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

Good morning, everyone. It's really, really thrilling to see everyone today here at Legal & General. And welcome to our results presentation for the first half of 2022. Please silence mobile phones. And the usual disclaimers about forward-looking statements apply. Consistent strength and growth are very apparent in today's numbers, strength in our balance sheet, which consistently proves itself highly resilient in the face of external economic and political shocks and profitable growth delivered by all our businesses. We are performing ahead of our 5-year plan for cash and capital generation, delivering unique synergies across divisions, and we have a terrific collaborative management team. I'd like to thank all of our people for today's results, whilst still encouraging them to be even more ambitious. Here are the headline numbers. Operating profit from divisions, up 7% to GBP 1.35 billion. EPS of 19.28p, that's up 8% as well. This is more than the 18.16p we achieved in the whole of 2015 when the share price was the same as it is today. The ROE of 21.3% and a Solvency II ratio of 212%. And Solvency II operational surplus generation, GBP 0.9 billion. That's up 14% and an interim dividend of 5.44p, up by 5%. Our 4 business divisions deliver balanced, high-quality earnings. Across LGC, LGRI and Retail, we cover alternative asset origination, asset management, global pension risk transfer and U.K. retail retirement and protection. We are market leader in at least 10 of the market segments where we participate. Indeed, we participate in scale markets where we have leadership, and growth markets where we can both lead and can deliver scale. Our strategy is very clear and our focus is relentless. These businesses work together to deliver the synergies, which underpin our consistent 20% ROE. This should be a familiar slide, but the extent of the positive interplay between the divisions is a unique feature for Legal & General. Asset origination in LGC enables us to win business and optimize the annuity back book. Retail is a source of capital and further assets through lifetime mortgages. Our principal balance sheet in LGRI is a source of business for LGIM. And LGIM brings investment management scale and access to 3,000 institutional clients, a potential source of third-party capital for LGC. Our 4 divisions each contribute: LGRI, GBP 560 million, up by 7%; LGC GBP 263 million, up by 5%; LGIM GBP 200 million, down only 2% despite the market shocks of recent months; and Retail, up GBP 332 million, up 14%. The 6 strategic growth drivers to which we align our businesses have not changed. In fact, they are more relevant today than they have ever been and the market opportunities they drive are immense. Demographics is now trendy. The world continues to get older, driving demand for pension derisking and retirement solutions, a global $57 trillion opportunity. Only 10% of available DB schemes have completed buyouts. So we've just scratched the surface. Asset management continues to globalize and consolidate. The tough space is in the middle, but LGIM is in the global top dozen and internationalizing fast in this $129 trillion global marketplace. Real economy investment is supported politically. We are likely to see positive change in this area, and the market favors alternative assets. We have a unique capability to deliver and a trusted track record. Constrained government spending and economic insecurity drive welfare reform and the need for personal provision. Technology is advancing faster than at any point since the 1860s. We have invested directly and indirectly in over 500 startups. Climate change or possibly climate catastrophe creates a $20 trillion liability. And with it, for us, a series of huge investment opportunities. There's a great deal more to do as we tackle the planet's most pressing crisis. Turning to the current economic and market environment. This slide captures the 3 current trends of normalizing interest rates, widening credit spreads and rising inflation and their respective impacts on Legal & General. First, normalizing interest rates. This is a net positive for us as a group. You see the positive effects on the Solvency II ratio. This gives us greater capital optionality and creates more favorable conditions for PRT transactions. Normalizing rates also help EPS as they drive positive insurance investment variances. Against this, you see the higher rates, reducing LGIM's fixed income revenue. However, the shape and balance of our group is such that normalizing interest rates are a net tailwind. Widening credit spreads similarly support the PRT market by reducing DB scheme deficits and improving bulk annuity pricing with positive consequential effects for both volumes and margins. Our credit portfolio has seen no defaults since 2008. Concerns about the impact of widening of spreads are simply not borne out by the facts as Jeff will explain in some detail. Inflation, which is a challenge for so many people across the U.K. is for us a minimal second order impact. In short, L&G's mix of business and its resilient balance sheet, again, put us in a very strong position to manage headwinds from the broader economy. We're on track to achieve R&D beats our cumulative cash and capital ambitions for the 5-year period 2020 to 2024. Here you see the 0%, 5% and 10% growth assumptions for both cash and capital. The key takeaway is that even if we have 0 growth in cash and capital from here through to 2024, we will achieve our target. This is a good underpin, but we will not rest on our laurels. We are confident that we can grow cash and capital faster than our dividend commitment. Widening jaws over the dividend creates positive optionality for us. We expect our annuity portfolio to be self-sustaining again in 2022 as it was in 2020 and 2021. The driver is growing operational surplus of capital generation, which we expect to see at GBP 1.8 billion in 2022. This grows year-on-year as the annuity portfolio grows, and we exercise consistent discipline around new business strain. Our newly created retail division has multiple growth opportunities. In retail retirement, we have strong market shares and growing markets in workplace savings, retirement income and home finance. We also have strong positions in U.K. protection and a smaller market share in the larger U.S. protection market, where we are bringing to bear our digital expertise, disrupting the market and gaining market share. And in fintech, we have made 9 strategic investments in growing and exciting businesses that complement our adjacent to our own business. L&G has always been a purpose-led company. We think this is entirely consistent with the delivering value for our shareholders. Aligning purpose and profit makes purpose scalable. We believe in applying the principles of ESHG, we include health as a socially beneficial impact. Tackling health and qualities is explicitly part of our leveling of policy. We have started already through our partnership with Michael Marmot to narrow the widening inequalities in health outcomes. ESHG and a commitment to sustainability strengthens our business for the long term, attracting new customers and existing customers and also motivating our employees. Inclusive capitalism that is investing our capital and our customer savings to benefit society as well as delivering good returns is a purpose we have been leaning into for over a decade, including our 20 U.K. cities and now the GBP 4 billion investment in the West Midlands, the GBP 2.2 billion deal with British Steel Pension and a $4 billion deal with Ancora in the United States. To sum up, our strategic drivers are more valid than ever. We have made a strong start to 2022. LGIM experienced GBP 65 billion of inflows. The market environment is accelerating global demand for PRT. LGC Is on track for our 2025 ambitions to deliver at least GBP 600 million to GBP 700 million of operating profit and attract GBP 25 billion to GBP 30 billion of external capital. These are strong half year results and the outlook for the full year is positive. I'll now hand over to Jeff to take you through the numbers in more detail. Jeff?

