Legal
Participating companies
Nigel Wilson – Group Ceo
Jeff Davies – Chief Financial Officer
Michelle Scrimgeour – Managing Director, General Investment and Legal Management
Andrew Kail – Managing Director, Legal and General Institutional Retirement
Kerrigan Procter – President of Asia Pacific
Conference Call Participants
Andy Sinclair – Merrill Lynch Bank of America
Ashik Musaddi – Morgan Stanley
Nasib Ahmed – UBS
Larissa Van Deventer – Barclays
Alan Devlin – Goldman Sachs
Dom O’Mahony – BNP Paribas Exane
Oliver Steel – Deutsche Bank
Mandeep Jagpal – RBC Capital Markets
Barrie Cornes – Panmure Gordon
nigel wilson
Hello everyone. It’s exciting to see everyone here at Legal today.
The steady solidity and expansion are very evident in today’s figures. The strength of our balance sheet, which is proving to be very resilient in the face of external economic and political impacts, and the successful expansion achieved across all of our businesses. Annual money and capital generation plan, which provides unique synergies between divisions and has a wonderful collaborative leadership team. I would like to thank all our employees for today’s results, while encouraging them to be even more ambitious.
Here are the main numbers. The division’s operating profit rose 7% to £1350 million, EPS 0. 1928 pence, also up 8%. That is more than the 0. 1816 pence we reached over the 2015 total and the percentage that is worth the same as today. RoE of 21. 3% and Solvency II ratio of 212%. Generation of operating surplus Solvency II of GBP 900 million, an increase of 14% and an interim dividend of GBP 0. 0544, an increase of 5%.
Our 4 commercial spaces generated balanced and quality results. Through LGC, LGIM, LGRI and Retail, we cover select asset origination, asset management, the global movement of pension risks and retail and retirement coverage in the UK. We are market leaders in at least 10 of the market segments in which we participate. In fact, we participate in large-scale markets, where we have leadership and growth markets, where we can lead and deliver at scale. Our strategy is very transparent and our strategy is relentless. These corporations combine to generate the synergies that underpin our consistent 20% ROE.
This may be a familiar slide, but the extent of positive interaction between divisions is a unique feature of Legal.
Our 4 divisions contribute £560 million to the LGRI, up 7%; LGC GBP 263 million, up 5%; LGIM £200 million, down just 2% despite market impacts in recent months and Retail £332 million, up 14%. The six strategic drivers of expansion on which we align our business have not changed. In fact, they are more applicable today than they have ever been and the market opportunities they generate are immense.
Demographics are now fashionable. The world continues to age, driving demand for retirement and threat relief solutions. A $57 trillion global opportunity. Only 10% of available DB plans have made buybacks. So we just scratched the surface. Asset control continues to globalize and consolidate. The tricky area is in the middle, yet LGIM is among the dozen global heads and is internationalizing in this $129 trillion global market.
Investment in the genuine economy is politically supported. We will probably see positive adjustments in this area. The market favors select assets. We have an exclusive capacity to deliver and a balance of trust, restricted public spending and lack of economic confidence lead to the reform of social coverage and the lack of private provision. The technology has become complex faster than at any time since the 1860s. We have invested directly and in more than 500 start-ups. Climate change or perhaps a weather disaster creates a $20 trillion liability and, with it, for us, a series of massive investment opportunities. Much remains to be done as we take on the world’s most pressing crisis.
With respect to the existing economic and market environment. This slide presents the 3 existing trends of interest rate normalization, widening credit spreads and emerging inflation, and their respective effects on Legal
Widening credit spreads supports the LRP market by reducing the deficits of the profit plans explained and improving the prices of block annuities, with positive consecutive effects on volumes and margins. Our loan portfolio has not experienced any defaults since 2028. Concerns about the effect of widening spreads simply aren’t shown through the facts, as Jeff will explain in detail.
Inflation, which is a challenge for many other people across the UK, is a second-rate minimal effect for us. In short, the combination of L activities
We expect our annuity portfolio to be self-sustaining in 2022, as it was in 2020 and 2021. The driving force is to develop an operating surplus or capital generation, which we expect to see at $1. 8 billion in 2022. This is developing year after year as the annuity portfolio grows and we develop a constant field around the pressure of new business.
Our newly created retail department provides opportunities for expansion. At Retail Retirement, we have strong percentages of Marketplaceplaceplace expanding Marketplaceplaces, in worker savings, retirement income stream, and real estate financing. We also have strong hedging positions in the UK and a smaller percentage of Marketplaceplaceplace in the broader marketplaceplaceplace coverage in the US. In the US, where we leverage our virtual experience, revolutionizing marketplaceplaceplaceplaces and gaining the percentage of marketplaceplaceplaceplace. And in Fintech, we have made nine strategic investments to develop exciting businesses that complement or are adjacent to our own business.
L
ESHG, in a commitment to sustainability, strengthens our corporate in the long term, attracting new and existing consumers and also motivating our employees. Inclusive capitalism, which invests our capital and the savings of our clients to gain advantages from society, while generating smart returns. , it’s a purpose we’ve been on for over a decade, adding our 20 UK cities and now the £4 billion investment in the West Midlands, the £2. 2 billion deal with British Steel Pension, a $4 billion deal with Ancora in the US.
In short, our strategic levers are more valuable than ever. They gave us a smart start in 2022. LGIM recorded £65 billion in admissions. The market environment is accelerating the global demand for PRT. generate at least £600-700 million in operating profit and attract £25-30 billion in external capital.
These semi-annual effects are forged and the outlook for the whole year is positive. Now I turn the word to Jeff to talk about the numbers in more detail. Jeff?
