and a real estate debt business that accounts for 25% of loans by insurers. In a tough market last year, we deployed GBP 4.6 billion. In 2018, we deployed GBP 5.8 billion. So we have significant scope to scale up for Aviva and for external clients. So these are the reasons why I am confident that we have a truly differentiated proposition at Aviva Investors. Number one is a market-leading franchise, which essentially is scale. We have capacity to originate more assets for both Aviva and our external clients. Number two is a multi-asset mindset using the breadth of capabilities we have to enable speed of deployment and better relative value decisions. Thirdly is the advantage of having an in-house manager, which not only retains more of the value chain, it gives us invaluable flexibility as Doug discussed earlier, including agility to innovate and warehouse assets for the future. And finally, number four, our sustainability expertise. We have been at the forefront of responsible investing for decades, and this is becoming increasingly important for winning new business. I'll start with why scale is so critical in real assets. Managing real assets is labor-intensive with high costs, but our scale means we can keep fees very competitive, and scale is a huge competitive advantage due to this barrier to entry. But for me, the real benefit is increased deal flow and the quality of the deal flow. And that's due to 3 factors. Firstly, we are a direct investor with full control. In infrastructure and real estate lending, we predominantly talk directly to the borrower not via an intermediary. The strength of our relationships means we get better terms and can source opportunities others may miss. Secondly, we offer great flexibility to borrowers. By combining scale from Aviva and external clients together, we can offer funding across the capital structure across different maturities and even create fixed and floating combinations, which enables access to more deals where other lenders are simply unable to compete. In turn, we access larger deals and get exclusivity because of the ease of dealing with one trusted lender. And thirdly, the benefit of having a GBP 24 billion back book means we have established long-term relationships with borrowers who benefit immensely from the stability of capital from the retirement business. It's all about trust, and we have a great example of this on the following slide. We started lending to Romulus 8 years ago. So when they wanted to restructure their loan, we entered exclusive dialogue with them, avoiding the need of any direct price competition from other lenders. We obviously knew the quality of their buildings in attractive high-demand locations. So we were able to create a new loan, which added new buildings, which improved the credit quality for us and reduced the loan-to-value. We increased the loan size and extended the duration matching our liabilities better. We also included sustainability incentives to reduce the carbon footprint, meeting both there and our sustainability goals. Given we have been lending in private markets for almost 40 years, you can imagine the amount of repeat business we receive. But our business is not just about real estate lending. We invest in a wide spectrum of private markets as shown on this page. The key point for me here is the flexibility to shift to where the market is strongest with the best risk-adjusted returns. Most assets are typically buy and hold, which means there's a limited secondary market. Our primary issuance, for example, in infrastructure debt, just doesn't happen every week. Being able to deploy quickly, but with the right return and risk profile requires a flexible approach across different asset classes. This flexibility has helped us win many external, multi-asset mandates. The key benefits to our retirement business are: increased deal flow, meaning quicker deployment; a greater variety of deals, helping to diversify risk; and more relative value optionality, which increases the yield. Deep diving into infrastructure debt on the next slide. We are 40% larger than our nearest competitor, with over GBP 10 billion invested in everything from schools to renewable energy. This ensures retention of talent, strong deal flow and innovation. For example, within the transport sector, we've been at the forefront of U.K. rolling stock deals, financing around GBP 1.5 billion across a range of transactions in the past 6 years. The majority of these are long term. And based on a new model, we help shape, which has now become the market norm. One standout transaction was the Thameslink Electric rolling stock deal, which we closed at the end of last year. This is a great example of how we support not just Aviva's net-zero ambitions, but also the U.K.'s. Now I'm often asked, why does Aviva need Aviva Investors. It is simply because we are the best fund manager for Aviva. We are experts in the areas most important for Aviva from Solvency II investing to ESG to real assets. We are also significantly cheaper than appointing external managers in expensive asset classes, which retains more of the value chain. For the retirement business, we also have an important alignment of interest. We seek high-margin investment opportunities but remain focused on building a diversified and risk control portfolio, which will endure tough market conditions. Our multi-asset platform creates many nonstandard opportunities where decision-making at pace requires an agility only possible with an in-house team. Deciding when to warehouse deals to match future BPA transactions or when to bypass opportunities due to relative value considerations can only come from close collaboration. I have a great example of this on the next slide, which was a trade we did last year. So this is an infrastructure interest rate swap with Associated British Ports, which we packaged as a structured loan for our retirement business. A new structure like this throws up a huge number of issues and resolving them could take a huge amount of time. But because we are used to working hand in glove, it can go through the system here swiftly, and we were able to transact something few others could achieve, enabling us to capitalize on this bank derisking. Not only did we trade 30-year cash flows to match liabilities, it was a great yield in trade also. And my final slide, sustainability. We are genuinely market-leading in sustainable investing. Why does that matter? Or firstly, green assets, these are no longer limited to listed markets. We developed our own framework offering sustainable transition loans to real estate borrowers. As part of our ambition to be net zero by 2040, we set a target to originate GBP 1 billion of these by 2025. We've already exceeded that target in just over a year and have strong ambitions to achieve more in this area. I've also given examples of how we've embedded sustainability in structured finance and infrastructure projects. And just this week, we will announce a transaction with Packaged Living to deliver 195 single-family rental homes in the West Midlands, helping to build sustainable communities in energy-efficient homes. Sustainability-linked loans are the future of this market. Secondly, it's becoming increasingly important in winning new BPA deals from schemes who are discerning as to how the assets backing pension and liabilities will be invested. And finally, it enables us to win external asset management mandates. This is a competitive advantage that will become increasingly important as external clients focus on net-zero investing. I opened my presentation by highlighting some of the recent awards that we have received. So it seems fitting to conclude that two of those were for sustainability, namely in the climate mitigation investment initiative of the year and the stewardship initiative over the year. And now back to Amanda.

