Edited Transcript of LGEN.L earnings conference call or presentation 4-Mar-20 9:30am GMT

Our focus is twofold: firstly, on large, often international markets, where we have a small market share and can outpace market growth, like our investment management; and secondly, growth markets where we have leading market share and can grow by retaining market leadership and expanding internationally, like PRT. That strategy is working for us.

We’ve also entered a new — a number of new adjacent markets successfully, and at scale, for example, affordable housing and salary finance. Meanwhile, in 2019, we continued to sharpen our business focus by completing the sale of the General Insurance division for GBP 255 million. We expect to complete the GBP 650 million sale of the Mature Savings business in the first half of this year.

New business in 2019 was similarly strong, building on sustained compound growth across all of our divisions: 47%, 23%, 35%, 5%, 31% and 48%, as shown on the slide. We have no laggards. In pension risk transfer, LGRI delivered GBP 11.4 billion, including significant international success. We are a global leader in this market, and our pipeline is strong. LGIM’s external net flows of GBP 86 billion is more than twice the equivalent in 2018. LGC’s direct investment of GBP 2.9 billion are another step forward. LGC is unique. As well as contributing to its own operating profits, it is a crucial part of our strategy to create alternative assets for the broader group and to deliver outstanding economic and social outcomes in housing, in energy and in future cities.

Insurance GWP rose to GBP 2.7 billion. Again, we are a market leader. Competitive products, strong distribution and Fintech sit at the heart of LGI, which includes our intermediated mortgage business, which facilitated GBP 78 billion of transactions in 2019.

Retail retirement in LGRR delivered GBP 970 million of individual annuity premium, and in a more competitive market, GBP 965 million of lifetime mortgage advances. I’d like to thank all of our divisional CEOs: Laura Mason; Chris Knight; Kerrigan Procter; Bernie Hickman; Claire Singleton, who is delivering the sale of Mature Savings; and Michelle Scrimgeour; as well as all of their colleagues and, indeed, many of our advisers for another stellar year. And to wish Michelle a speedy recovery from her ski injury. She is listening in today and has every reason to be proud for our businesses’ performance.

Our colleagues make Legal & General the success that it is today, and they operate within a collaborative and mutually reinforcing structure. LGC, LGR and LGIM work closely together to create assets which deliver shareholder returns. We structure and/or self-manufacture assets to support PRT business and to provide AUM to LGIM and to LGC. This model, which is built around positive and constructive collaboration, creates new asset classes and provides co-investment opportunities for our external institutional clients. And this combination of investing as a principle and as an agent is supported by the Solvency II capital advantages and technological leadership provided by LGI.

Working collaboratively across our divisions has diversified risks, and it is the structural and capital synergies which results in our 20% ROE. These synergies remain unique in our sector and our industry.

I would now like to hand over to Jeff to take you through the numbers.

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Stuart Jeffrey Davies, Legal & General Group Plc – Group CFO & Director [2]

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Thank you, Nigel, and good morning, everyone.

This morning, I’m going to cover our 2019 financials on both group and divisional basis, the management of our credit portfolio, the ongoing investment in LGIM, and lastly, our capital position and surplus generation.

Looking to our group financial metrics. 2019 was a strong year for Legal & General, continuing to deliver value to our shareholders. Operating profit from continuing divisions was up 17% to GBP 2.5 billion, with growth in all 5 businesses, demonstrating the quality of our diversified business model and the value of our focused long-term strategy. This growth rate is excluding a mortality release from LGR’s annuity book. We’ve been able to make sizable mortality releases for the past 3 years because of our long-term assumptions about mortality. We’re prudent against emerging longevity trends.

In the second half of 2019 and in light of more recent mortality trends, we conservatively adopted an adjusted version of the CMI 2017 tables, resulting in a reserve release of GBP 155 million. As usual, we maintain our cautious and staged approach to the trends we are seeing. And we will investigate a move to the next actuarial table, CMI ’18, in light of 2019 population experience and relevance to our book of lives. We’ll provide an updated analysis later in the year. Going forward, all comparisons I make to prior year metrics will exclude these mortality releases unless otherwise stated.

As I mentioned at our half year results, we’re making measured investments into our business in order to improve efficiency, drive growth and comply with the evolving regulatory framework. For that reason, you’ll notice investment projects spend is up GBP 60 million. The additional expenditure primarily relates to augmenting cybersecurity, upgrading the IT infrastructure and preparation for IFRS 17. We expect this to reduce as these complete and move to BAU. Despite positive performance in equities and other asset classes over the course of the year, the overall result was a negative investment variance. In particular, LGI was again impacted by a fall in U.K. and U.S. government bond yields, as we’ve seen in previous periods. However, we were still able to maintain profit before tax and EPS growth of 15% and 16%, respectively. And Nigel has already covered the synergies that lead to a 20.4% ROE.

Finally, the group Solvency II operational surplus generation was GBP 1.6 billion, up 9% from last year, and the coverage ratio for year-end was 184%. I’ll cover our capital position in more detail later.

So turning to our divisions. LGR’s momentum has continued in 2019, with operating profit growing by 27% to GBP 1.4 billion. This success was driven by the ongoing delivery of prudential margin releases from our growing back book, further helped by positive variances arising from routine updates to our mortality assumptions.

Both our retirement businesses delivered solid growth. Our institutional business grew operating profit by 34% to GBP 1.1 billion. For the second year in a row, the U.K. PRT market had record new business volumes, topping GBP 40 billion in 2019. LGRI took roughly 1/4 of total market volumes as we maintained pricing discipline, achieving Solvency II new business margin of 7.9% and capital strain of just 4%.