Jeff Davis
Hello everyone. I hope you are well. It’s a bit hot. In the first part of 2022, Legal
As Nigel said earlier, we are well placed to navigate existing market situations and our diversified trading style allows us to continue to provide consistent and reliable pricing to our consistent shareholders. year to GBP 1. 4 billion, however, earnings consistent with a consistent percentage to GBP 0. 1928, up 8% and our ROE exceeded 20%. 212%. This very high index demonstrates the strength of our balance sheet and gives the Group an option for long-term expansion opportunities.
So, let’s go back to our divisions. In the first part of the year, LGRI posted an operating profit of £560 million. This functionality was driven through the predictable and continuous delivery of prudential margin releases from our developing accumulation and an effective continuous asset strategy that increases the overall return on our portfolio. , and a surplus of new business generated through physically powerful PRT turnovers. Positive investment change, reflecting the continued strength of LGRI’s well-diversified and defensively controlled asset portfolio.
The results of the first part of 2021 included positive variations due to COVID-related deaths, which were not repeated on the same scale this period. In the first part of the year, LGRI increased the global TRP by £4. 4 billion in 25 transactions. were subscribed with margins and degrees of capital stress of less than 4%; the result of smart asset structuring and favourable reinsurance prices. We are pleased to announce a follow-up transaction of over £2 billion with the British Steel Pension Scheme in the UK, executed under a framework agreement. In the U. S. , we signed our largest transaction of over $550 million. We remain excited about our customers’ expansion into the U. S. PRT market. USA We celebrated another $230 million Canadian agreement, building our strategic partnerships in this market.
Market volumes in 2022 are expected to be higher than 21, and our project portfolio is strong. PRT. As always, we will be disciplined in our pricing to meet our target monetary metrics.
Transition to the portfolio of annuity assets. As usual, we will provide a review of our A-rated annuity portfolio. The £73. 2 billion diversified bond portfolio, which has fallen in price due to emerging interest rates, is on the defensive and actively monitored to optimise functionality and mitigate downgrades. we maintained maximum credit quality with two-thirds of our portfolio of A-rated bonds or higher with 14% sovereign assets.
Our portfolio is geographically diversified and we have low-rated minimum cyclical exposures. In the first part of the year, we generated £1600 million in new direct investments. DI’s portfolio now amounts to £20. 5 billion, or around 26% of total assets. 100% of expected cash flows were paid off during the era and approximately two-thirds of our DI portfolio’s exposure comes from counterparties rated A or higher, guaranteed, making it highly resilient to market stresses. Exhibits in the appendix and come with names like National Grid and Bayer. Our ambition is to continue to strengthen our asset sourcing functions with a strong ESG focus. Together with LGIM and LGC, our ability to manufacture long-term hot assets ourselves to help rents, for example, affordable housing, rental structure and urban regeneration is a differentiating feature of our annuity business and remains a key competitive advantage.
Investment grade credit, which rarely fails, accounts for 99% of our life bond portfolio. Despite this, we are adopting a conservative annual provision for NON-compliance with IFRS of 43 basis points, based on assumptions that have remained virtually unchanged for about a decade. This corresponds to the default reserve of £2. 7 billion held on the Group’s balance sheet.
To illustrate the point of caution in this assumption, the benchmark IFRS default assumption for the portfolio is only 18 basis points, which in itself has been conservative. Our actual default rate has been much lower with an annualized default rate since 2007 of less than 1 basis point. While we are of course proud of our low default record, the key point is that we are making conservative default assumptions that we expect to be particularly impressive to our delight over time, and that gives us an option as margins to rebalance the portfolio. , If necessary.
The result of our prudent technique for credit threat control is transparent on this slide. Since 2007, the e-book on pensions has more than quadrupled. The actual default losses on the e-book were just £25 million and most of them date back to 2008. The difference between the fundamental assumption of default and our actual experience of non-compliance is pointed out through the variation of investments as well as other business benefits. Year after year, this spread has been positive, even after taking into account the selective trading charge of all assets.
To further demonstrate the resilience of our balance sheet, we have conducted a serious prospective credits stress situation, broadly in line with the creditsss of 2001, 2002 credits annuity; the worst was in 30 years for rebates and defaults. In this situation, we saw that 1% of our creditss assets defaulted before collections, with 1. 4% of BBB assets in default and 7% of investment quality assets. We assumed an early decommissioning of 20% of all assets and have not identified any advantages to widening credit spreads. In this situation, the biggest effect on our solvency ratio comes from downward revisions. We expect the downgrades to reduce the index by about 29% without taking any control action.
However, delight in the signs that we may take steps to rebalance the portfolio. We would carry about 10 percentage issues of a partial rebalancing of lower investment grade assets, which is itself conservative, compared to our popular sensibilities. Therefore, it was moderate to expect the solvency ratio to be around 190% within a while after this situation given the existing starting point. This shows that our balance sheet is well placed to absorb a significant credit event, should it occur.
Moving on to LGC, operating profit increased by 5% to £263 million, reflecting higher earnings from our portfolio of select assets and strong CALA and household business functionality, as well as valuation increases in our venture capital portfolio and Pemberton, which were driven by strong revenue expansion and committed assets under management. The select portfolio now stands at £3700 million. We now also have £156 billion in third-party capital, which positions us well to exceed our ambition and manage over £30 billion in select assets through 2025 and generate at least £600-700 million in operating profit.
As part of LGC’s expansion strategy, we recently announced our first investment in the U. S. In the U. S. , a 50-50 component partnership with the U. S. real estate developer. USA Ancora, which offers studies and life sciences services in this developing market. This is a first step in replicating the synergistic style we have in the UK and will generate investment opportunities for two-thirds as well as the annuity portfolio.