Thank you, Mark. So before we get into Q&A, let me quickly sum up. As you've just heard, our Annuities & Equity Release and Asset Origination businesses are first class. We have strong ambitions and a clear strategy for achieving them. These are key cash-generative businesses for Aviva and our investments today deliver long-term cash generation at attractive returns. We are already a scale player in these markets with leading positions and unrivaled brand strength. We're targeting mid-single-digit growth in external individual annuities and double-digit growth in our equity release business. And in BPAs, we're targeting volumes of GBP 15 billion to GBP 20 billion in total over the next 3 years. And finally, our in-house expertise and long history in real asset origination is a key enabler for our ambitions in the Annuities business. So with that, we'll now move on to Q&A. And I'm just going to explain quickly how we're going to work this.

[Operator Instructions] The last thing I want to say before we open up is obviously today's event is about our Annuities & Equity Release and Asset Origination businesses. So if you can please try and focus the questions on these businesses as much as possible. And we'll try to get through as many questions as we can in the time that we have. So with that, our first question comes from Farooq.

That was very illuminating. Just wanted to ask three questions actually. So question one, can you give some numbers on kind of the yield pickup versus corporate bonds, some sort of guide that you're getting from in your annuity backing portfolio from real assets? And can you also enumerate the cost advantages that you talked about versus other insurers having to get third-party asset managers? But obviously, you are one of those third-party asset managers so you'll know how much you charge them. The second question is why only GBP 15 billion to GBP 20 billion over the period for BPAs given your capital position, given the strength of this business and given your -- the likely demand. And I guess the third question is, one of your competitors invest its own equity to seed assets and has made a kind of a business out of it and bringing third-party capital in too, so almost like a separate business. I mean, I presume from your presentation that you -- that's kind of what you're doing already, but if you could talk a little bit about that and whether you see any value in separating that out.

So Mark will pick up the first question. Doug will pick up the second question, and I'll answer the third question.

Farooq, illiquidity premium. So certainly more of an art than a science. And it varies dramatically between different deals, on different durations, different ratings and many things. But the range we typically receive is between 50 and 150 basis points. So hopefully, that sort of explains the lie of the land there. On the cost benefit question, then look, we don't publicly disclose the fees we charge for our external mandates. But in the discounts that we provide, first of all, we save VAT of 20% by doing our assets in-house. We then offer a substantial discount on external fees to the Life company because of the scale benefit. And then, of course, we capture some of the value chain with individual investors as well. So the answer is a significant saving relative to external fees. So hopefully, that covers the question.

