Legal & General Group Plc (LGEN) Earnings Call Transcript & Summary

Thank you, everyone, for joining us this morning. I'm just going to make 3 very short comments and then open it to questions. First, we're all feeling very positive about our businesses, our pipelines and businesses. Not only have they been robust and resilient during 2020, but we see great prospects for growth going forward. We're also seeing that the perceived risks that many of you and, indeed, many of our shareholders that have are fading away, and we try to answer those risks in the presentation. We've retained our progressive dividend policy. We've given greater clarity of that. I'm sure there'll be questions on that, but we've tried to give much greater certainty to that going forward, having a pause year for this year and then low to middle digit growth for the next 5 years. And I think the third thing, and this is that we do have a great team here. We have a great team, a fantastic collaboration between all of the executive team and indeed my colleagues across the whole of the Legal & General. And as you'll have seen from the 5 presentations on each of the businesses, they have huge opportunities to grow. And it's really -- we can self determine our success. But it's all about our execution capabilities, which have been fantastic over the last 10 years, and we're feeling confident about further great execution in the future. Now I'll hand over to -- we'll now cover questions. Just to alert you. The first question is from Andy Sinclair; the second one, Jon Hocking; the third one, Andrew Baker; fourth, Oliver Steel; and fifth, Greig Paterson. There's a whole bunch of others on -- who have put the hands up. So can I encourage people to put their hands quickly because there is a queue? We're very cognizant that Generali is starting at 11:00, and we want to try and finish ours a fraction before 11 and try and cover as much ground as possible during the call. So thank you. Over to you, Andy.

Thanks, Nigel. And 3 for me as usual, if that's okay. So firstly, just on the GBP 8 billion to GBP 9 billion cash generation number. I just wondered if you could confirm if you're allowing for any significant one-offs like longevity releases in that number. Second question was on debt leverage. You've indicated that leverage should come down over the plan period. I just really wondered if you could put some numbers around that. Remind us your key metrics and where you'd like to sit on them over the planned period. And thirdly, just on solvency, mid-170s today. You've committed to growing the business, growing the dividend and deleveraging over the next few years. Just wondered if you can confirm that you can keep the Solvency II ratio at least flat ex market moves, if not increasing over the course of that plan period alongside all of that.

I'm going to answer the first one because that's the easiest question. And I've already delegated the other 2 to Jeff Davies who is looking very enthused about it. On the GBP 8 billion to GBP 9 billion, that's without any -- the one-offs of mortality releases. And I think a lot of people forget that we've generated over GBP 1.6 billion of cash from disposals over the last few years and that the longevity releases are now GBP 1 billion, and all of that turns into -- pretty much all of that turns into cash for the group. And so that's one of the reasons that Kerrigan has got a huge amount of cash sitting within LGC that we can deploy that cash to help grow the earnings on a go-forward basis. Jeff, do you want to answer the other 2?

Yes. On the debt leverage, we talked about that coming down as the balance sheet grows, which is exactly what's happened in the last year since I've been here. We're very conscious of the rating agency metrics. The one that's historically really been the main focus is the Moody's adjusted, which runs about 30% for a AA is the limit. We monitor all of those. We're probably there or thereabouts at the moment on the Moody's one. We would see that reducing over time. Our strategy is to let those run down as the balance sheet grows and then to go back to debt markets when it makes sense in order to optimize the ROE, the balance between debt and equity to give the optimal return to shareholders always staying at or below those maximum levels that are implied for the rating agencies. So that's sort of 30% dropping below. I think, on average, we've been about 27% over the last 4 years. Every time I ask Frank, that's the answer he gives me. So that's sort of roughly where we aim up here and the plan shows, the similar source of progression for that. On the solvency, well, you know as well as I do, there's obviously, say in all things being equal on solvency involves a lot of caveats, but yes. The summary of what you're saying is the sense that we have that solvency over that 4, 5 years you've been talking about is broadly leveled. It's that sort of broadly level flat solvency. We'd be looking at sustaining with those massive caveats, but so many things move, but absent market movements, everything else, building a plan that does that over that period.

Can we move on to Jon Hocking?