Good morning, everyone. I hope keeping well, if not a little warm. In the first half of 2022, Legal & General continued to prove its resilience by delivering another set of strong results. Year-to-date operating performance is in line with our expectations, notwithstanding market volatility, with operating profit up 8% to GBP 1.2 billion. Investment variance was positive reflecting the impact of increasing interest rates on protection reserves and strong performance in the annuity portfolio. This was partially offset by volatile global equity markets impacting LGC's traded equities. As Nigel mentioned earlier, we are well positioned to navigate prevailing market conditions, and our diversified business model allows us to continue to deliver dependable and consistent value generation to our shareholders. In the first half, profit before tax was up on the prior year at GBP 1.4 billion, with earnings per share at 19.28p, up 8%, and our ROE was once again above 20%. Solvency II operational surplus generation was GBP 0.9 billion, up 14%. And finally, the coverage ratio at 212%. This very strong ratio demonstrates the strength of our balance sheet and provides the group with optionality for future growth opportunities. So turning to our divisions. In the first half, LGRI delivered operating profit of GBP 560 million. This performance was driven by the ongoing predictable delivery of prudential margin releases from our growing back book, an effective ongoing asset strategy that is increasing the total yield on our portfolio and new business surplus generated from robust volumes of PRT business. Investment variance was positive reflecting the continued strength of LGRI's defensively managed and well diversified asset portfolio. The H1 2021 results included positive variances driven by COVID-related deaths which have not been repeated at the same scale in this period. In the first half, LGRI wrote GBP 4.4 billion of global PRT across 25 transactions. These volumes were written at attractive margins and capital strain levels were below 4%, the result of good asset origination and favorable reinsurance pricing. We were pleased to announce a follow-on transaction of over GBP 2 billion with British Steel Pension Scheme in the U.K., executed under an umbrella agreement. In the U.S., we wrote our biggest ever transaction at over $550 million. We continue to be excited by our growth prospects in the U.S. PRT market. We wrote another Canadian deal for $230 million, building on our strategic partnerships in that market. Market volumes in 2022 are expected to be higher than in '21, and our pipeline is strong. We're confident in delivering against our 5-year ambition of GBP 40 billion to GBP 50 billion of U.K. PRT and $10 billion of international PRT. As always, we will remain disciplined in our pricing to ensure we achieve our target financial metrics. Moving to the annuity asset portfolio. As usual, we've provided an overview of our A- rated annuity portfolio. The diversified GBP 73.2 billion bond portfolio, down in value because of rising interest rates, is defensively positioned and actively managed to optimize performance and mitigate downgrades. We've maintained high credit quality with 2/3 of our bond portfolio rated A or better, with 14% in sovereign-like assets. Our portfolio is geographically diverse, and we have minimal lower-rated cyclical exposures. During the first half, we originated GBP 1.6 billion of new direct investments. The DI portfolio now stands at GBP 20.5 billion, approximately 26% of total assets. 100% of scheduled cash flows were paid in the period and around 2/3 of our DI portfolio exposure is from counterparties rated A or above, often secured, making it very resilient to market stresses. We provided our top 10 BBB exposures in the appendix. It includes names such as National Grid and Bayer. Our ambition is to continue to strengthen our asset sourcing capabilities with a strong ESG focus. Working alongside LGIM and LGC our ability to self-manufacture attractive long-term assets to back annuities for example, affordable housing, build-to-rent and urban regeneration is a differentiating feature of our annuity business, and remains a key competitive advantage. Investment grade credit, which very really defaults, represents 99% of our annuity bond portfolio. Even so, we adopt a prudent annual IFRS default allowance of 43 basis points based on assumptions that have been broadly unchanged for almost a decade. This is equivalent to the GBP 2.7 billion default reserve held on the group's balance sheet. To illustrate the level of prudence in this assumption, the IFRS-based default assumption for the portfolio is just 18 basis points, which in itself has proven to be conservative. Our actual default experience has been much lower with an annualized default rate since 2007 of less than 1 basis point. Whilst we are, of course, proud of our track record of low defaults, the key point is that we adopt prudent default assumptions that we expect to be significantly greater than our experience over time and which provide us with optionality as margins unwind to rebalance the portfolio if and as required. The outcome of our careful approach to managing credit risk can be seen clearly on this slide. Since 2007, the annuity book has more than quadrupled in size. Actual default losses in the book have been just GBP 25 million, and the majority of these were back in 2008. The difference between the base default assumption and our actual default experience is reported through investment variance, together with other trading profits. Year-on-year, this variance has been positive even after allowing for the cost of selectively trading out of any assets. To further demonstrate the resilience of our balance sheet, we've run a severe potential credit stress scenario, broadly consistent with 2001, '02 credit event, the worst period in 30 years for downgrades and defaults. In this scenario, we assume 1% of our credit assets default pre-recoveries with 1.4% of BBB assets defaulted and 7% of sub-investment-grade assets defaulting. We assume an immediate big letter downgrade on 20% of all assets and haven't recognized any benefit from widening credit spreads. In this scenario, the primary impact on our Solvency ratio is from downgrades. We would expect downgrades to reduce the ratio by around 29% without taking any management action. However, experience shows we could take action to rebalance the portfolio. We would add around 10 percentage points from a partial rebalancing of sub-investment-grade assets, which in itself is prudent compared to our standard sensitivity. We could, therefore, reasonably expect the solvency ratio to be around 190% shortly after this scenario given the current starting point. This demonstrates that our balance sheet is well positioned to absorb a significant credit event should it occur. Moving on to LGC. Operating profit was up 5% at GBP 263 million. This reflects increased profits from our alternative asset portfolio and strong trading performances in Cala and Affordable Homes as well as valuation increases in our VC portfolio and in Pemberton, which was driven by strong growth in revenues and committed AUM. The alternatives portfolio now stands at GBP 3.7 billion. We also now have GBP 15.6 billion of third-party capital, which positions us well to exceed our ambition of managing over GBP 30 billion of alternative assets by 2025 and delivering at least GBP 600 million to GBP 700 million of operating profit. As part of LGC's growth strategy, we recently announced our first U.S. investment, a 50-50 partnership with U.S. real estate developer Ancora , delivering life science and research facilities in this fast-growing market. This is a first step in replicating the synergistic model we have in the U.K. and will produce investment opportunities for both third parties as well as the annuity portfolio. Moving on to our Investment Management division. In LGIM, operating profit was down 2% to GBP 200 million, a resilient result in tough market conditions, where interest rates, inflation and equities impacted asset values across the portfolio. Second half revenues will be challenged if these conditions continue. Expenses were up, reflecting ongoing investment in the business and inflation, offset by careful cost management, resulting in a stable cost income ratio of 59%. Total AUM was down slightly at GBP 1.3 trillion with international assets accounting for approximately 36% or GBP 468 billion. We remain a market leader in U.K. DC where our strong customer focus has helped grow AUM to GBP 129 billion, covering over 4.7 million workplace members. And our wholesale business continues to make good progress with AUM reaching GBP 46 billion. We continue to make strategic progress to modernize, diversify and internationalize the business. For example, we are expanding our ESG product range. This includes ongoing preparations for the launch of a new renewable infrastructure equity offering in partnership with NTR. In Europe, we've expanded our product range through the development of thematic equity and fixed income ETF products and extended our distribution reach. And in the U.S., we expanded our product proposition through the launch of 5 new mutual funds, which provide the building blocks for our U.S. DC retirement income solution. We also add it to our U.S. real estate investment capability. Despite market volatility, we delivered record external net flows of GBP 65.6 billion, equivalent to 10% of open and external AUM on an annualized basis. The flows were diversified across the business and driven by strong international growth, reflecting deep relationships with our clients. International net flows represented over half of LGIM's total. U.K. DB flows were also strong as clients seek to derisk in volatile markets with ongoing demand for LDI solutions. U.K. D.C. also produced solid results, where we had 22 scheme wins, many of which use our multi-asset or target date funds as their default strategy. And our ETF business has shown a resilient performance against a challenging market backdrop, contributing to overall growth in LGIM's annualized net new revenue of GBP 13 million, up 14% compared to the first half of last year. Now moving on to our Retail division. Operating profit increased 14% to GBP 332 million, driven by ongoing releases from our growing protection and individual annuity portfolios. We also experienced valuation uplifts in 2 of our retail fintech businesses, where there was external funding and strong business growth. In the U.S., we continue to experience adverse mortality consistent with the broader market. COVID-related claims were concentrated in Q1 and in line with the GBP 57 million provision set up at the year-end. Solvency II new business value generated was down on the prior year at GBP 124 million, reflecting some margin pressure and lower retail protection volumes compared to the very strong market we saw in the first half of 2021. Moving on to capital. Our balance sheet remains well capitalized with the group's Solvency II surplus at GBP 9.2 billion. As of the end of June, the coverage ratio was 212% as we've said, following positive market movements, partially offset by payment of the 2021 final dividend. Operational surplus generation from the growing back book was up 14%, demonstrating the predictable nature of our capital generation. After allowing for efficient new business strain of just GBP 0.1 billion, net surplus generation was GBP 0.8 billion. Market movements were GBP 1.2 billion, predominantly driven by the higher interest rates. As a reminder, we hedge inflation, and so we're not materially exposed to this risk as can be seen by our sensitivities, a 50 bps increase in future inflation expectations reduces the solvency ratio by just 3 percentage points. So to conclude, we have delivered another strong set of financial results with operating profit up 8% and an ROE of 21.3%. Our carefully managed annuity portfolio continues to perform as expected with no defaults, and we are well positioned to absorb a significant credit event should it occur. As noted and assuming no change in market conditions in the second half, we expect LGIM revenues to be down year-on-year due to the reduced level of AUM. However, given our diversified businesses, we still expect the group to deliver full year operating profit growth in line with the first half. Our unique business model drives predictable levels of cash and capital and funds our progressive dividend. As guided previously, we expect to deliver GBP 1.8 billion of capital generation at the full year. We continue to make significant progress on our 5-year ambition, and our solvency position is stronger than ever, allowing us to capitalize on the significant growth opportunities across our businesses. Thank you. Nigel?