All right. I'll take the second question. Look, we are a well-diversified business across wealth, insurance and retirement. And we're always looking at the best opportunities to deploy our capital. But we have come up with a 3-year plan. And clearly, we're targeting the GBP 15 billion to GBP 20 billion. We can take advantage of additional opportunities, but we don't want to be just a pure BPA player. We have great businesses where we talked about before with Health & Protection. At some point, we'll come back and talk to you about the wealth business, and it's important that we remain diversified going forward.

Yes. Thanks, Doug. And finally, your point around investing own equity, Farooq. Obviously, we are in a strong capital position. We recognize that. And we are looking at whether or not we put some of our money to work in the early-stage infrastructure investments that obviously could then lead on to the attractive fixed income assets for the annuity business over time, and particularly the assets focusing on the ESG-themed assets that Mark was referring to. But this is -- we're in very, very early stage development on that. So you would expect us to be extremely cautious on that. So I guess more to follow on that. And the next question, please, is Alan Devlin.

Perfect. Just a couple of questions for me. I suppose following on from Farooq's question. What is the kind of binding instrument on growing the BPA business? Is it the capital you're willing to invest, which we saw at a 3.5%, strain is around GBP 200 million a year or is it [indiscernible] kind of quite a risk you want to take, et cetra, how are you thinking about that opportunity? And then secondly, in the individual annuity opportunity, would you kind of, yes, being the -- you largely forgotten push Pension Freedoms. Again, your growth objective there is relatively modest, given the growth in DC and auto-enrollment and the fact that interest rates are now materially higher, you should make individual annuities much more attractive for people into retirement. Do you think that opportunity will actually start to accelerate if interest rates continue to increase?

Okay. Thanks, Alan. I think with -- a little bit in less [ holding ] your first question. I think you said what's the constraint on BPA. Is that right?

Yes, that's correct.

Yes. Yes, Perfect. Doug?

I mean we provided some clear guidance on the level of volumes we expect to write over the 3 years. And actually, we don't expect to be constrained whether or not that's capital or asset origination or reinsurance within those plans. So we believe that's the right volume of business to write. I mentioned before that we're diversified. We don't want to be concentrated in one area, but we don't believe there are other constraints. And clearly, we need to make sure that we keep our financial discipline and write at the right margin. So that's going to be a key component when we're looking at the business.

And individual annuity?

Individual annuity. Yes, I mean -- I think I mentioned it in the script. Clearly, we see with increasing interest rates and yields that there's greater opportunity. And we've already seen early this year increased number of applications within our business. That sort of tempered with -- the markets are down, so actually, the size of the annuity is also slightly down. So volumes are up bit, but not as much as you expect. But you kind of typically see around a 10 bps interest rate will increase the annuity by about 1%. And so we think as interest rates rise, that will be attractive. And as you say, there's a lot of DC money coming. So it's clearly a business that -- where we continue to be very excited about and believe we're well positioned to take advantage going forward.

Larissa, I think you've got your hand up.

Two questions from my side, please, one on growth and one on margins. We've spoken about the growth in bulk annuities. But is my understanding from the slides correct that you expect mid-single-digit growth in LTMs and individual annuities as well, is the first question? And the second question is on margins. You explained that you consider yourself conservative in reporting new business margins. But what do you see as the biggest levers to increase your margins, specifically the one on bulk annuities?

Doug, would you like to pick up both of those?

Yes. I mean your first question was about growth. And on the [ Year RMs ], I think we do expect to see sort of mid-single-digit growth on that. And individual annuities, I think similar, probably maybe a bit lower but close to that single -- I think we said single-digit growth. So probably a bit more on the equity release than on individual annuities. But of course, depending on what happens with interest rates and consumer behavior that can change. And then your next question on levers. I mean -- I think we can clearly demonstrate -- as I said, there's lots of different ways of measuring. In the market, different people report different things. We tried to give some clarity on how ours sort of is positioned versus some of the components that others might include in their margin. So we think the margin that we're doing is actually pretty consistent with what others in the market. Clearly, there's always levers that we can use. Levers include reinsurance, levers include the asset origination capability that we can get. We're looking at longevity and other pricing sophistication. So there's always certain levers that are there. But actually, we think our margins are consistent with the market.

The next question is from Ashik, please.