Yes. I've got 3 questions, please. Firstly, on capital generation, Jeff, in your slide section, there's a chart showing that 55% of capital generation came from LGR. Over the course of the plan period, would you expect the proportionate contribution for LGR to go up or down? Because I see that if you look at the LGIM targets, for example, you've got EPS growth broadly in line with the dividend, which has suggested that maybe LGR becomes more important in terms of proportionate capital generation. Second, also in your section, Jeff, you mentioned potential tailwinds to capital generation from risk margin reform and matching adjustment changes. Can you be a little bit more specific about what the expectations are there, please? And then just finally, Kerrigan, in your section, there was a comment about an expected blended portfolio return in LGC of 8% to 10%, which seems pretty high given where yields are. How should we think about benchmarking? Is that a running yield? Or is it more of an IRR is the way we should think about that return target?

Sure. Yes. On LGR, Jon, the -- yes, I show that proportion. I'd say over the planning period, actually, the LGR contribution is probably level to probably slightly lower, I would say. There's again, many, many, many assumptions on that, and it depends exact timing of when we see the growth in the other areas. But I'd say it's stable to reducing, I would say, certainly not in the core plan accelerating. The tailwinds, risk margin, matching adjustment, yes. I mean it was short 3, 4 page, consultation paper put out by PRA around this. We're obviously in the middle of a lot of the conversations and looking to put forward suggestions as well as working with the API around that. It's -- we won't -- can't put a number on where the risk margin would reduce to. They're obviously committed to reducing that figure, and that will give us more optionality in how we write new business, how much capital we use, how much reinsurance we use, and we will welcome that. We obviously feed into the process where that risk margin needs to land in order for us to have that freedom around risk management. It's pure cost of capital decision. And the matching adjustment is, in particular, about removing a lot of the operational overheads and then having more freedom in the types of assets that can be invested in removing some of the straitjackets and requirements that probably don't serve anyone any benefit as long as you have the right risk management around it. And so we'd open up more assets universe for Laura to put the money into and for us to develop and create more of those assets as well.

Thanks, Jonathan. And just on the blended return, yes, I think of it more as an IRR than a running yields. And just to remind, your comments it looks higher relative to yields at the moment. There's a whole range of different assets in there at different stages. So we've got development assets in there. We'd expect to earn, let's say, something, double digit, certainly in terms of IRRs and then some more stabilized asset a bit further on the maturity schedule, a little bit lower. So it's a blended range of all those that gets you to that IRR-type figure.

Oliver?

Yes. First question is on timing of the returns over the next 5 years. I mean LGIM looks as if it's back-end loaded equally on slide, I think, 92, there seems to be quite a sharp drop coming in and the back book OSG from the annuity book. So I'm just wondering if you can give us a bit more guidance as to how the sort of the individual years, over the next 5 years develop, whether there's any sort of imbalance there? Second question, coming back on Jon's question about diversification of the business. I mean if LGR is going to decrease as a percentage of the total over the next 5 years, which part of the business is actually getting -- growing faster than the rest because based on the targets you set for LGIM, it doesn't sound as if it's that.

I think the -- I'll take the last question. Then if -- and Michelle is going to talk a little bit about LGIM specifically. And Jeff is going to find Slide 92, some detailed comments on it. And I kind of hope that's the right way of dealing with it. Do you want to go just first? Michelle will talk a little bit about LGIM.

Sure. And it's a good question. So I mean, if you -- so the strategy that we've described today and we stated is to modernize, diversify and internationalize. That's a continuation of the foundations that the business has laid over the last 2 years and really using those capabilities. What you are going to see and which I think we've been clear about is we are going to continue to invest in the business. We think that's an appropriate thing to do, and that's in all 3 of those pillars. So you will continue to see an elevated cost-to-income ratio for the next couple of years before that trends back down again. But the growth that we're also looking for and we are ambitious for, is in line with, as we said, with what Jeff has said today as a restated ambition for the group dividend.

Yes. And just going back to the group in its entirety and relative growth rates. If we go back to our plans from 5, 6, 7, 8 years ago, we had pretty much balanced growth in those plans. The variance typically say between 6% annual growth and 10% annual growth. What happened was that the Laura's business and Chris' business both had much bigger opportunities than we thought they would have, and the PRT market opened up much bigger. And we -- the turnaround that we've had in Chris' business has been huge, and that resulted in 20%-plus growth. They're clearly not going to grow at that level going forward. Similarly, LGI grew at 2%, whereas actually we think from where it is today, it's got very good growth prospects, both in United States, where early results are very promising, but also in the adjacencies of the business. And LGIM has managed 3 over a number of years. Well, Michelle has been here a short while. There's a lot of changes to management team, spending a lot more time on the operating economics and investing in -- further investing in activities, which make us a bigger, more robust business and a better platform to expand internationally and modernize and diversify, as she talked about. And LGC grew at double digits for the last 5 years. I mean the -- there's noise this year in the performance, particularly on the housing side. But we very much see that as a high -- very high-growth business going forward because it has so many options for growth. And starting a fresh in lots of areas, you don't have the legacy issues that several of my colleagues have to deal with on a monthly basis. Jeff looks as though he now fully researched the Page 92.