Thanks, Jeff. The investment case for Legal & General can be summarized in these 6 points, a track record of growth, which has been consistent through changing economic environments, driven by a proven synergistic business model delivering 20% ROE, delivering predictable value across the long term, a resilient balance sheet and a clear purpose. This is a standout proposition in a challenging economic and political environment. . We have delivered a gain in H1 2022 and are positive and ambitious in our outlook for the second half of the year and beyond. Thank you, and we are now very happy to take questions. Before each question, can people state the name and the organization they're representing? And why don't we start with Andy?

Thanks. It's Andy Sinclair from Bank of America. Three for me, please. Firstly was just on LGC. Just wonder if you could give us an idea of the actual cash generated within LGC and if possible, just to give an idea of that by mature businesses, disposal proceeds and margins and third-party capital? That's question one. Second was just on the bond portfolio. I think for the first time, correct me if I'm wrong, under 50% of the portfolio is now in the U.K. with over 50% international. Just wondering, are you looking to further internationalize that portfolio? And does the average credit rating differ by geography? And thirdly was just on LGIM. Just with a slightly lower AUM base, just if you can give us an update on outlook for costs and cost income ratio for the rest of the year and beyond.

Okay. Jeff, do you want to take the first one? I'll do the second one, and Michelle, you'll have you with the third one. .