Very insightful presentation. I have a couple of questions, if I may. So first of all, clearly, interest rates have gone up materially about 200 basis points since the beginning of the year and probably more from the lows. So what are we seeing in terms of the yield pickup? I mean are the yield pickup on the illiquid still remaining the same or are there question marks? So any thoughts on what is the current trading environment on the illiquids given the rates momentum. So that would be very helpful. And secondly, I mean clearly, there is a bit of a concern in the market around the quality of illiquid assets because clearly, the disclosures are typically not enough on illiquid assets. So how would you highlight -- I mean, again, I mean, what's happening in terms of pricing of the illiquid assets at the moment? I mean have you seen any dislocation in your portfolio? Is there any evidence that there are things getting worse or kind of remaining same? So any thoughts on that would be very helpful.

No problem. Those actually are two questions for Mark.

All right. So let's start with the first one, which is interest rates have gone up. So have we seen any pressure on illiquidity premium? We have seen some pressure, but illiquidity premium is holding up. So we -- there's generally a little bit of a lag in the illiquid markets versus the public credit markets. But we're seeing lots and lots of attractive deals still happening in the market. So yes, illiquid premium is holding up and volumes holding up pretty well in this market, too. And then on the quality of illiquid assets. I think probably good one to highlight here is our commercial mortgage book. And we learned a lot of lessons back in the global financial crisis. And all the loans we've done perfectly ever since have had very strong covenants built into them. So interest covenants and loan-to-value covenants. So there's a huge in-built resilience in the portfolio. And currently, we've got a loan-to-value of mid-50s for the entire commercial mortgage book. So there's a lot of resilience out there in that. We're not seeing dislocations in the illiquid assets. In fact, generally real assets prices are holding up a lot better than the listed market. So actually, as an overall business, having the illiquid book is actually a good stabilizer for business.

So the next question is from Oliver, please.

Yes, three questions from me. The first is the GBP 1 billion of cash remittance cumulative over 2022 to '24. Can you give us some indication of what it was, say, in 2019, '20, 2021, just to give us some comparison? Secondly, on individual annuities, you talked about rising interest rates being positive, but equally, we've got substantial increase in inflation coming through. And I'm just wondering I mean if you inflation link on individual annuity, it's half the amount you actually received in the upfront in the early years. So I'm just wondering what impact that is actually having on volumes. And then thirdly. You talked about increasing your direct distribution of equity release. Sort of implicitly some of your distribution is through third parties. And I'm just wondering if there's a clash between increasing your direct and trying to maintain that third-party distribution.

Okay. So we don't actually separate it out for 2019, '20 and '21. So we don't have those numbers, Oliver. So Doug, if you can pick up the second and third questions, please.

Yes. On rising inflation, I think you were asking in terms of -- clearly, interest rates go up, inflation is going up. And as we know, on individual annuities, a lower proportion of consumers actually take the inflation option. So that could impact in terms of demand, but we're not -- I mean it's a bit early to be seeing that at the moment. And obviously, I think interest rates increasing will probably outweigh anything there. In terms of our book itself and managing inflation, obviously, just to give some comfort, the BPAs have a lot of inflation-linked liabilities in them. But clearly, we look to match that with the assets, both public assets and private assets and also inflation-linked gilts. So when Mark goes out to do the origination, we're always looking at trying to build in the inflation into it. And then there's a lot of caps and collars in RPI and LPI link. So you can't always match perfectly, but we have a very robust ALM framework that ensures we do. So actually, we have very minimal exposure from inflation risk on the balance sheet. And then you were asking a third question on the equity release and the distribution. It's -- consumers want choice, people want choice. So we have very good relationships with our distributors. We continue to offer in the whole end-market. A lot of our -- a lot of the competitors or the distributors that we're using that have a whole market offering also have a tied offering and a direct offering. So we're not really doing a lot different from what they are doing. So we don't expect that this will impact on that distribution, and we think that there's a good opportunity for us within direct and within our advice capability to grow that.

Can I quickly come back on the cash.

You can.

Is the GBP 1 billion greater than -- on average greater than you've seen in the last 3 years? Or is it less?

Look, we don't -- we're not going to go into the cash and interest on the product line on today's call. As you know, we don't disclose that by product line. So because the SCR isn't split by products. So can we just sort of pause that question, if you like. And maybe over time, as we come back to these -- we do more of these sessions, then we'll be able to give a little bit more detail. But for today, we're not going to give that. The next question is Andrew Baker.