Let’s move on to our investment control division. At LGIM, operating profit fell 2% to £200 million; a resilient end result in challenging market situations where interest rates, inflation and stocks have affected the price of assets across the portfolio. Revenue in the current part of the year will recover if those situations continue. Expenses increased, reflecting continued investment in the business and inflation were offset through prudent charge control, resulting in a strong operating ratio of 59%.
Total assets under control were reduced to £1. 3 trillion, and foreign assets accounted for around 36% or £468 billion. more than 4. 7 million members in the workplace. And our wholesale business continues to grow well with controlled assets reaching £46 billion. ESG products. This includes ongoing arrangements for the launch of a new investment in renewable infrastructure in partnership with NTR.
In Europe, we have expanded our product diversity through the progression of thematic equity etFs and bonds and expanded our distribution coverage. And in the U. S. DC Retirement Income Source Solution in the U. S. USA We have also strengthened our ability to invest in real estate in the United States.
Despite market volatility, we generated record net external flows of £65. 6 billion, equivalent to 10% of open and external assets under control on an annual basis. our consumers. Net international flows accounted for more than a part of Belgium’s total. TV broadcasts in the UK have also been strong, with consumers to lessen hazards in volatile markets with continued demand for LDI solutions.
U. K. DC also delivered solid results, where we won 22 programs, many of which are our multi-asset budget or target date as the default strategy. And our ETF business delivered resilient functionality in a challenging market environment, contributing to further earnings expansion of £13 million, up 14% from the first part of last year.
Now let’s move on to our retail division. Operating profit increased by 14% to £332 million, thanks to continued releases of our annuity portfolios and developing non-public coverage. We also saw valuation increases in two of our Fintech retail businesses, where there is external investment and strong business growth.
In the U. S. , we continue to revel in unfavorable mortality, in line with the overall market. COVID-related claims were concentrated in the first quarter and in line with the £57 million provision made at the end of the year. The price of new business generated by Solvency II decreased from the previous year to £124 million, reflecting some strain on margins and the decline in personal protection volumes, in the very strong market we have known in the first part of 2021.
Let’s move on to the capital. Our balance sheet remains well capitalized with a Group Solvency II surplus of GBP 9. 2 billion. At the end of June, the policy index 212% as we said, after positive market movements, partially offset by the payment of the 2021 dividend balance. The generation of operating surpluses of the portfolio under development exceeds 14%, demonstrating the predictability of our capital generation.
After taking into account the effective pressure on new businesses of just £100 million, net surplus generation amounted to £800 million. Market movements amounted to £1200 million, basically due to higher interest rates. exposed to this risk, as evidenced by our sensitivities. A 50 basis point accumulation in long-term inflation expectations reduces the solvency ratio by just 3 percentage points.
So, to conclude, we achieved a new set of false monetary effects with an operating income source of 8% and an ROE of 21. 3%. a significant credit event occurs. As noted and assuming market situations are not replaced in the current part of the year, we expect LGIM’s revenue to decline year-over-year, due to the decrease in the point of assets under management.
However, given our diversified business, we still expect the Group to register an operational source of revenue expansion in line with that of the first part of the year. Our unique business style generates predictable degrees of money and capital and budgets our progressive dividend. As stated above, we expect to generate £1. 8 billion in capital generation throughout the year. We continue to make significant progress in our five-year ambition and our solvency position is stronger than ever, allowing us to capitalize on the significant expansion opportunities in our business.
Thank you. Nigel?
nigel wilson
thanks jeff legal case
Merci. Et we are now very pleased to answer questions. Before the question, can Americans imply their calling and the organization they represent?
Q&A session
Q-Andy Sinclair
Thank you. Speak Andy Sinclair of Bank of America. Three for me, please. First of all, only in LGC, ask yourself if you can give us a concept of the real money generated within LGC and, if possible, give a concept through mature companies, the product of the sale and the margins on the capital of third parties?That’s the first question.
The consultation so far involved only the bond portfolio. I think that, for the first time, kindly if I’m mistaken, less than 50% of the portfolio is now in the UK and more than 50% internationally. I wonder if you are going to internationalize this portfolio more?And does the average credit score differ by geography?
And third, it was only on LGIM, only with the lowest AUM base, only if you could, give us an update on the price outlook and cost-to-income ratio for the rest of the year and beyond. Thank you. .
nigel wilson
Jeff, do you need to take the first one? I’ll do moment one. And Michelle, satisfied with the third.
Jeff Davis
Yes, of course. Coins in LGC during the first part of the year were an oblique benefit. I think, as you said before, it will be less than our profits, some will be more, some will be much more like last year with the sale of MediaCity, for example. So there were no big deals as such in the first part of the year. So it was a clever roundabout of solid coins appearing just above their profit figure.
nigel wilson
Yes, it’s very attentive to your part in the bond portfolio, because it’s in the appendix of one of the slides. So bravo, Andy, it’s true that we’ve invested more assets outside the UK than in the UK, 51-49. And that’s one of the arguments we’ve had with the government and the regulator, because clearly, ideally, we’d like to invest more in the UK. So giving us a mandate where we have more opportunities and more valuable assets in the UK would undoubtedly lead to greater effects for the UK.