Sure. Yes. The cash around LGC for the first half was around about op profit. I think you'd said before, sometimes it will be less than our profit. Some of it will be more. Some of it will be significantly more as it was last year with the sale of MediaCity, for example. So there were no large transactions as such in the first half. So it was good, steady cash emergence around about just higher than the op-profit number.

Very observant of view on the bond portfolio because that was in the appendix in one of the slides. So well-done, Andy. It is indeed the case that we've invested more of the assets in -- outside the U.K. than in the U.K., 51:49. And that's one of the arguments we've been having with both the government and the regulator because clearly, ideally, we'd like to invest more of those in the U.K. So giving us a mandate where we have more opportunities and more asset classes in the U.K. would undoubtedly result in a better outcome for the U.K. Unfortunately, I mean, America is very open for business as my colleagues will tell you. And therefore, we are getting some pull from America. And in one sense, the attractiveness of America is going up a bit and the U.K. has gone down a bit under the current politically regulatory environment over here. We'd like to reverse that. And we're hoping one of the things that the new prime minister does is indeed reversed that to give us more opportunities to invest here in the U.K. Plus, ironically, they've got a bit ahead of us in things like retrofitting of housing and offices already produces a matching adjustment asset class. But we'd like the U.K. to at least keep up with the U.S. and indeed Europe. Michelle?

Yes. Look, on cost, I mean, just to say, clearly, it's a challenging time. I'm not going to lie about that. But in terms of what we said, what we said at the Capital Markets Day in November 2020 was that we would expect to see the cost income ratio go up towards the mid- to high 50s given that we're going to invest in the business. That hasn't changed. What's happened, as Jeff has also indicated is that we would expect that to probably drift up a little bit, actually, in the next year or so, but that's not going to be the norm. It will normalize once markets settle. And we'd expect that to come down again over time.

Thank you, Michelle. We do 3 there, then we'll...

Ashik Musaddi from Morgan Stanley. First of all, a great set of results and pretty clean this time. So I really appreciate that. Not many one-offs, so that's a good news. Just 3 questions. One, I saw somewhere in the table at the end of the presentation. The credit default reserve was GBP 3.4 billion last year, it's GBP 2.7 billion this year. I mean can we just get the big mechanics, I think it has to do with the level of assets. But would be good to get a bit of mechanics as to how you decide on this number would be good. The second one is around solvency ratio now 212% is a number, which looks pretty good. I guess, you would agree that there is a lot of buffer to absorb shocks here. But how are you viewing this? I mean would you like to capitalize on this through some extra capital return or some accelerated growth? Are you looking to do that? Or you're just waiting for markets to settle and then take a call at that point? And the third one is, I mean, one of the sensitivities that you have is around interest rates and a bit of benefit that has come through in solvency ratios rates. Is there any way you can hedge that out at a reasonable cost so that the solvency ratio doesn't go down even if interest rate drops again?

Jeff, do you want to take the first and the third question, and I'll go on the second one.

Sure. Yes. The first one is reasonably straightforward. It is just the discount. And so the methodology is still the same. It's the 43 basis point supply to the same assets as it was before, basically. But I think [indiscernible] an e-mail, I think our discount rates have gone up by something like 170 basis points. So it's literally just discounting at a higher rate for the same cash flows, gives you a much smaller number. So if we put it back to the old, it would be virtually the same. So there's no big change there.

On the third one, do you...

Yes, sure. Rates, hedging, we constantly look at this. It's a big question. We have our smartest people on it all the time to think we try to balance solvency versus IFRS and, of course, with the change coming in IFRS, we're looking at what's possible there. You shouldn't confuse solvency ratio movements with whether we're matched or not, a bit like inflation, we're matched cash flow matched where rates matched on the annuity portfolio. It is the fact that you've got an [ SCO ] which has got a big stress, which gets brings in more duration to that. So we constantly look at it. We balance using derivatives to do that, spend some money or use the liquidity in a stress up by putting more derivatives on. But we're pretty happy. We wouldn't want -- we don't want it to get higher. We try and balance the two, but we will be making changes as we go into IFRS 17, and we'll see -- try and optimize between the different metrics.

On -- We want an investment-led recovery here in the U.K., in fact, everywhere. We fundamentally believe that's the right thing to do. We would like to be given bigger mandate to allow to invest. And so the fact that the Solvency II ratio well over 200 is very comforting, and it does bring into the question of buybacks, which we made a comment on that in the RNS. Our preference, if we can still deliver a 20-odd percent return on equity is to continue investing in very attractive high-growth businesses and just relentlessly pursue that. We've got -- we've hired some great new people into our organization who are globally dispersed, looking at investment opportunities everywhere. We've got a great track record and pretty much all of the businesses right now. And these 500 start-ups our activity in new and attractive sectors like renewables, give us lots and lots of opportunities to invest and to grow. There is, in fact, accelerate the growth of the business. And one of the things we're looking forward to is explaining why we're accelerating growth in 2023 and 2024 beyond. We're not going to go along the 0% line that I had in my slide. Okay. Next question. You could just pass the microphone and just frankly, it'll be a bit easier.

Nasib Ahmed from UBS. So first one on your capital generation target for 2022 of GBP 1.8 billion. If I double the 1H number, I get to GBP 1.9 billion and you've got management actions coming in, in the second half, presumably. Are there any offsets that bring you down to GBP 1.8 billion? And then on the GBP 25 billion of pipeline, what percentage are you exclusive on I didn't see that in the release of -- Apologies if I missed that. And then on the credit migration sensitivity, it was a little bit higher. What's driving that? And what's the difference between the minus [ 19 ] on the slide and the minus [ 14 ] in the press release?

Jeff, do you want to take the first and third question. Andrew, do you want to take the pipeline and the opportunities and why you're so confident that we're going to outperform?