So I just have a couple on the Solvency II reform and then one on IFRS 17. So on Solvency II reforms, I know you're still working through the detail, but if you don't get a satisfactory outcome on the matching adjustment point, do you think this will impact the BPA market volumes as a whole that you talk about? And then secondly, on the Solvency II reforms. Are you expecting a reduction in the amount of longevity reinsurance that you use on new business because of, obviously, the lower risk margin? And then just on IFRS 17, will it change in the profit signature here, have any impact on the way that you look at the BPA market at all?

Andrew, maybe I'll just pick up the first two and Doug can pick up the third one on the profit signature. On Solvency II reform, I think we've been flagging that obviously, there's a consultation process going on at the moment. And this is -- it's absolutely, I think, critical that the policy is right if we're going to get the right outcomes for everybody, i.e., that the government get the investment that they need in the U.K. infrastructure and we get the benefit we need in terms of the way that the capital is treated at our end and particularly the fundamental spread for the matching adjustment. I don't doubt that I think everybody is aligned that we're all on the same page, but we've got to get the design absolutely right. The consultation doesn't close for another month. So I think it's a bit too early to comment on whether it will be negative, positive. I think things are still specifically moving. But in terms of the risk margin, I don't think it will change our approach to longevity reinsurance because I think we're at our risk appetite as far as that is concerned and the capital is better utilized elsewhere, if you like. So I think we've got a very smart mechanism for doing that, and Doug and the team are sort of well setup to do that. So hopefully, that picks up your questions there. I think it is a moving piece. I think on IFRS 17, there's no impact really to how we actually look at volumes. But I don't know, Doug whether you want to add any more to that.

Yes. I mean, obviously, the profit and the earnings are the same but under IFRS 17, the way those emerge is differently than currently IFRS 4. But actually, the underlying cash and Solvency II, there's no impact from the change to IFRS 17, and that's how we look at this business when we look at the returns in Aviva and the other things. So IFRS 17 won't impact.

Next question from Greig Paterson.

Four questions, two of them are numbers. One is you spoke about the management's discretionary capital requirement. I was wondering when you work out the 3% to 4% strain, are you using 1x the SCR there? Or is it one -- a higher factor to take into account that discretionary component? The second question is you mentioned asset reinsurance as opposed to longevity insurance. I assume you were talking about the move towards quota share. I was wondering what percentage of the in-force book currently has a quota share/asset reinsurance element to it. My third question is, I wonder -- just -- I appreciate that the illiquid, you're a leader, but there's a [indiscernible] ways going on. So I wonder if you could sort of help us understand how you're doing that? In other words, could you give us a list of new collateral classes that you've recently entered into like 2021 or '22? So I can't get a feel for the lead that you have. And then finally, you mentioned, I think, 40% of your book, in-force book had longevity reinsurance. As far as the Solvency II reforms, the more important question is what percentage of your post-2016 book has a longevity reinsurance? So I wonder if you could just give us that percentage.

Okay. Greig, we'll do our very best to answer some of those questions. But you've got 3 CEOs in the room here and not a CFO in sight. So we may need to come back to you but...

You're smart people...

On the first one, when we look at our metrics, we do include the Solvency buffer. So -- and part of it depends on what you're looking at because when we look at Aviva and IRR, we're looking at it from a group perspective. And so the Solvency buffer would be in the range that we've sort of said is our target range, which is around 60% to 80%. And when you're looking at strain and so forth, that's constrained by the local U.K. Life business. And so it includes a Solvency buffer, but it's different than the one that we would do on a group basis, if that makes sense.

So does it mean you're doing a 1.6x to 1.8x SCR when you're calculating the 3% to 4%?

Yes, around that range.

That would be extremely low compared to our peers because Leagal's [Audio Gap] 1x coverage. And I think Phoenix does 1.3x coverage and is up at 7%. So I'm just clearing that stat.

Okay. We'll come back -- let us come back to you on that, but I don't...

The return -- well, we're calculating a return on a higher solvency buffer. So it's more prudent.

All right. So I can publish 1.6x to 1.8x is yours.

Yes. Yes. We're actually to confirm that if we're talking about the same thing. But yes. And your second question around asset-backed reinsurance. I think the percentage is quite small Doug.

It is. It would be -- I mean, if you look at as on the GBP 25 billion, it's well below 10%.

Okay. And Mark, on the illiquid debt.