Unfortunately, I mean, America is very open to business, as my colleagues will tell you. And as a result, we get a certain charm from America, and in a sense, America’s appeal increases a little bit and the U. K. decreases a little bit. and in the existing political and regulatory environment here. We would like to oppose the fact that we hope that one of the things the new Prime Minister will do is to oppose that in order to give us more opportunities to invest here in the UK. Also, ironically, they’re a little ahead of us on things like house and renovations are already generating a corresponding adjustment asset class. But we would like the UK to at least join the US. USA and even Europe.
michelle scrimgeour
As far as pricing is concerned, I just want to say, clearly, that this is a complicated time. I’m not going to lie about that. But in terms of what we said on Capital Market Day in November 2020, we would expect to see the cost-to-income ratio increase in the mid-50s, given that we’re going to make an investment in the company. That hasn’t changed. What happened and as Jeff also indicated, is that we would be expecting a little bit over the next year, but possibly not the norm, it will normalize once the markets stabilize. go down over time.
nigel wilson
Thank you Michelle. We do 3 there, and then we pass. . .
Ashik Moussaddi
Yes. Hello, thank you. Ashik Musaddi of Morgan Stanley. First of all, a wonderful set of effects and quite empty this time. So enjoy it. There aren’t many exclusive pieces, so that’s good news. Only 3 questions. First of all, I saw somewhere in the table at the end of the presentation that the credit default reserve was £3400 million last year, and it’s £2700 million this year. I mean, can we understand the mechanics? I think it has to do with the asset point, however, it would be wonderful to have a little bit of mechanics about how you in that number, that would be wonderful. Thank you.
The moment considers the solvency index. Now, 212% is a number that looks pretty good. I guess I agree that there’s plenty of room to absorb the shocks here. But how do you see that? I mean, would you like to take credit for that through higher return on capital or accelerated growth?Are you looking to do that or are you just waiting for the markets to stabilize and then take a call at that time?
And the third is, I mean, one of the sensitivities that you have is interest rates and a little bit of merit that has translated into insolvency rates. Is there a way to cover this at a moderate cost?fall even if interest rates fall again. Thank you.
nigel wilson
Jeff answers the first and third questions. I’ll move on to moment one.
Jeff Davis
Of course. Yes, the first one is pretty simple. It’s just the reduction. So, the method remains the same, providing 43 basic problems to the same assets as before, essentially. But I think Tim sent me an email that I forgot, the reduction rates increased around 170 basic problems. . So literally just cutting back at a higher rate for the same money gives you a much smaller number. So if we put it back in an obsolete way, it would be almost the same. So, there’s no big replacement in that.
nigel wilson
In the third, you. . . ?
Jeff Davis
Yes, of course. Rate coverage, we’re constantly looking for that. This is a big question that we’ve been asking the smartest people in the world all along to think that we’ve tried to balance solvency as opposed to IFRS and cost, whether or not there’s an update in IFRS, we’re looking for whatever is imaginable there. Movements in the solvency ratio deserve to be unrelated to whether we are matched or not, as do inflation, matched money flows, matched rates in the annuity portfolio. . It’s the fact that you have an SCR, which has a lot of stress, that becomes. . . it brings more time for that.
So, we’re constantly looking at the situation, balancing the use of derivatives to do that, spending cash or liquidity under stress by placing more derivatives, but we’re pretty happy. We wouldn’t need, we don’t need to go higher, we’re looking to balance the two, however, we’re moving on to making adjustments as we enter IFRS 17 and we’re moving on to see the search to optimize among the other measures.
nigel wilson
We need an investment-driven recovery here in the UK, indeed everywhere. Basically, we think this is the right thing to do. We would like to have a broader mandate to allow investment. So, the fact that the Solvency II ratio is well above 200 is very comforting, and this raises the factor of repayments, about which, although we made a previous comment. . . in the R
We have, we have hired wonderful new people in our organization, who have dispersed all over the world in search of investment opportunities in each and every one. We have a wonderful track record and almost every company right now. And those 500 new companies, our activity in new hot sectors such as renewable energy is offering us many opportunities to invest and grow the corporate, and in fact, to drive the expansion of the corporate. And one of the things ahead of us is to explain why we’re accelerating expansion in 2023, 2024 and beyond. We’re not going to stick to the 0% line I had on my slide.
nigel wilson
It is ok. Next questions. Could you pass the microphone and [indistinguishable]
Nasib Ahmed
Hello. Thank you. Nasib Ahmed of UBS. Thank you for answering my question. So, first of all, in its capital generation target for 2022 of £1800 million. If I double the number 1H, I get to £1900 million and you have controlling shares in the current part of the year, presumably. Is there any payment that will return it to £1. 8 billion?And then, in the £25 billion pipeline, in what percentage is it exclusive?I didn’t see that in the version. My apologies, if I missed this?
And then, on the sensitivity to credit migration, it’s a little higher. What explains this and what is the difference between minus 19% on the slide and minus 14% on the press release?Thank you.
nigel wilson
Jeff, should you answer the first and third questions? Andrew, should you take credit for the pipeline and the opportunities and why are you so confident that we will perform better?
Jeff Davis
If no problem. Capital generation, I mean, there’s not much there. It’s pretty much the same, doubling a bit around 0. 9 and 1. 8, but not much there. We expect a double-digit expansion in the GSO, it is notoriously based on what happened in the past era when I was only looking at the semester, which is a full year, however, we expect a double-digit expansion of 1. 8 roundabouts in the GSO. So, nothing important happens there.
I move on to do the last one, please, I mean, again, it’s largely mathematical. Credit migration is very undeniable and we have noticed it in the pandemic in our numbers. It is very undeniable, because under- Investment grade spreads have widened. So when we design our tension in formula form, we say, well, BBB is downgraded, and then we sell them and pass them back. So, we suffer a greater loss the moment we sell them in our style. , because the differentials are wider than those who migrate. Then we saw precisely that in the pandemic, it is just the calculation of having wider gaps as a starting point. So there’s nothing, we haven’t strengthened it or anything, it’s just market conditions, the way forward.