Yes, no problem. The capital generation I mean, to be honest, there's not a lot going in there. It's pretty much the same. It just doubles up. There's a bit of random in 0.9 and [ 1.8 ], but there isn't much there. We expect double-digit growth in the OSG. It's obviously dependent what was in the previous period when you're only looking at a half year, what's in the full year, but we expect that GBP 1.8 billion about double-digit growth in OSG. So there's nothing major going on within that. . I'll do the last one, if you like. I mean, again, a lot of it is math. The credit migration one is very simple, and we saw this in the pandemic in our numbers. It's very simply because the sub-investment grade spreads have widened. So when we formulaically model our stress, we say, well, BBBs, downgrade and then we sell them and we go back case we make a bigger loss at the point we sell them in our model because the spreads are wider that they're migrating to. So we saw exactly that in the pandemic. It's just the math of having wider spreads as a starting point. So there's nothing. We haven't strengthened it or anything. It's just the market conditions the way it flows through. And on the 19% to 14%, yes, we showed 19% was the net impact of 20% downgrade. We show 14% in our sensitivities. As I said, we've taken a slightly more prudent view. So we've only rebalanced sub investment grade and not quite all of it, partially it's, let's call it, 75% or so of the sub-investment grade. If we rebalanced all the sub-investment grade, that will give you another couple of percent. And if we rebalanced the investment grade, which we also haven't done in the sense -- in the slide, that would give you another 3%, which closes the gap on the 5. So we've just taken a more prudent view on what we would rebalance to show in the sensitivity on the slide.

Good morning, everybody. So on the $25 billion, we haven't disclosed a number we're exclusive. That's a relatively small number at this stage. And the $25 billion would cover the transactions that were in active conversations through to pricing across the U.K. U.S. and Canadian markets. So as Nigel said and Jeff said, very bright markets, both in the U.K. and the U.S. And as with other commentators, we'd expect 2022 to be a high level of transacted volumes than we saw in the previous year. And we are in the final stages of some very significant pricing conversations, but we're not exclusive at that stage.

Yes. I think we can be -- it's fair to say we've got more active conversations than we've ever had in the history of 35 years that we've been doing this business. So the sales teams are very busy at the on pricing up various things. And people are pulling forward deals that they might have been thinking about doing 3, 4 even 5 years' time because rates have moved up, deficits have gone. Chairman of trustees are pretty anxious now that they've got a window of opportunity to do things. And so they're kind of getting on. I think the other thing, Jeff, about our portfolio we don't have very much BBB- in our portfolio as well, which I think is a good thing. And Chris is sitting at the back there, and he's always commenting on the fact that we've got so little cyclical BBB- as well. And so the team construct the portfolio. We spent a lot of time figuring out what's the rate portfolio for us to have as a business. Don't the -- just can we just -- if you just put the mic there, and you guys are just -- Sorry.

Larissa Van Deventer from Barclays. Two questions, please. The first one on LGC. How should we think about growth and the sustainability of growth to the end of your 5-year plan? Specifically, which areas do you expect most aggressive growth and what would put that at risk. And then with respect to bulk annuities, you mentioned the [indiscernible] discussions on margin, what are those margins most sensitive to? And what would be the biggest risk be to the margin compressing?

Laura, unfortunately, is not here. We don't have all of the executive team here today. So I have gone LGC and if you take the second question, that'll be great. I think we're very fortunate now we've created lots of optionality for ourselves across the whole of the LGC business. And really cited that in 2013, 2014, and lots of those businesses, which were tiny in those days have really become quite substantial businesses already and are in structurally growing markets. I think the -- so the GBP 600 million to GBP 700 million target, which I know from some of your peers, you think is very conservative. I will agree with that myself. And in fact, I certainly agree with it myself. But that's kind of the targets we've set at the moment. I think the -- if you talk to the management team and Gareth's here, who's the CFO, just stand up gusto people know who you are. If you catch Gareth afterwards, you can go through some of them are detail about it and why we're very excited about the American opportunity, which has really opened up for us. And the renewables opportunity. And again, Simon Gadd's, he's here sitting at the front and go through some of the more the detail around what are the opportunities. We've done sort of tactical equity and a small amount of debt investment so far, but the universe of opportunities is this wide, which just goes back to this point about Solvency II there's a lot of that we have to do outside the Solvency II buckets at the moment. We'd like to push a lot more of that into Solvency II and get rid of the fixed cash flows and come around to highly predictable cash flows and hopefully, our regulator and the treasury, can see it eye to eye that just makes a huge amount of sense for here in the U.K. and indeed elsewhere. If you just -- Jeff?

The second question was on margins.

Yes, sure, yes. Yes. No, the PRT margins. I mean you'll see first half last year, pretty consistent. Solvency II, new business margin. We absolutely will only deploy capital if we believe the margin is there. The big thing that drives that for us, I talked about it is obviously the asset manufacturer that gives us a big competitive advantage. Spreads widening also make it easier to achieve those margins with traded credit which gives us a bit more optionality in the investment. And we are able to get very good reinsurance terms. We then make a decision about how much capital, how much to reinsure, pending Solvency II discussions and everything else out of capital headroom, how much do we want to maintain. But we have a model that works extremely well to deliver that margin with a really good team that can deliver the hedging required on day 1 and source the assets. And we're very careful to make sure we've got a site on those assets, what are the spreads? What are we going to achieve? And that's the main thing that drives the margin in conjunction with the reinsurance.

You can just keep passing it. It would be something harder

Alan Devlin, Goldman Sachs. Two questions. First of all, on capital, how are you thinking about capital given your strong solvency reissue and the comments with the jaws of capital generation, increasing above the dividend. I think in your press release, you included for the first time that you wouldn't sit in excess capital, if it was in the best interest of returning to shareholders. But then obviously, given the very strong book annuity volumes and your comments that things you're expecting to see in 3 or 4 years coming through potentially earlier, you would use that excess capital to take advantage of that market if you could? And then secondly, a related question. Just given the big move in interest rates and credit spreads you've seen both in the U.S. and U.K. and you've talked about it in the investment portfolio. Does that change your kind of view on what part of the bulk annuity market that's incrementally more attractive to invest capital for [indiscernible]. Obviously, both markets have got more attractive, but in relative terms, has there been any change?