Yes. So we've had some geographical expansion. So we've invested more in non-U.K. infrastructure and commercial mortgages, so Europe, U.S., Canada. You heard that we've grown an emerging market debt book by GBP 1 billion now. We have invested more in U.S. municipal and semi-public bonds. And then some of the newer areas have been long income real estate, and we're looking at commercial ground rents at the moment. But I think the main growth area has been anything that is a sustainability linked loan, so particularly decarbonization initiatives of fiber, electric vehicles, smart meters, things like that. So within the sort of sectors of infrastructure, that's probably been one of the biggest growth areas. And then obviously, I talked about our sustainability linked loans in commercial real estate, which is effectively a brand-new offering and no one else is offering that yet. We've done GBP 1 billion of that in the past year as well. And then the last question. Post 2016, pretty much we're using longevity reinsurance, so on all the BPA business and individuals. So the majority of the nonreinsured would be pre-2016.

Okay. Great. We'll follow up on your first question.

Yes. It's crucial because when you reverse out the calculations and model it, it's an important point.

I think in reality is about 1.3, but we will come back to you.

It depends what metric we're using.

Next question from Dom.

Thank you very much for the presentation. It's really -- these are all really useful. So we really appreciate them. I've got three questions, if that's okay. The first is just on the individual annuities. As Alan was saying, it's a segment we haven't talked about so much in recent years. But I'm really interested in sort of the sourcing of internal clients for that. You highlight the flow of people coming from saving into retirement as a source of business. Can you give us a sense of how much AUM is retiring each year and also the direction of travel on that one? The reason for the latter question is, I can clearly get the importance of the growth of workplace for future annuity business. But I'm guessing workplace is very young. And I'm wondering whether actually a lot of people kind of going into retirement might become the sort of the more heritage book. And if you could give us a sense of whether actually that's a growing source of business in the next sort of 5 years or whether actually that's not, that would be helpful. The second question is on the illiquid sourcing. Really helpful disclosure and comments. You've got about half your existing book in illiquids. And I'm wondering whether on a go-forward basis, your illiquid sourcing is more -- is really a new business topic or whether actually, you're interested in going beyond 50% on your in-force. I get that in any individual period, it will be lumpy, you'll warehouse some, sometimes you'll avoid the business before you get the illiquids. But in sort of the broad scheme of things, are you expecting to grow the percentage of the in-force that's illiquids. And then the third question, technical question. So Page 28, I think you say on the bottom right that the average whole book rating for the -- I assume this is the illiquids, is BBB. Is that just -- trying to just check, is that representative of the illiquids in the insurance book? Or is that -- or actually would the insurance book be a different sort of average rating?

Doug, do you want to pick up the first and then Mark the second one?

Yes. I mean I can try. On the first, about 80% of the volume of individual annuities that we showed there is from our internal customers. And as we know, a lot of those customers also have a guaranteed annuity option. And so about -- I think it's maybe 50%, 60% or so. That will persist up until probably 2035. And clearly, it's running off slowly, but we expect to have a significant component of the [ GIO ] in our customer base, which will help. But it's one of the reasons that we're looking to grow externally. And we don't think we have to grow external that much in order to keep the individual annuity volumes at the level they're currently at. And then there's further opportunity with what we're doing through the retirement business that we'll come back and talk to you about one day with our holistic retirement proposition where we think there's further ability to capture additional customers, whether or not that's in workplace or elsewhere.

Okay. Thanks. Mark, do you want to pick up the illiquid sourcing?

Yes. So the focus for us is on new business. So the back book and there is optimization that is done from time to time. So there is opportunity to add value through optimization. In terms of the share, then I think you should consider the 50% is quite as a stable outlook for us. So think of that definitely as a new business opportunity. And then the BBB rating, I think that does relate to the illiquid book, the back book of real assets. And the key point there is the nonperforming loans is a tiny fraction of the book, which shows the strength of the credit quality and those covenants that we have in place, which is probably the most important part.

Very helpful. I hope you don't mind if I just follow up just two tiny things. Just on that last point, is that the illiquid book across internal and external? Or was that internal or are they roughly the same rating?

[indiscernible] that's just an internal.

Okay. Got it. And then just on the guaranteed annuity options that hadn't appreciated at this point is, it makes a lot of sense. Wouldn't take -- wouldn't you expect take-up to reduce as rates go up and options become slightly less attractive?