And from 19% to 14%, yes, we showed that 19% was the net effect of a 20% reduction. We show 14% in our sensitivities. As I said, we’ve taken a more cautious view of the slide. So, we’ve only rebalanced the degree of underinvestment and not quite, in part, let’s call it about 75% of the degree of underinvestment. If we rebalance all the sub-investment grades, I would give it a small percentage more. And if we rebalanced the quality of the investment, which we also didn’t do on the slide, that would give it an additional 3%, which would close the hole at 5%. So we just took a more cautious view of what we would rebalance to demonstrate sensitivity on the slide.
andres kael
Good morning, everyone. So, of the £25 billion we haven’t revealed the number of exclusives, it’s a small number at this point of the £25 billion that would cover transactions where we’re on active verbal exchange up to the price in the UK, US, and the UK. U. S. and Canada. Markets. So, as Nigel and Jeff have said, very dynamic markets, whether it’s in the UK and the US. the later stages of verbal exchanges of very vital value, however, we are not exclusive at this stage.
nigel wilson
Oui. Je I think we can, it’s fair to say that we’re having more active conversations than ever before in the 35 years we’ve been doing this work. So, sales groups are very busy right now setting the costs of things and other people are advancing business that they might have thought to do in three, four or even five years, because rates have gone up, deficits are gone. And the president and administrators are pretty worried now that they have a window of opportunity to get things done. And so they are getting along.
I think the other thing, Jeff, about our portfolio, we don’t have a lot of BBB, also in our portfolio, which I think is kind of smart. And Chris sits in the back and comments on the fact that we also have very few BBB-cyclicals. That’s why the team, a smart team that created the portfolio, spends a lot of time figuring out which portfolio is right for us as a company.
If they put the microphone there and you guys, I’m sorry.
Larisa Van Deventer
Larissa van Deventer from Barclays. Congratulations on a smart series of results. Two questions, please. The first in LDC, how we think about the expansion and sustainability of the expansion until the end of its five-year plan. And more specifically, in what spaces do you think expansion is maximally competitive and what would jeopardize it?And then, regarding block annuities, he discussed active discussions about margin. What are also those delicate maximum margins and what may be the biggest threat of margin compression?Thank you.
nigel wilson
Sadly, Laura is not here. We don’t have the full control team here today, so [indistinguishable] LGC is gone, and if you answer the question of the moment, it will be great.
And I think we’ve been very fortunate now, we’ve built a lot of functions for ourselves in the total LGC business, and we started this in 2013-2014, and a lot of those corporations, which were small at the time, have become corporations that they are already quite gigantic and are developing structurally in the markets. I think the overall target of £600m to £700m that you think is very conservative, I agree with that myself and the fact that I agree with that myself But those are the kind of targets that we have set for ourselves right now. I think if you’re talking to the control team and Gareth is here, who is the CFO, please stand up, Gareth, so other people know who you are. are.
If you listen to Gareth afterwards, you can go through some of the main points about it and why we’re so excited. The American opportunity, which has really opened up for us and the opportunity of renewable energy. And again, Simon is satisfied that he is sitting in front and can go through some of the main points related to any of the opportunities. So far, we’ve done some kind of tactical equity and a small investment in debt. But the universe of opportunities is the reason. Solvency II returns to this point. There are a lot of things we want to do outside of the Solvency II tranches right now. We would like to push much more Solvency II and get rid of constant money flows and highly predictable money flows, and our regulator and the Treasury can agree on what makes a lot of sense here in the UK and even elsewhere.
If you. . . Jeff?
Larisa Van Deventer
And the moment consults on margins.
Jeff Davis
Yes, of course. Another PRT margins. I mean, we see in the first part of last year pretty consistent amounts compared to the margin of new business. Surely we will only deploy capital if we believe the margin is there. The most important thing that motivates us this thing I talked about is notoriously the asset manufacturer that provides us with a great competitive advantage. Widening spreads also makes it easier to realize those spreads with traded credit, which gives us a little more features in investing and allows us to offload very smart reinsurance conditions. make a resolution on the amount of capital, the amount to be reinsured pending discussions on Solvency II and everything else, the capital margin, the amount we must maintain.
But we have a style that works incredibly well to provide that margin with a very smart team that can provide the required policy from day one and locate the assets and we’re very careful to make sure we have the assets in question, what the spreads are, what we’re going to get, and that’s what determines the margin in conjunction with reinsurance.
Larisa Van Deventer
Gracias.
Alan Devlin
Nigel, thank you. Alan Devlin, Goldman Sachs. Two questions. How do you see capital given its higher solvency ratio and comment with the jaws of capital generation, expanding above the dividend?I think in his press release he included for the first time that he would not establish an excess of capital and that it would be more productive interest to consult the supporting shareholders. But then, obviously, given the very high volumes of e-book annuities in your comments, which you expect to see in 3 or 4 years potentially coming sooner, would you use that excess capital to take credit for this market if you could?
And then, secondly, a similar question, given the huge variation in interest rates on credit spreads that you’ve noticed in the U. S. He has talked about the investment portfolio. Does this replace your view of block annuity markets?that they are increasingly excited to invest capital for Legals, as the markets are increasingly excited, but relatively speaking, has there been a substitution?Thank you.
nigel wilson
Andrew, do you want to take moment one? And Jeff, do you want to answer the first question?
Jeff Davis
Of course. Yes, I mean, we’ve included some of them. We’ve had a lot of questions over the past few months. So, well, the proportions are higher. What does this mean? As you know, we don’t set a solvency index range, because we like to look economically at what’s going on inside. Then you have hit the right point. These are the jaws, the kind of projection and generation of genuine economic capital that we produce. And as they open up, this is the genuine generation. So if rates go down and we’ve created that capital and we put it in paints or sit down and that’s when we have a discussion, not just because rates fluctuate, it gives us a wonderful option, as Nigel said at the beginning of investing, and it’s not just capital for PRT.