Andrew, do you want to take the second one? And Jeff, do you want to take the first question?

Sure. Yes. I mean, we did include some wording. We have had lots of questions over the last few months. So well ratios are higher. What does that mean? As you know, we don't set a range of solvency ratio because we like to look at economically what's really going on within that. So you hit on the right point, it's the jaws, the sort of what is real economic capital projection and generation that we are producing. And as those open, that's real generation. So if rates go back down and we've created that capital, and we've either put it to work or we're sitting and that's when we have a discussion not just because rates move around. That gives us great optionality, as Nigel said at the start, to invest, and it's not just capital for PRT. I mean that's pretty efficient, but it's also capital, whether it's LGC, LGIM, to grow those businesses create assets for the third parties, create assets for other parts of the business. We -- look, you don't need too much capital for retail. It's a very efficient business. So we balance the 2 all the time, but it's that real economic capital growth that is important for us.

And then just on the U.K. U.S. markets. Obviously, we have a very different market profile in the U.S. to the U.K. We're typically competing on $500 million and below schemes in plan termination. And we do see a difference in margin in the U.K. and the U.S., so I won't repeat Jeff's comments, but we're very disciplined around how we deploy capital and making sure we achieved the right margins, recognizing our U.S. business is in scale up. And just like I said, on the U.K., the U.S. business volumes and the market opportunities there are significant. So we're very active in the U.K., but really disciplined on how we deploy capital, particularly given the different scale of balance sheets and a different capital regimes we have in the U.S. There are some technical differences around yields and margins in the U.K. and U.S., particularly around duration and local U.S. stat. But I think on an economic basis, we're very disciplined in how we deploy capital.

The exciting thing is U.S., we're quoting on over $500 million deals and winning them. So that's a big plus for us. So the brand recognition has gone up measurably in the United States. . [indiscernible] Somebody reach forward. or I'll do it.

Just 3 questions for me, please. I think in the appendix, you've got your top quality BBB. So what's actually -- do you have examples for the BBB- because that's also 12% of your total BBB? And second question, your 35% exposure in BBB, that's obviously much higher than your peers on the mid-teens. And that had increased from your 2008 position, which I believe was around 20%. And is there any action or any plans you could do sort of going forward on the new business side as well as the existing book to maybe like bring down that 35 percentage? And the third question is the widening jaws between the capital and dividend. You've talked about optionality. Could you give a little bit more examples of what sort of investment in growth you could do? And also, would you consider any excess return to shareholders?

I think that was about 6 questions around that. On the credit portfolio -- I'll just make a few general comments. I think we're all feeling very relaxed about the composition that we have -- we decided not to -- people want it in BBB, so we give them BBB, and then they come back and say, "We can you give us the minuses. We've had no defaults in the portfolio. So it's not -- and it's discussed more by you guys than by our rating agencies and our regulators. So the more sensitive rate we've given you a lot of information to try and get you over the hurdle effect. This isn't a high-risk portfolio. And the more names we give you, there seem to be somebody else you want to get the access to. So we're very comfortable at 35%, Chris, who is the CRO of right? If you want to catch up with them afterwards and have a longer discussion about the risk in the portfolio, be very happy to do that.

Yes. I mean, some of the change there will be that will be FX because there's a much more active BBB market in the U.S. And so with the movement in FX, it proportionally looks a bit bigger. You'll notice that AAA also proportionally has gone up. So no one says that, though. It is just moving around a little. It isn't that it's very active. Some of it also is to do with early-stage direct investments when you're developing some of those. And a lot of those don't get reviewed and upgraded later. And don't forget the BBB- will include some of the sub IG that we've had as upgrades over the last 12 months or so after coming out of the pandemic.

Yes, there's a formulaic thing that we do on assets under construction, which gets upgraded once they stop being under construction. So there's some mechanics in there. So there's part of the reason that we've got a 35% and not a lot of percentages, they were actually building assets in different parts of the country and things like affordable housing and stuff like that. It can get a lower rating, but they get upgraded once the development is finished and producing over a long period of time. But we we're very comfortable with the portfolio but not complacent. Next question. Yes.

I have the mic. Just firstly on -- going back to Megan's question and Alan's question. I mean I think one of the EBCs are saying that next year is going to be a record year for bulk volumes. So given your capital position, would you consider going over the 40 to 50 and the 10 because it's great value business? And would you also consider asset reinsurance to really -- to white label and to grow in that space? Question two is the direct allocations to the back book. Presumably, given LGC and given the opportunities you have, you're looking to expand that? Can you give some more idea about that? And lastly, on mortality, where are you in the journey to thinking about what is a sustainable kind of picture for mortality improvements, mortality rates and protection, given what's just happened? Are there -- is there any movement there?

Yes, I think the answer to the first question is yes and yes. I mean if you can make -- if our capital is very strong and there are lot opportunities then clearly, were guidelines. They're not necessarily -- if the market is poor, then we'll be below targets if the markets very attractive, then we may be of targets. I think I don't think it's one EBC thinking the market is going to be large next year. I think all of them are thinking that it's going to be very large next year. And that's part of the reason why the rules changed for Solvency II is to give us a wider university of DI so we're capable of dealing with this issue when it comes our way. Jeff?

Yes. I mean in terms of backbook DI, it is back book and obviously, putting the better assets against new business, and you can see different examples of that, the part of positive investment variance in LGR is put in assets to the back book and seeing that come through in returns. But also in the release from operations is some of that is the assets that we've started applying to new business, some of which will also be put into the back book going forward is prudent allowance for those assets coming through. And so the majority of that increase actually comes from what we've done with assets, whether that's build to rent, et cetera, and we have very prudent assumptions around those. And those, therefore, unwind under the IFRS. And you see that in the release from operations. So economically, we think absolutely it makes sense. We have whatever you want -- however you want to measure a $10 billion, $13 billion, $15 billion of headroom to put these assets against. We believe we can produce more than we need for new business, even with these large volumes. And at the same time, we can direct some to the back book. We have still significant gilt holdings in the back book. We don't believe we need those all the time. And so we're constantly managing the flow and how much we can put to the back book and then it goes back to would we use asset reinsurance as well, et cetera, to optimize the economics of the whole thing.