Well, but at the same time, interest rates are increasing. So it makes the normal annuity [indiscernible]. So at some point, they merge, but it shouldn't impact because you'll get a benefit elsewhere as well.

So can we now ask Steven Haywood.

I just wanted to kind of follow up on a couple of questions previously asked on the Solvency II reforms. I noticed that there was a meeting with Rishi Sunak and John Glen this week. And I wondered if there was any key takeaways you could talk about at all from the press. It obviously seems like they are wanting to push through the reforms as quickly as they can. But if you have anything additional that would be very helpful to hear. And then secondly, following up on the internal individual annuities. You say internal annuities make up 80% of new business individual annuities each year and you're only forecasting external annuities to grow mid-single digit. So internal annuities, will they be coming down over time and the external annuities will be offsetting that? And so over time, you should essentially see flat individual annuities in total or have I got that completely wrong?

That is the expectation. So that's how I explained it. And then there's further opportunity we're looking at within our workplace and other things that we think we might be able to get further growth. But at the moment, that's probably remaining fairly flat.

On the meeting with Rishi, obviously, you wouldn't expect me to say what we discussed in the room at this stage, but I think it's very important to note that there is good alignment between, I think, what the government wants in terms of investment in more infrastructure and what the industry wants in terms of being able to invest in more infrastructure, but obviously, without any penal actions on our capital. So I think there's good alignment, but you know there's a long way between good alignment and what a good solution looks like. And I think that, that is what we are now continuing to work hard on. Next question is from Andrew Crean, please.

Yes, three questions, all right. Firstly, within your GBP 15 billion to GBP 20 billion new BPA target, how much of that is internal as opposed to external business? And what from the Aviva pension fund is the full extent of how much BPA you could do on that? Second question, following up from Oliver. Presuming if you set a cash remittance target from the annuity business over the next 3 years, you're going to give greater granularity around your cash remittances and so that we can monitor whether you hit that target or not. And then thirdly, I see you've got GBP 25 billion of BPAs and GBP 45 billion of individual annuities on the books. What proportion of that is not reinsured fully because presumably, that is the source for future longevity releases.

Doug, do you want to pick up one and three? And then I will pick up on two.

Yes. Just BPA target, how much...

How much is internal and what's the sort of full extent of BPA?

So I mean, the target of GBP 15 billion to GBP 20 billion was set and we're confident we can hit it sort of regardless of whether we get internal or we do get some internal. So that target is in total, and we're quite confident given the capabilities that we have and the market and the asset origination that we'll be able to hit it. But you'll have seen in the last few years, I think we've done about GBP 5 billion of transactions. And there's roughly, probably just shy of GBP 10 billion left in that to go.

Okay. And on the GBP 25 billion.

Yes, the GBP 25 billion, most of the BPAs is reinsured, as we said from a longevity perspective. But on the GBP 45 billion, you've got about 40% of that, that wouldn't be.

And I think on your question, Andrew, around are you going to be able to, if you like, monitor the performance. I mean what we're trying to do through these sessions is obviously give you a little bit more detail than we do at results to allow you to do that. And now that we're a more simpler group just U.K., Ireland, Canada Aviva Investors, there will definitely be more opportunity for you to get more visibility around what is going on within each of the individual business lines. What exactly that will look like? I'm not going to say today, but you would expect that if we've given you some information today that you will be able to continue to follow up on that to make sure that we're actually doing what we said we would do. More work for us to do that. Mandeep, please.

Three questions on BPA for me, please. The first is on capital strain. You stated a 3% to 4% initial capital strain on new BPAs. Are you able to disclose how this has developed in recent years? And do you think it could improve going forward based on more deferred liabilities now being brought out and a more competitive longevity reinsurance market? And if the strain came down, how would this affect new business margins? Second question is on market share. Taking the midpoint of your own BPA target of GBP 15 billion, GBP 20 billion over the next 3 years on the estimated market volume of GBP 100 million to GBP 150 billion, gets you to overall market share of around 15%, if my calculations are right, which is in line with your current market share. Do you see a risk to this share coming down if other insurers become more aggressive in their pricing or new entrants too in the market? And finally, the last one is on volumes. You estimated GBP 100 billion to GBP 150 billion or you have an estimate in there of GBP 100 billion and GBP 250 billion over the next 3 years. And this looks in line with many of the pension consultancy forecast from the start of the year. But given how rates have risen and have been unexpected at material benefit from pension scheme funding levels year-to-date, do you think that estimate is now looking a bit low and therefore, your 15% to 20% could potentially be higher if the demand is there?