I mean, it’s effective, but it’s also capital, whether it’s LGC, LGIM to grow those businesses, create assets for third parties, create assets for other parts of the business. Fortunately, we don’t want too much capital for retail, it’s a very effective business. So, we would balance the two all the time, but that’s because the genuine expansion of economic capital is vital to us.
andres kael
And only in the UK and US markets. In the U. S. , we have a very different market profile in the U. S. We compete on systems of $500 million or less and planned completions. And we see a margin difference in the UK and the US. USA So, I might not repeat Jeff’s comments, but we are very disciplined about how we deploy capital and make sure we get the right margins, considering that our U. S. business is not very disciplined. The U. S. is growing. And as I said about the UK, turnovers and the US market. the opportunities are significant.
So, we’re very active in the UK, but we’re not disciplined about how we deploy capital, especially given the other scale of balance sheets and the other capital regime we have in the US. USA There are some technical differences related to yields and margins in the UK and the US. In the U. S. , specifically around duration and local U. S. statistics. USA But I think, from an economic point of view, we are very disciplined in the way we deploy capital.
nigel wilson
And the exciting thing is the United States, we quote contracts for more than $500 million and we win them. That’s a big plus for us. Therefore, the popularity of the logo has increased tremendously in the United States.
unidentified analyst
Hello. I only have 3 questions please. I think in the appendix you have your most sensible quality BBB. So what is it, do you have examples for BBB, because it’s also 12% of your overall BBB?
And the consultation at the moment is their 35% exposure to BBB, evidently not much higher than that of their peers in mid-adolescence. Plans you can make to move forward on the side of the new business as well as the existing e-book to perhaps reduce that policy by 35%?
And the third query is the jaw that opens between capital and dividend. Could you give a few more examples of the kind of expansion investment you can make?Also, would it return an excess for shareholders? Thank you.
nigel wilson
I think it was six questions about that. On the loan portfolio, I will only make some general comments. I think we’re all very comfortable with the composition we have: we know other people didn’t need a BBB. So we give them BBB, and then they come back and say, well, can you give us a BBB?We had no portfolio failures. So it’s not, it’s discussed more through you than through our rating agencies and regulators.
So, the most delicate group, therefore, we have given you a lot of information to verify that you can cross the impediment for this purpose. It’s not a high-risk wallet and more names to give you seem to be more what you need to have access to. So we are very comfortable at 35%. Chris’ crisis is the CRO. If you need to catch up with him later and have a longer discussion about the wallet threat. I would be very pleased to do so. Jeff?
Jeff Davis
Oui. Je, I mean, part of the upgrade will be FX, because there’s a much more active BBB market in the United States. And so, with the movement of fx, it is proportionally a little larger. You’ll notice that AAA also has a higher proportion. So nobody says that even though we’ve noticed it. It moves little. This is not the case, however, it is very active. Some of them are also similar to direct investments at an initial level when expanded on some of them, and many of them are not reviewed and updated later. – will come with some of the sub-GIs we’ve had as updates over the last 12 months or so after the pandemic came out.
nigel wilson
Yes, there is a formula that we do with assets under construction, which are updated once they prevent them from being under construction, so this mechanic is there. So, there’s a component to the explanation of why we have 35% and not a decreasing percentage, they were assets under construction. in other parts of the country and things like affordable housing, and so far you can get a lower rating, and then improve once the progression is done and produce for a long period of time, but we are very careful with the wallet, not yet complacent. Next question, yes.
unidentified analyst
I have the microphone First of all, to go back to the [indistinguishable] consultation and Alan’s consultation. I mean, I think one of the EBCs says next year will be a record year for bulk volumes. So, given its composition, would it go above 40 to 50 and 10, since this is a high-value business and would also activate reinsurance to be a white label and grow in this space?
The moment factor is the direct attribution of the previous book. Presumably, given LGC and given the opportunities it has, it should expand that. Can you give one more concept on that? And finally, on mortality, where are you in your reflected symbol about what is a sustainable symbol for improved mortality, mortality rates and protection, given what has just happened?There’s. . . is there a motion there? Thank you.
nigel wilson
Oui. Je I think the answer to the first question is yes and yes. I mean, if you can do it, if our capital is very strong and there are a lot of opportunities, then it’s transparent that those were guidelines, they’re not. necessarily — if the marketplaceplaceplace is weak, then it’s going to be below the targets, if the marketplaceplaceplace is very attractive, then we can have a lot of goals. I don’t think it’s an EVC that thinks the marketplaceplace is going to be bigger next time, I think everyone thinks it’s going to be very big next year. And that’s part of the explanation for why the rule replaced by Solvency II is to give us a broader UNIVERSITY of ID. Then we can solve this challenge when it comes our way. Jeff?
Jeff Davis
Oui. Je means, in terms of later DI eeeebook, is eeeebook back and notoriously puts the most productive assets in opposition to new businesses and you can see other examples of that. The component of this positive investment differential in LGR is invested in the assets of the reserve eeeebook and this translates into returns, but also in the release of operations, it is part of the assets that we have begun to apply to new businesses, some of which we will also put in the back eeeebook in the long run is a prudent allocation for the assets that are to come. So most of that construction comes from what we’ve done with the assets, whether it’s construction for rent, etc.