Yes. On assets, I mean, we'd like to do more affordable housing and social housing. There's -- the housing list in the U.K. is working is over 1 million houses to children in London in temporary accommodation last night. These are sort of shocking statistics for a modern economy. And all the capital is available, all the lands available, all the people available to produce a massive change in that. And again, that's something we think between the government and the regulator, they've got to get these things sorted out so that firms like ours can step up. We're really excited about the life science projects, not just here, but in the United States because pretty much everything we've done in cities and towns over here, there's a mirror image somewhere in America of a town or city. It looks a lot like what we're doing in the U.K. And the universities themselves have realized they only to modernize and compete, even the mighty Oxford University in that position, but we have great partnerships with about 10 or 12 of the U.K. universities right now. And they're all recognizing the world is changing, online teaching is changing, the customer proposition for the students is changing. How much research and how much commercialization you can do in the U.K. is changing. So there's everywhere, there's change and disruption going on, and we are sitting at the heart of the debate and the discussion of more of those things. And yes, we will deploy capital to help you go on this transitional journey with us. And I know if the renewables team were here, they've got a very long list of new opportunities that are coming our way that we want to invest our capital in, in part to produce returns for normal service, but also to back our annuity liabilities are if we're growing annuity liabilities.

I have a very quick answer on the mortality rates because basically, it's too early to tell is the correct answer, but we look at that. We think it will be any probably slightly negative impact going forward will probably impact the annuity portfolio, the older age is more than, say, the retained book in the U.S. but it is too early. I mean you will have some form of endemic COVID, but of course, you've got vaccines and medical treatment improving. And we've been monitoring Australia where you have had a flu season again but we haven't had. There's been some hospitalization, but you haven't had a huge number of deaths, but you can definitely say flu is back. So we will have both endemic COVID and the flu season. What will the impact be on that? It's quite subjective at the moment, and that doesn't change our long-term view. So at the moment, we remain prudent on that, and we would assume we'll see again, releases coming through into P&L year-on-year at the moment unless we make changes to the assumptions.

Dominic O'Mahony, BNP Paribas Exane. I've got 2 detailed questions and one [ broader ]. The first is just on the fintech revaluations. I couldn't see a value or an impact on the op profit. If you could just share, that would be very helpful. And clarify would that have been in the operating surplus generation would it have been in the variances within the capital movements? Secondly, in the operating surplus generation, what are the management actions in there? I couldn't see that in the release, but if -- it would be helpful to understand how much. So then the broader question is Solvency II reform. We've now had -- we now had quite a lot of detailed insight into how the PRA is thinking about this some scenarios around fundamental spread. The ABI has been quite clear that actually, this isn't -- the reforms has posed don't seem to achieve some of the outcomes that the government suddenly seem to have thought they might get. Could you give us a sense of where you think the impact on your business would be given the performance as they were laid out, both sort of the stock and the sort of the new business dynamics. I don't really have a sense of whether this is a big thing, a small thing or positive or negative at the moment.

Do you want to take the first one, Jeff, and I'll do the second one.

Yes, sure. The fintech, well, a number of you have stated it already. I'd say it's sort of in the tens of millions. You've had [indiscernible] people about a standard 30 to 60 . So that's pretty closely in the range there. Obviously, we have to be sensitive. There's a lot of third parties investing in these businesses, if it isn't public, et cetera. But equally, we don't make these numbers up. There is either external funding or go through a rigorous process of are they achieving the business plan. Salary finance is really moving forward. The U.S. is accelerating. And it's not the [indiscernible] on the board, you can ask her afterwards, if you like. They're really doing well and dealing very well with the economic environment and then continuing to invest. So we look at are they achieving plan? Is the funding? This is the model we said we would be investing in fintech, and Nigel mentioned the 9 of them, they will come through. So yes, I mean, the IFRS is the base balance sheet for Solvency II, so that will be in there coming through within it. And so yes, it would be in the surplus generation. Management actions, I mean, very little, you saw -- there was a negative investment rate, that's more about reinsurance-type management actions. And so we hadn't executed same as ever. We haven't put in place the -- what used to be called the XXX funding for the term life in the U.S. that's not there. So that will be gone by this in the second half. So very little in the way of management actions. It continues the theme of clean number.

Yes. On Solvency II, clearly, if all of this PRA recommendations were implemented, our ratio would go down a little bit. And so that's not something that we think represents the Brexitdividend for the U.K. I think it would force us to look at asset reinsurance rather like longevity reinsurance, given the amount of volume that's out in the marketplace right now. It would encourage us to invest in non-U.K. assets as well. So we think those are not good outcomes for the U.K., but putting in rules that make us less competitive as an industry, it doesn't seem like the right thing to do, particularly when we think we haven't -- there's a great need for investment-led recovery. And we're the largest investor in the U.K. and resetting rules, which discourage us from investing in the U.K. doesn't seem the right policy outcome. It's not like the -- this runs full of rash and reckless people and bet on red and obviously spread betting all day. There's some of them was conservative prudent people we have. And that's one of the reasons I can sleep well at night. And so many people worrying about these sorts of things across our firm that it's not a worry for me. And we've given you more data as much data as we can the part of the -- we have to ask it for everybody's name, and we have to ask permission of S&P to get all this data to you guys so you can do it, do a better job analyzing what's really going on in our credit portfolio. And we always want to do the right thing for the right reasons, to deliver the right outcomes. And we're not certainly going to go change our spots and actually go around and do all sorts of reckless things because we take our prudent principles very seriously. Tim and I have worked very unsuccessfully together for 6 years on trying to get reform in Solvency II. He is reassuring me that at some point in the next 10 years that we will resolve it. But if you really want to any details on the lack of success that Tim Stedman and I have had, then you can talk to Tim afterwards. That's okay. [indiscernible]

Oliver Steel, Deutsche Bank. [indiscernible] So 2 questions. The first is the gross release from operations in LGRI and LGRR pushed up very, very strongly at 23%, I think, on the first of that. I appreciate that some of that came from increased direct investments and increased yields on direct investments. But I think some of it was also caused by inflation. So I'm wondering, is there any element of that, that is not sustainable and where we'll find out next year that actually the numbers are coming back done again. So that's question one. Question two is if you hit the top end of your targets on capital generation and cash, is it axiomatic that you should then be at the top end of your targets on dividend growth?