Okay. I'm going to let Doug answer all of that because it's how we gave and how do you make sure...

Look, we're clearly always looking to optimize the capital strain and looking at ways that we can improve that. So I challenged the team to make sure that we're doing that. And we hopefully see that sort of going down moving forward. And as you said, there's lots of things and different levers you can do. Deferred is one component that can bring different risks. But clearly, that can have an impact on the strain as does improved reinsurance pricing. So when we look at the total business that we're doing, that clearly is something that gets a lot of focus. And I know Dave and the rest of the team will be doing what they can to ensure that we remain as efficient as we can. The next question, look, the GBP 15 billion to GBP 20 billion, I think the thing to point here is that we're not actually driven by market share in this business. We think we already have scale. We have the capabilities to compete. We're comfortable with the volumes that we say we can write, and that will allow us to continue to compete given the scale that we have. So if the market is up and we go a bit below 15% market share, that's not going to be a problem for me. It's making sure that we hit the volumes, which is key. And then the final one, you're right. I think we said GBP 30 billion to GBP 50 billion would be probably consistent with what others are saying, but you're right, interest rates have gone up. So that might be more like GBP 25 billion to GBP 40 billion or whatever, depending on where they are. I think the number of opportunities still exist. But clearly, higher yields will bring the liabilities down, which will potentially have an impact on the market. But that then could be tempered by greater demand depending on funding levels and where people are at.

And the final question is from Nasib, please.

Thanks for the presentation and the insights. I've got a few follow-ups here. So firstly, on optimization of the back book and the management actions you can drive from the business, it seems like 50% illiquid proportion you're happy with and it's going to be there and thereabouts. Can you increase longevity reinsurance? And I know you've got expense saving targets and presumably some of them are in the BPA. Are there anything else? Are there any other actions that you can take here? And then on inflation, just coming back to the point on hedging. So inflation on the assets is presumably going up to 10%, but just caps and collars, as you said, on the benefit. So does that give you a bit of a tailwind? So I think the caps are roughly 5% on the recent annuities written. And then finally, on the IRR and VNB estimates, what kind of defaults are you assuming or expected losses? I know it depends on ratings, what is the average sort of expected loss in that calculation?

Thank you. Doug, they feel like to talk to you.

Yes, maybe Mark might be able to help on the last one. But yes, optimization of the back book, as we said that clearly, longevity reinsurance is a potential one, one of them. You have to weigh out that you can get their yet, the capital sort of from that, but obviously, it has an impact on own funds. So it's something that is a possibility, and we always look at. There are other opportunities to re-risk the assets. I mean we do still hold gilts. We still have corporate bonds. We saw spreads widen earlier in the year. And I think Mark and the team did a good job of getting some good high-quality sort of U.S. corporate names as well as some emerging market debt. So there's always re-risking opportunities that we can do to further optimize the back book. On your inflation question, the tailwind, we try to match as we say, with the assets, but clearly, you can't do that perfectly. So we do use our ALM strategy. We use swaps. We use hedges to manage the caps and collars and make sure that we don't have exposure. And as I mentioned before, we have very minimal exposure to inflation risk in the UK Life business. And then Mark, the level of defaults that we're assuming.

Yes. So we've had incredibly low credit losses last few years. I think almost no credit losses in the last few years on the illiquid book. The assumptions we have are in line with the Solvency II guidance that we have in our internal model. So it's potentially a source of profit that emerges over time to the extent they don't arise. Obviously, we are in a tough cycle or we're about to go into a tougher cycle. So you may start seeing credit losses coming through across all credit. So that's something we manage very, very carefully, and we're very confident in the book we have today.

Thanks, Mark. Okay. So you haven't disappointed us. There were loads of questions. So thank you for that. That was the last question, as we said. So I just want to thank you all for joining. I'm glad that you find these useful. A couple of you have said that you do. Obviously, we will continue to do them. We look forward to speaking to you all at the interim results, which is not that far away on the 10th of August. But in the meantime, thank you very much for your questions. Thank you for your time today. And if there's any follow-up at all, Rupert and the team are here to answer any of the questions. So thanks very much, everyone.