And we have very conservative assumptions around what’s going on, and IFRS and you see that in the publication of transactions and economically, we surely think it makes sense. We have, whenever you want, but you want to measure £10 billion, £13 billion, £15 billion of room to manoeuvre to pit those assets opposed to each other. We believe we can produce more than we want for new business, even with those giant volumes, and at the same time we can direct some of it to the order book. We still have significant blame shares in the previous book, we don’t think we want them all the time. And so, lately we are managing the flow and how much we can put in the portfolio and that corresponds to us also using asset reinsurance, et cetera, to optimize the economy of the total thing.
nigel wilson
In terms of assets, I mean we would like to do more for affordable housing and social housing. There is – the list of housing in the UK is – a waiting list of over a million houses, there were 90,000 young people in London in transitional accommodation last night. These are shocking statistics for a sleek economy and all capital is available, all land is available, all other people must have to produce a great replacement in this. And again, this is all we think between the government and the regulator, they want to fix those things, so it turns out that ours would possibly escalate. We are excited about life science projects, not only here, but also in the U. S. in the towns and villages here, there’s a mirror symbol somewhere in America of a town or village that looks a bit like what we do in the UK.
And the universities themselves have realised that they all want to modernise and be competitive, even the tough University of Oxford is in that position, however lately we have perfect partnerships with around 10 or 12 UK universities and they all recognise the evolution of online coaching. around the world. adjustments, the visitor’s proposal for school adjustments. The amount of studies and the amount of marketing that can be done in the UK is changing. So, anywhere there are adjustments in the disruptions that are occurring and we sit in the middle of the debate and discussion of more of those things. Yes, we will deploy capital to help you embark on this transition adventure with us. And I know that if the renewable energy equipment is there, they have a very long list of new opportunities that come our way in that we want to invest our capital in, partly to produce returns for the general service, but also to annuity liabilities if annuity liabilities increase.
Jeff Davis
I have a very brief answer about mortality rates, because it is necessarily too early to say. But we keep in mind that we think there will probably be a slightly negative effect in the future, probably an effect on the pension. Wallet, old age is more than, say, the retention e-book in the United States. But it’s too early, I mean, you have some kind of endemic COVID, but of course the vaccines and medical remedies are getting better, and we’ve been tracking Australia where you’ve had a flu season again, but we haven’t had it, there’s been a hospitalization, but you haven’t had a lot of testing, but you can say the flu is back. So we’ll have endemic COVID and an influenza season. What will affect will be that, it’s pretty subjective right now and doesn’t replace our long-term vision.
So, for now, we remain cautious about this and assume that we will see publications on the P again.
Dom O’Mahony
Thank you, Dom O’Mahony, BNP Paribas Exane. I have two detailed questions, then an edge. The first considerations are just revaluations of Fintech. Es possible that Je simply does not see a price or have an effect on profits. percentage that, would be very beneficial and explain if it had been in the generation of the operating surplus or had been in the gaps in the movement of capital?Second, in the generation of the operating surplus, what are the control movements in it. You may not see this in the press release, but would it be beneficial to perceive how much?
So, the question of borders is the reform of Solvency II. We now have a lot of detailed data on how the PRA thinks about this, some scenarios around the basic differential, but the ABI has been quite transparent that it’s in fact not the reform. , is that the subsequent office does not seem to achieve some of the effects of the government, in fact, it seems to have an idea that they could obtain them. Could you tell us where you think the impact on your business would be on those reforms?as they have been presented with either the type of inventory and the type of dynamics of new business. I really don’t know if it’s something big or small or positive or negative right now?Thank you.
nigel wilson
Do the first thing Jeff and I will do the second.
Jeff Davis
Yes, of course. Fintech, many of you have already tried. I’d say it was kind of tens of millions, other people were stabbed between 30 and 60, so it’s pretty close to the diversity there. Obviously, we will have to be sensitive, apparently, to third parties who invest in these companies, if it is not public and so on, but in addition, we do not invent those figures, or there is external financing that is going through a rigorous procedure of realization in the business plan, the financing of salaries is advancing. The U. S. is accelerating, I deserve to point out that [indistinguishable] she is on the board. You can then ask him if you want, they are doing well, they adapt very well to the economic environment and continue to invest. So we take a look at whether they are wearing out the plan is funding.
Rather, it’s the style we said we would invest in Fintech. Nigel discussed the nine, they will get it through it. in this one. And then yes, it would be in the generation of surpluses. Management actions, that is, very little, then there is a negative investment gap, it is more like reinsurance type control actions, then we did not do the same As always, we did not put into position what used to be called XXX term life financing in the United States, it is not there. Therefore, it will have gone by the time being in half. Thus, very little in terms of control actions, pursues the theme of own figures.
nigel wilson
Yes. In Solvency II, if we left all those PRA recommendations in place, our ratio would drop a bit. And so it’s not something that we think is the dividend of Brexit for the UK. I think that would force us to look more at asset reinsurance than reinsurance longevity, given the volume that has been in the market lately. This would inspire us to invest in countries outside of the UK. also active. So we think it’s not a smart end result for the UK, but putting in place regulations that make us less competitive as an industry doesn’t seem like the right thing to do, especially when we think it’s not – there’s a great need for a recovery driven by investment and with the largest investor in the UK and a set of regulations that discourage making an investment in the UK doesn’t look like the right political end results, it’s not like this room is full of reckless and reckless other people and betting on betting bets all day. He is one of the most conservative and cautious people we have and that is one of the reasons I can sleep well at night. There are many other people who care about this kind of thing in our company, but it is not a fear for me.
And give you as much knowledge as possible. We have to ask everyone’s name, and we have to ask S for permission.
Olivier Steel
Oliver Steel, Deutsche Bank.
nigel wilson
You have a quick catch there. [Multiple speakers] you don’t have the light.