Yes, Oliver. No, I mean, there isn't a drop in OSG that comes from that. As I said in the self-sustaining part of the presentation, even when we reached that self-sustaining level, then we see growth in that underlying LGR portfolio for 20 years beyond that, just right in the GBP 10 billion, GBP 11 billion that we talk about. And so the OSG grows broadly with that portfolio. If you think it's really it's credit spread unwind and capital release. So as you see growth in the portfolio, you continue to see OSG growth. Clearly, the speed of that growth depends on the mix of business, you rise, deferred, et cetera, how long the duration is, but we still see that underlying growth in it, and there's no drop-off.

Can we move on to Andrew Baker, please?

So 3 from me, please. First one is on the GBP 8 billion to GBP 9 billion capital generation target. So this excludes new business strain. I can see that you have, including new business strain, the target is just to grow surplus in excess of dividends. Are you able to give any insight as to how much you expect the capital generation after strain to be in excess of dividend over the planning period? The second one is on the cash target, GBP 8 billion to GBP 9 billion, is based on the net release from operations, excluding mortality releases, can we expect actual remittances, so internal dividends could be roughly in line with this? And then thirdly, are you able to just give a quick update on the U.K. PRT competitive environment. Specifically, you've seen some ownership changes or additional capital from some your peers. Has this changed the competitive dynamic in any way? And are you seeing any potential new competitors looking to enter the space?

Okay. Thank you, Andrew. Jeff, do you want to answer the first 2? Laura, can answer the third question.

Yes. Andrew, as you say, part of our target ambition is to manage the business such that the surplus generation is greater than the dividend. As we've shown, we've done from 2016 to 2019 was right in sort of GBP 34 billion of annuities. So there's a wide range there, depending on how much we manage the strain versus the dividend, thus, you can appreciate, if we're at the 3% or the 6% means a deviation in the dividend. What we've done is we put the numbers there. You know the volumes. You know what the average strain looks like. So you can project those as we will be very capital-efficient in the business we write. We will continue to pull the levers that appropriate this year. We've been very efficient on the capital used on the PRT business, the sort of circa 4% strain still holds. We've probably beaten that this year. So you can apply that to the GBP 40 billion to GBP 50 billion. That gives you an answer, and then you get a number above that. But there's so many variables in that, that we felt it didn't make sense to give a target on that. And just -- we will manage it. And obviously, as we're going through, we'll manage that number. The net release and remittances, I mean there's a bit of a yes and no as the answer to that because our usual comment that we bring as much out to the insurance company out of LGAS as is required. We don't necessarily want to sit in a group. And so a lot of that is the net release in respect of LGI and in respect of the annuity business, obviously, we pay a dividend across from the U.S., but that's part of LGI as well. But of course, [ for us ], the answer is yes, because the vast majority of profits, which are also their version of net release are simply paid up. And to the extent that there's net remittances from LGC, then that would be helpful. But of course, we're investing in that business to grow it and get more assets under management, and that's where we're trying to put the capital to work alongside the PRT business.

Thanks, Jeff. And then, Laura.

Yes. Thanks, Andrew. I mean, as you rightly point out, we're aware that a couple of our competitors have had sort of new ownership and new capital put in. Do we expect that to change the competitive dynamics of the U.K. PRT market, not particularly? And I think as we cover in the presentation, we're expecting sort of that there could be the potential of GBP 240 billion of PRT coming to market over the next 5 years. So I think in that context, we are still pretty happy with our competitive position. And I think the other thing we cover, we are still the only player in the U.K. market that is whole of market. So it's covering sort of from the smallest to the largest scheme and don't expect that to change too quickly.

Thank you, Laura. Greig?