I have got the second question. Jeff, can go ahead.

Yes. I mean, that's what I was referring to earlier. So of your 23%, 60% plus is the [indiscernible] the assets that we applied to the book last year. And those are fully repeatable. It is just the prudent assumptions. It just unwinds in the same way there's a prudence in the default assumption. Some of that is helped by inflation if it's rental assumptions on build to rent, then those will factor through in the model. But those are fully repeatable. It just unwinds over time, and it's just a very prudent assumption. People like Chris and the PRA, make sure that we're very prudent on that, and it completely makes sense. We don't anticipate lots of future increases for 25 to 40 years that they would inflate way too much and wouldn't give a fair view of that.

Part of the problem is that we are still prudent that you end up with being so far behind you bought have...

You get the catch-up, which is the big increase. Yes. So over half of that, that's 60% or so of the 40% of half of that is then just from having a bigger book. So that's fully repeatable and the other half is just noise to be on a bit of going through. There's always -- in a massive portfolio, there's always stuff that comes through. But -- so we wouldn't see it dramatically going backwards or anything.

Yes. We're clearly ahead of plan. And the plan had 5% dividend. And we actually haven't had a bit, but anything other than that right now, Oliver. So if we continued on the trajectory and the jaws open up, then there will be debate at the board about what's the right dividend policy and what should we do about the buyback. So I'm holding at the moment, our colleagues and my colleagues, our colleagues will go on with even more investment ideas on a go-forward basis, so we can continue to kind of get the sort of results that you guys all like and we like. . You still haven't got it, not amount of influence.

Mandeep Jagpal, RBC Capital Markets. Just one question for me on the credit portfolio again. I think later this year, we're going to see the impressive event of the Bank of England setting back tens of billions of pounds of corporate bonds back to the market. At the same time, we're expecting potentially record volumes of bulk annuities for the next 12 months. And given the high proportion of corporate bonds used by insurers to back these transactions, do you foresee any risk or opportunities as a result of these bonds being sold back? And could it potentially have a positive impact on margins or pricing?

That's a very insightful question that one. And I'm going to pass it to Jeff.

I mean any liquidity in the market clearly helps. I mean there's a reason why we go to the U.S. dollar market for a lot of our corporates because it's just way more liquidity. So if there's sterling buttons being sold back in -- we, of course, don't really invest heavily in financial services, which is a lot of the sterling bond market that you'll be talking about. So it's very hard to tell what it does to margin or spread and the spreads move around anyway, that gets reflected in pricing. If you look back, our margins have been pretty consistent and Solvency II have come in. So we wouldn't be looking at this in a grin it fundamentally changes things. But yes, it's a good question. Anything that help in liquidity definitely help has been sold in. I mean we may be at the point where we want spreads to come in a bit come out, who knows.

Barrie Cornes at Panmure Gordon, at last. Just most people have asked my question, to be honest, but I'll take it from a different angle. Obviously, you have great opportunities going forward to get that in high ROEs. But you also talked about optionality, what needs to occur for you to start seriously considering returning capital to shareholders? You skirted around it, but what should we be thinking need to? What sort of hurdle rate? What should we be looking at before we think it might be on the agenda?

I don't think we've ever -- we've never really had a serious discussion at the Board, I think about what's the right parameters around it. It's relatively new that we're over 200% solvency ratio that the -- we've been through yet another test as it were, and everybody is happy with it. I think we were. The only financial service company with a market cap of GBP 10 billion, GBP 12 billion who paired the dividend during COVID. So there's lots of attractive features that we have and how resilient the model is. We don't have a parameterization right now. If XYZ happens, I don't [indiscernible] did, but we actually don't. Are there any more questions? Karen, do you want to say a couple of things about Asia since your -- he's busy not in quarantine at the moment?

Well, really, really good to see you all. It's been 3 years since I've seen a lot of you. So thanks, Nigel, for give me the opportunity to say a couple of words. I think when we look at Asia, the opportunities there and you think about our skill sets and incredible skill sets, capabilities that we have in pensions and investment and the strategic growth drivers that we talk about. I'm very enthused about the opportunities we have in Asia all the way from long-term savings, pensions, addressing climate change and alternative assets more broadly. So all of those things are things that we're exploring actively investigating. And I very much hope that we'll have more to say on progress on those in the near future.

There are a number of questions that have come through from Andrew Crean and Greg and others on the back. But they tend to, I think, overall overlap with questions that we've asked answered here. if Andrew or Greg, I think that's not the case or anybody else who submitted a question, if they then just call us, and we'll answer the questions, obviously, and give [ Ed or NIM ] a ring and either Jeff or I make ourselves available afterwards. I'd like to say thank you to everyone. Whilst it was really a really good set of results. I think we have to remember the ongoing struggle. There is a real cost of living crisis out there. People are living in extraordinary times, they're unable to pay their fuel bills, energy pricing, et cetera, et cetera. And I know that we as a corporate and [ MSE heading agile ] for us is want to make a difference, both from our investment-led strategy, but actually looking after our people and our customers doing these really difficult and challenging times, which we're going to be here for a while until we get some good resolution on those things. I don't want to leave on a downbeat note. So I'd like to say again that we are very confident about 2022, 2023 and beyond. We've got a great team, tremendous collaboration, huge investment appetite and huge investment capabilities. We're very motivated to continue to deliver great outcomes for our shareholders and our customers and indeed for you guys as well. So thank you.