Olivier Steel
[Multiple speakers] to ask questions, but intelligent judgment. So two problems, the first is the gross release of operations in LGRI and LGRR which has a very, very strong increase through 23%, I think, in the first of that. I perceive that this component comes from higher direct investment and higher returns on direct investment. But I think some of that has also been caused by inflation. So I wonder if there is a detail of this that is not sustainable and where we will find next year that the numbers are going down. is the first question.
The question of the moment is whether it is achieving the most sensible of its capital generation and liquidity goals. Is it axiomatic that you are then in the most sensible of your dividend expansion goals?
nigel wilson
Alan received the question of the moment. Jeff can pass –
Jeff Davis
Oui. Je, that’s what I’m referring to above, so of the 23%, 60% and more of the assets we implemented in the eBook last year, and the ones that are completely reproducible, those are just conservative assumptions, it just happens in the same way as caution in the default hypothesis. Part of this is due to inflation, if those are lease assumptions about the construction to rent, then they will be included in the model. But they are completely reproducible, they just happen over time, and it’s just a very conservative assumption.
People like Chris and the PRA make sure we’re very careful about this and that makes a lot of sense. We don’t expect many long-term increases over 25 to 40 years if they inflated too much and didn’t give a fair picture of that. .
nigel wilson
Part of the challenge is that we’re so careful that you end up so late. You will have to have. . .
Jeff Davis
Yes, you have to catch up, that’s why you had the big increase, so more than a part, about 60% of 40% of the part, is just because you have a bigger book. Therefore, it is completely reproducible, and the other part is just noise when passing, there is in a large wallet, there are things that happen. But, so we don’t see him backing down dramatically or anything.
nigel wilson
Yes, we’re obviously ahead of the plan and the plan was 5% dividend and we haven’t had to pay anything more than that right now, Oliver. So, and if we continue on the trajectory and the jaws open, then there will be debates in the Board of Directors about what the right dividend policy is and what we deserve to do in case of percentage buybacks. So I hope that right now our colleagues, or my colleagues, our colleagues will come up with even more investment concepts. in the future. So that we can continue to get effects that everyone loves and that we all love. And you still don’t have [indistinguishable], you’re not a kind of influence.
Manprofundo Jagpal
Hello. Mandeep Jagpal, RBC Capital Markets. One more question I have about the loan portfolio. I think later this year we will see the unprecedented Bank of England event bringing back tens of billions of pounds in corporate bonds. to the market and, at the same time, we expect potentially record volumes of block annuities over the next 12 months. And given the higher proportion of corporate bonds used through insurers to aid those transactions, do you foresee any threats or opportunities resulting from the resale of those bonds and may this have a positive effect on margins or prices.
nigel wilson
That’s a very insightful question. I’ll pass it on to Jeff.
Jeff Davis
I mean, any liquidity in the market obviously helps. I mean there’s an explanation for why we’re going to the U. S. dollar market for a lot of our companies, because it’s a lot more liquidity. So if the sterling bonds have been resold. . . we, of course, do not invest in money services, which is a large component of the pound sterling bond market that you are going to communicate about. Therefore, it is very complicated to say what it does to marginal spreads and spreads move anyway. , which is reflected in the price. And if you look back, margins have been pretty consistent since Solvency II went into effect. question. Everything to help with liquidity is, in fact, so that we are at the point where we need spreads to become a little suspicious as soon as possible.
Barrie Horns
Barrie Cornes to Panmure Gordon finally. Most other people have made my inquiry to be honest, but I’m going to take it from another angle. Obviously, it has wonderful opportunities to get this and the best SMRs, but it also communicates about optionality. What you want to happen so that you begin to seriously contemplate the return of capital to shareholders. He’s eluded it, but what do we think about what kind of minimum rate, what do we look at before we think it might be on the agenda?
nigel wilson
I don’t think we’ve ever had a serious discussion in the Council, I’m thinking about the right parameters around that. This is relatively new, with a solvency rate above 200%, we have undergone another check, so to speak. and everyone is happy with that. I think we were: the only monetary facility company with a market capitalisation of over £10 billion, £12 billion that paid a COVID dividend, so we have a lot of interesting features and resilience of the model. We don’t have a parameter right now if X, Y, Z happens and obviously we do, but we don’t.
Are there any other questions? Kerrigan, do you need to say a few things about Asia since you are?He is busy with anything quarantined right now.
Kerrigan Procter
Really smart to see them all. It’s been 3 years since I saw you so much. So thank you, Nigel, for giving me the opportunity to say a few words. I think when we look at Asia, the opportunities there and you think about our amazing skill sets, the roles we have in pensions and we’re investing in the strategic expansion drivers that we’re talking about, I’m very excited about the opportunities we have in Asia for long-term savings, pensions, fighting climate replacement and overall choice assets. So all those things that we’re actively exploring. I hope we will have more to say about the progress made in the near future. Thank you.
nigel wilson
Several consultations were made through Andrew Crane and Greg and others in the back. But I think they tend to overlap globally with the queries we’ve asked answers to here. Whether Andrew or Greg, I think that’s not the case. or another person who sent a query if they call us then and we will respond to the inquiries with glare and Ed or Nim, Jeff or I will convince us after that.
And I would like to thank everyone. And while this is a very smart set of outcomes, I think we don’t want to forget the ongoing struggle. There is a genuine crisis in the charge of living. People live in normal times, unable to afford their food expenses. , fuel, energy prices, etc. , etc. workers and our consumers in those difficult and complicated times, who will be here for a while until we get a smart solution for those things.
I don’t need to convey a pessimistic knot. So I’d like to repeat, we’re very confident in ourselves for 2022, 2023 and beyond that, we have a wonderful team, wonderful collaboration, a massive investment appetite and massive investment capabilities. We are highly motivated to continue to deliver wonderful effects to our shareholders and customers, as well as all of you. So thank you.