Yes. I hope everyone is safe. 3 questions. One is of the annuity assets? And when I say this, I mean, the traded portfolio and the direct investments. I was wondering what the amount or percentage is in the bucket immediately above BBB-? Because you mentioned BBB-, and what are the sort of collaterals and the risks there of the downgrade? Second question is I wonder if you could just remind us of what percentage of the annuity portfolio is currently in, what do you want to call it, direct to liquids private debt? And what you see the optimal level at the end of the planning period? In other words, to what extent that you can increase that? And then the third question, I note that you've mentioned this before, you speak about this launching and developing this insured self-sufficient and assured payment policy. I wonder if you could just remind us what that brings to the table. And is that something to do with the new pension super funds? And how -- is it like in response to the pension super funds? Or what are you doing then?

Jeff answers the first one, and Laura answers the second and third one. I think that's probably the best way of pulling that together. Jeff, do you want to go first?

Sure. Greig, in terms of credit, I mean, the overall -- we give the breakdown. You can see the total BBB is roughly 1/3 of the portfolio, 33% at the half year. The one we focused the most is the BBB-, where we give the 3%. In the BBB, BBB+, I think it's probably broadly equal, but we could give that breakdown. I don't think it's not that sensitive. A lot of where we look to invest would be BBB+ or very resilient BBB because we obviously want to avoid that chance of moving to sub investment grade where we can. And so we're happy where we are in the names in those and the type of bucket. And even more so with DI where I think we've talked before, when we're looking to go into those investments, we look for very, very resilient. So we would push back on BBB-. We would almost anticipate what is the [ restated downwind ], would we still invest in the 25-year investments. And so we tend to be aiming more at the higher end of the rating categories when we're looking at the DI.

And then on the second one...

[ And so on the portfolio and the DI, together ]?

Yes, that's the total portfolio. I'm sorry, [ I didn't have the slide number, I just closed it ].

So on your second question, Greig, at the moment, we're about 29% of DI in the portfolio. I'm assuming that there are no changes to the MA, as Jeff said, that we expect there will be some. We would be quite happy to go up to sort of about the level of 50%, taking into account the capital benefit that MA gives us. So if the MA rules changed a bit, we might sort of increase that. And on your questions on ISS and APP, I guess, yes, they are -- you could potentially think of them as competition or products that could be competing with the consolidators. And they don't give the whole buyout or buy-in, but they certainly help schemes on their way to buyout or buy in by giving them protection and also on the APP, sort of locking into and assets is effectively ensuring the asset returns of the [ STEM ], which then gives them a nice path to buy in or buyout.

Greig, if you remember, investment-grade credit hardly ever defaults. I mean it's usually a fraud or something that causes the default. And so we've still got about GBP 3.5 billion credit default reserve. We've never used it in all the years that certainly I've been here. And we've only had one minor default, GBP 23 million back in 2008 against a portfolio of GBP 80 billion, and that's a combination of the scale of our LGIM colleagues, but also the nature of the Solvency II regime, which is structured in such a way that it results in very high-quality assets going into the portfolio with a high degree of certainty around the cash flow. Move on to Gordon Aitken now and then Andrew Crean.

Yes. 3 questions, please. First on the dividends, you're holding it flat in 2020. Pretty good in the context of U.K. Plc, but I know myself and others have penciled in some growth in the final. Just can you talk us through the decision, how much of that is due to pressure from the regulator, maybe social and media pressure? And how much is driven by cash generation pressure? That's the first question. Second question is on mortality. You usually move to CMI-18 for projections in the 2020 numbers. And I assume '18 was, as you know, 6 months of reduction, 3 months of life expectancy, 3 months was smoothing against the CMI-17, which was just two months. Just flat earnings, the target you've given, does that mean you're going to hold some of CMI-18 back? And the final question is to Laura. You talked about [ RPI ] forecast for the U.K. buyout market over the next 5 years, GBP 240 billion. I know you said it was at the top end of your expectations. But I mean that could require in very simple terms of about GBP 20 billion of capital. I know some of that will obviously come off back books. And given the numbers, the forecast that you say, you're going to be writing about, say, 17% to 20%. And that's a little bit lower than your usual market share. So how do you see the market panning out? Who's writing the rest? And would you encourage third-party capital into this space?

Just the second one. And Laura just the third one. On the -- I mean the discussions with the regulator have always been very constructive and open, and they've gone it through a process with ourselves, with M&G and with Phoenix, which is very similar, just looking at various forward projections, lots of sensitivity, exactly the process that we go through with our Board. And we listen to shareholders a lot as well in the discussions that we had, and the shareholder feedback was very much in line with what we've actually done, which is 0 for this year. We thought we flagged that pretty clearly at the half year when we said the choice was really 0 or 7, given all the circumstances that were going around, is unanimous and our Board and indeed, across the executive team that we should go for 0 this year and then have a progressive policy going forward where we provided lots of details on that. We are cognizant as well of the current yield on the shares, which is extraordinarily high, a massive premium to the FTSE 100, and we have to believe that we've got better prospects than the majority of the constituents of the FTSE 100 as we've absolutely shown over the last 10 years. And hopefully, you'll all get time to listen to my colleague's presentations because they really cover a lot of detail. The opportunities, which we usually don't get the chance to do when we're doing the year-end results. And that's why we're very optimistic for all 5 businesses right now. We have great teams, great opportunities. We've got the capital, we've got the bandwidth to execute on these. And the doors that we're beginning to open up are opening up even further right now. Jeff, do you want to answer the second and then Laura the third one?

Yes, sure. I wouldn't characterize it as holding back, Gordon. But on the other hand, we have looked at where does CMI-19 take you, obviously, that wouldn't be as far as the full CMI-18 that you talk about. And then we've looked at the level of uncertainty in 2020 and not so much in a risk way of just a lot of noise in the data. And so a prudent implementation of '18 with a view of what '19 was telling you. And then probably a change of approach, which we may well talk more about in terms of thinking what does 2020 look like? What are now the drivers of change? And can we just disaggregate a lot of what happened in underlying flu from COVID, from other causes in 2020, that's going to take quite a while to play out. And so we want to understand a lot of that, a lot better before we use the full potential of what could be there for some of these, but equally, we want to fully understand the drivers. But not any particular concern about it I would say it's more -- let's understand what's in '20. The days of just implementing a table, I think, have gone for a while, while we clean up what's happened in '20 and will be in the start of '21, I'm sure, obviously, as well. So it's just a slightly different approach whilst implementing '18 in a prudent way with a view what '19 tells us.

And then your third question, Gordon, if you say, I mean, the GBP 240 billion, and I think as we say in the presentation, that seems that the sort of upper end of what might happen, but I guess, in theory, it could. In terms of who we see as being our competitors, I mean, it is the usual suspects. And we are seeing some of the sort of more, I suppose, traditional U.K. insurers being a little bit more active than they have been over the last few years. And I think as we sort of covered and implied, I mean ever since Solvency II, we have been using reinsurer to manage capital, and we are seeing more sort of quota share [ straight to ] asset reinsurance players coming into the market to support the sort of the names that you would recognize during the front end of the deal. And I would expect that to continue, all else being equal with Solvency II.

Thank you. Andrew?

3 questions also for me. Firstly, you talked about increasing the direct portfolio behind the annuities from 29% to 50%. What yield pickup does that imply in terms of the -- if you did it overnight, how much would that increase your profits? Secondly, you talk about operating capital generation of GBP 8 billion to GBP 9 billion and a dividend of sort of 5.50 to 6-ish. The difference there is presumably the strain -- new business strain. And if you do GBP 40 billion to GBP 50 billion in the U.K. and $10 billion in the U.S., even using just your 4% capital that would use that difference, which would mean that the -- it implies that the solvency margin would slowly depreciate down. So why do you think you can keep the solvency margin in the 170s, if you write-down amount of business? And thirdly, it sounds a little bit of a silly question, but what are the key drivers, which would determine 3% dividend growth versus 6% dividend growth?

Why don't I go through the first one because this depends really on lots of factors. We typically see premiums in the 50 to 150 basis points, which is -- I've got colleagues looking at me here around that. But that's very much what I think we can deliver. They're beginning to now. So I'm a bit happier about that. But that's the sort of numbers that we're looking at, Andrew. Now we don't get to keep all of that. We get to keep it if we retrospectively do something with the back book, which is still an opportunity. So if we create assets, put them in the back book, we would keep all of that. When we do it in the front book, we give a proportion of that to our customers. So we reward ourselves as a proportion with customers. We do see the opportunity for many, many new asset classes. Jeff mentioned that very briefly in one of his answers to his questions, but Laura, myself and indeed the rest of the team have been looking at all the new emerging asset classes. Affordable housing is one, build-to-rent housing is another, SITECH is another one that we're very excited with. We saw the life of mine building in Oxford happening. We've obviously got the Sky, NBCUniversal happening as well. Life Sciences is going to be another very exciting area. And the whole area of climate is going to produce a ton of assets for us on a go-forward basis. So we're very confident of having a yield pickup. Why doesn't Jeff have a go at 2 and 3.

Yes. Andrew, yes, I mean, it's just at the top end or range, I've been right in the GBP 40 billion to GBP 50 billion and don't forget the $10 million is in dollars in the U.S. It does leave that as slightly positive in terms of total surplus. It's very dependent in the model, as we sort of showed on the sustaining portfolio, the difference been what's been released from capital in the back book. And that's then funding the capital of the new business in terms of what happens to the ratio rather than just looking at pure surplus numbers. And so the mix between capital and own funds is very important within that calculation. But if you look at those applying the 4%, applying a bit more than you do get. At the top end of the range, it looks balanced. Obviously, at the bottom of the range, we'll have levers a bit like your second question, the levers between a lower dividend versus more Australian, et cetera. We do also say in any period, it may not hold in a single year. I mean, interestingly, if we write more business faster and then you get to the self-sustaining portfolio quicker. And so there is a benefit in doing that. So we weigh that up at each point in time. And obviously, we'd explain our thinking if that's the route that we go down. So we're confident that we -- all things being equal, and all the caveats I gave to Andy at the beginning, but you do end up with a reasonably level trajectory in that. In terms of what drives the dividend, but we have the progressive dividend policy underlying the numbers that we talk about. We continue to look at our underlying IFRS metrics, our core metrics, the net surplus generation, what is that sustaining as well as an eye to in certain stress and scenario Solvency II, is very much the progression. I mean, this year, we said operating earnings is going to be pretty flat, and we've gone with a 0 growth on the dividends, but we would look through over the planning period, and that's exactly what we provide to the Board. What's the affordability in a single year? What's the confidence in the next year? What does that look like in different scenarios. And so there isn't a single metric that we'll say if that is lower in 1 year than we'll be at the lower end of the range. It's more a case of what the trajectory looks like? How resilient is that? Are we delivering in line with what we put together in the plan. If we're not, can we catch up or is something else outperforming. So it can't be -- I'm sorry, if I can't be more specific on a single metric for that.

Yes. Andrew, one of the others is that Laura and her team have just done an outstanding job this year, in particular, in terms of capital efficiency. And if you were very quickly to pick up, Jeff mentioned that in the second half of the sentence about 20 minutes ago, is -- and so we're definitely seeing that we can develop new ways of improving capital efficiency, which, again, if you compound that over a few years, that does give us a bit more upside. So anything else you want to add to that Laura or not?

No, no. And I guess the only thing I'd add in terms of this year, we've been able to use the volatility in the market to get very good metrics, capital efficiency and pricing for our customers.

Before we go onto other questions. A couple of questions have been e-mailed in from -- one of them is for Bernie. Can you just give a bit more detail on the plans for the United States? And why you're still bullish about the prospects for American. By the way, this isn't a question from Andy Sinclair.

Sure. And yes, I mean, I think the -- what we've done well in the U.K. has applied tech and data in our particular U.K. retail protection business. And the evidence of that has been growing strengths, we've been delivering growth consistently in mature competitive markets and throughout the pandemic, we've been continuing to deliver growth and our new business profits are growing as well. So we've been demonstrating already the benefits of that strategy. In the U.S., obviously, a much bigger market. We've got a sizable business, but a relatively small share, and it's less digitized. It's a more analog market. And that in simple terms, is where we see the opportunity is applying all our learnings and capabilities from the U.K., obviously, adapting them as appropriate for the U.S. market, but it's just wide open with many opportunities for us to really digitize and open up some operational leverage and to create a much stronger competitive advantages and, therefore, deliver much faster earnings growth, which is LGI, we're very focused on doing. Very happy with the consistent growth in revenue and profits, but not happy with the pace of that operating profit growth, in particular. And so our tech and data strategy, as I cover in my video is all focused around, yes, delivering much faster. We are delivering growth in the U.K. and then much faster growth in the U.S. and from our emerging fintech portfolio, where we're trying using tech and data to transform in our adjacent markets as well.

Thank you, Bernie. Steven Haywood from HSBC.

Thank you very much, and good morning, everybody. And just a few questions from me as well. I think going through your presentation, there's a lot of talk about growth internationalization, acquisitions in adjacent markets, replicating retirement solutions internationally. Could you give a bit of a sort of more clearer picture on how you're going to internationalize? What adjacent markets are you looking to grow in? And what businesses that energy have currently in the U.K. will be best suited to each market in the future? Secondly, you're talking about penetration into the wealthy retirees. And how are you going to do this in the U.K.? Are you going head-to-head to change this place culture, et cetera? Or are you targeting this from a lifetime mortgage perspective, and then finally from me, there's a comment about climate in your presentation, adding 5% to your operating profit over 5 years, and this is above your planned projections. Can you explain how and what is going to happen here?

You'll answer to some of these questions. And on the first one, just to give you a flavor of what we're thinking through, I'm going to get Bernie to talk about SalaryFinance and adjacency and get Kerrigan to talk about the housing situation. In the area of wealth, Chris Knight will cover that for his business. And on climate, if Laura and Michelle can each talk about what they're doing in their respective divisions around the opportunities that we have. So over to you first, Bernie.

Great. Thanks, Nigel. Yes. So [ given the video ], given some more color on the SalaryFinance investment. So we own just over 40% of SalaryFinance, which is really great business in the financial well-being platform space. It's #1, clearly, in the U.K., I've been acquired the assets of its major competitor in the U.K. and it started to grow and expand in the U.S. and we see it's got real potential as a global fintech leader, actually, in the employee benefits, employee financial well-being space, which is a very important area of growth at the minute. So I'd say SalaryFinance is a good example of both an adjacent market in terms of employee benefits. Obviously, we're very active in that across both LGM, LGR and LGI with our Group Protection business, one where we've got international potential there, particularly our investment in SalaryFinance.

I just pick up on the housing and some of the efficiencies there. I think the interesting markets for us -- well, we all know about the structural shortage in housing in the U.K. across every dimension that you can think about. So by tenure, by age, by affordability. So that's why we've really been thinking about expanding in affordable homes. That's business is going very well with the aging demographics, expanding our later living businesses with really great operational businesses there now. And then within build-to-rent, clearly, we've had an urban build-to-rent product for some years, but really looking at suburban build rents, the need for family homes in the suburbs, if you like, there's a rental proposition. So that's a true adjacency there in terms of how we can build out those housing businesses, which have compound effects on the group, of course. It's not just about the shareholder fund returns, it's creating stabilized assets for LGR that helps improve the yield on that portfolio or indeed working with Michelle on assets for LGIM.

Yes. Thank you. So yes, I think generally speaking across our businesses, we have good positions, around 20%. We have around 20% market share of the individual annuity market, which has been remarkably resilient given the [indiscernible], 20% share of [ the individual annuity market that's been released ], which is a future potential for growth. And long ago, we have 20% or so share in the [ workplace in DC ] pensions market, which is growing very rapidly in accumulated pace, and we're going to see in the next few years, it growing very strongly in a de-accumulation pace as well. I think our Heartland has traditionally been the sort of mass market, mass affluent market, but we are seeing a lot as well working with partners like SJP and others to bring our products to a slightly wealthier audience. So for example, on housing equity, we are seeing a lot more advisers and their customers use equity release as a sort of liquidity tool, a family wealth planning vehicle. And we see that continuing a lot next year. And on the retirement income side, a lot of pension parts, especially goes from [ B.C. world ] coming to a time now are relatively small, sub GBP 30,000 they get cashed in. But if we can help people as we are accumulated parts of GBP 50,000 or more, obviously, GBP 100,000 more, they see they're much more worse doing something with. And we're seeing much better success in that area to provide higher-margin products like annuities and like technologies to those customers, too.

When regards to the climate, Michelle, will you also comment on the higher-margin products that we're going to pivot towards?

I'd love to. And actually, just on international, if I could, because I think it's really important future strategy for LGEN. European wholesale is something I'd have to -- I'd say, expanding in the U.S. beyond Corporate DB and also selectively in Asia. On climate and related, Nigel, I think in terms of -- we run GBP 174 billion today in ESG-related products. Climate is important for us. And we have a really excellent investment leadership team. And one of the things we are definitely seeing is more engagement with companies and helping them think through their response to climate change. And then in climate-tilted products, particularly on index, this -- we launched a clean energy fund, ETF. So I think in the rounds, it's extraordinarily important to us. More broadly, in terms of higher-margin products which I do refer to in my presentation, we've seen, I think, a bifurcation in the market between index on the one hand and the more specialized areas on the others. Good news is that LGIM plays across those areas. And importantly is able, I think, to blend those together because we have fantastic solutions capabilities. Maybe just to point to a couple active credit, private credit, EPS that are tilted and real assets more broadly. Nigel, I think that just wraps it together with the underlying ESG, which I think goes across the entire company.

Thank you, Michelle. And Laura?

Yes. And from an LGR investment perspective, I mean, I think recent figures I've seen suggest that to get to net 0 by 2050 in the U.K., we're going to need the GBP 50 billion per annum investment now rising to about GBP 105 billion by 2030. And I think as I covered in the presentation, we're a very obvious long-term investor in renewable assets and intend, part of our strategy is to be working with LGC to create the types of direct investments in the renewables market that we can invest in, create extra direct investments for our business, but also helps the trajectory towards net 0 by 2050.

We're going to have one last question from Ashik, and then I'm going to give us something else -- or all of you can get away in time to get on to the Generali call. Ashik?

Just a couple of questions I have is, one, on the debt leverage. I mean do you have any pound sterling amount in your mind as to how much you want to delever over the next, say, 3, 4 years in terms of sterling amount? I mean it's obvious that natural progression of earnings and earnings retention will help delever, but any thoughts on the absolute amount? And secondly, I think the comment around moving some MA portfolio more into direct assets was very helpful following any solvency to review into new U.K. solvency regime. But are there any hurdles that you expect to happen in that switch, especially on the back book rather than on the front book?

Okay. We got 3 or 2, Ashik?

Sorry. Just 2 questions.

Okay. So Jeff answers the first, and I'll answer the second.

Yes. No, we don't -- I mean we don't have a sterling number as such we target. As I described, it's very much balance sheet growth, which reduces the leverage ratio. We then look to optimize ROE by getting the right balance between debt and equity. So over that period, it very much depends on how that plays out. We would obviously see balance sheet growth over that period. So we would be potentially -- the number being roughly the same plus a bit over that period. It wouldn't change that much depending on the size of the book value growth and what feeds into the rating calculation.

On the regulatory capital, indeed, the relationship with the regulators around this. I mean we're having probably the most constructive discussions we've ever had on assets with the regulator because there's just a widespread recognition in the U.K., its central government, local government, the treasury are all being hugely supportive of the things that we have been doing -- that we've been going on about for about 10 years now. And so ESG, climate change, regenerating towns and cities, building formal housing, build-to-rent housing, investing in the life sciences and things like [ life and mine ] are all things that we've been doing for a long, long time and there's a great recognition that we need more of that, not less of that, particularly with the local multiplier effect that we're seeing and experiencing right across the U.K. So and from a regulatory point of view, the regulators are happy because we're getting extra diversification across. And so there's no issues about increasing the amounts of DI and going into more asset classes because that's both in the interest of our solvency ratios, but also from a customer point of view, an economic viewpoint and a competitive point of view because this, of course, gives us competitive advantage in the marketplace because we are the only firm that has synergies between the likes of its businesses. Everybody else is pretty much an Olympic competitor. So we feel very confident about our capability to both originate and use those assets that they are opening up to us. Just in summary then, we've never had such good opportunities of such great opportunities since I've been here. And we've now got an absolutely outstanding team, not just my colleagues who are here on the call, but actually my colleagues who are sitting right across the businesses. We've got some unbelievable people with deep subject matter expertise in all sorts of all sorts of new opportunities. Those opportunities are not going to go away. They're going to get bigger over the next few years. And Jeff and the rest of the team have developed incredibly robust and resilient capital models for us and capital efficiency for us as a group. So we've got a very, very strong balance sheet today. We're delighted with the cash flow. We're delighted with the capital generation. And probably for the first time since I've been with the group, we have real competition for capital across the company, which is great. There's so many -- if you go through the 5 presentations, you'll see so many great ideas. And Jeff and I have weaned out some lots of ideas during the budgeting and planning process, but there's still a huge number of very exciting things where the markets are opening up. We've definitely got tailwinds which this rising tide is lifting certainly the L&G Boards. And we feel very confident about the future, notwithstanding that we're in the middle of a pandemic and Brexit is far from being finished. Because we just are really, really strong believers in these 6 macro and demographic drivers of our business. And 2020 is further evidence of that. And we're looking forward immensely to the opportunities that we have in 2021 and beyond. So thank you for everyone for listening to the call and asking such good questions. I'd encourage you all to listen to the video, see the slide, study it and engage with all of my colleagues, not just Jeff and the team, but all of my colleagues are here and willing to answer all of your questions. So be safe, be happy and look forward to seeing you, if not later this year, certainly in 2021. Thank you.