Our retail business delivered operating profit of GBP 298 million, up 5%, with annuity new business continuing to grow. As I said, LGRI had a fantastic year, writing more than GBP 11 billion, a 21% increase. In the U.K., we wrote GBP 10.3 billion on a wide range of deals, including one of the largest pension buyouts for Rolls-Royce, an LGIM client since 1989. We are a trusted partner for pension schemes across their derisking journey. And in 2019, we helped a number of clients meet their end goals, including the culmination of a 7-year derisking journey for Hitachi. We also completed one of the first transfers from fiduciary management to pension buyout for a client. We are unique in having both these capabilities in our business, meaning we are well placed to help fiduciary management clients move to buyout over time.

The U.K. PRT market opportunity remains vast, and we are continuing our development of capital-light PRT products. For example, in 2019, we wrote our first assured payment policy, which provides asset yield, interest rate and inflation risk protection to pension plans, paving a more secure path to buyout over a planned time frame. Many of these transactions benefited from LGIM’s long-standing client relationships. Over the past 3 years, 51% of U.K. PRT deals have been from LGIM clients. There are also significant international PRT opportunities. And in 2019, we entered the Canadian market with a transaction through our partnership with Brookfield of 200 — over CAD 200 million. In the U.S., we wrote more than $1 billion for the first time as we started writing larger mandates.

In retail retirement, we have delivered 24% operating profit growth annually since 2016. Our individual annuity sales increased 22% over the year, benefiting from our improved enhanced annuity proposition and increased broker presence. We added a fourth introducer arrangement in November with Prudential, which is expected to increase sales by 15% in 2020.

Lifetime mortgage advances were down to GBP 965 million as we maintained pricing and underwriting discipline in a competitive market. Despite stronger competition, we were still able to achieve a 25% market share, driven by a wide range of products and strong customer-focused brand.

Our LGR asset portfolio, which is a source of long-term captive AUM for LGIM, has now grown to GBP 76 billion, with 28% of the portfolio in direct investments, including lifetime mortgages. We have maintained high credit quality with 2/3 of our bond portfolio rated A or better and 17% in sovereign-like assets. The portfolio is well diversified by geography and sector. Only 22% of our bond portfolio is in U.K.-listed corporate credit, with many of these holdings being multinational companies with significant diversified overseas earnings. Our exposure to overseas issuers makes up nearly half of our portfolio, and we hedge our currency exposure to deliver matching sterling asset cash flows.

We are thoughtful in our exposures to various sectors. As I’ve mentioned before, we have reduced our holdings in pro-cyclical sectors like banking, where our exposure is less than 5%. We have also avoided sectors which we believe are at risk of significant disruption, for instance, traditional retail and automotive, which, together, constitutes less than 2% of our portfolio.

LGIM manages the portfolio to avoid downgrades and defaults and has been extremely successful at this, realizing less than GBP 25 million of default losses and traded credit since 2007 whilst maintaining overall portfolio of credit quality. As further protection, we continued to hold a substantial credit default reserve of GBP 3.2 billion.

LGR also has a diversified and high-quality direct investment portfolio, with stable income from high-quality counterparties often additionally collateralized or secured. 15% of the assets are rated AAA, and approximately half of these are quasi sovereigns, like HMRC and the Secretary of State.

We added GBP 4.3 billion of new alternative assets over 2019 and have had particular success financing internally-generated new asset classes in build-to-rent and affordable housing, leveraging the experience and skills of LGC homes and LGIM real assets. Again, and I know I stress this a lot, it’s important to remember that our primary exposure in LGR’s DI portfolio is to the counterparties, not to the properties.

We recognize the influence our annuity investment decisions can have. And therefore, we’ve been thoughtful about how to integrate sustainable principles into our asset strategy. We have made explicit commitments on overall carbon intensity in our TCFD publication. Across the group, we have sought investment opportunities to develop and commercialize decarbonization technologies. LGR alone has made more than GBP 1 billion of direct investments into renewable energy such as solar and offshore wind. We invest in assets like social housing and renewable energy because our pensions are for the long-term and require long-term sustainable assets to back them.

Now moving on to LGIM. Operating profit was up 4% to GBP 423 million, reflecting increased revenues from flows and positive markets. As previously guided, this was offset by continued investment in the business, resulting in a cost-income ratio of 54%, which has increased marginally from last year. LGIM achieved record external net flows of GBP 86 billion, representing 9.4% of opening AUM. Of this, international net flows were GBP 59 billion and included a GBP 37 billion Japanese passive inflow reported in the first half. This mandate leveraged our proactive ESG approach and provides LGIM Asia business with a platform for future growth. We also continued to see strong demand from a broad range of European customers, with flows of GBP 11.6 billion reflecting the continued focus we have placed on the region.

Total AUM increased 18% to GBP 1.2 trillion, with international assets accounting for 30% at GBP 370 billion. U.K. DC had another strong performance, with AUM up 33% to GBP 94 billion, maintaining its market-leading position. This includes GBP 8.9 billion in our Master Trust, one of the largest and fastest-growing in the U.K., reflecting its continued appeal to DC plans who outsource their governance, investment and administration to LGIM. Total retail AUM reached GBP 39 billion. LGIM is ranked second on both gross and net U.K. retail sales in 2019, as we continued to experience high demand for our multi-asset and index products.

As part of our ongoing change program, we continued to invest in the business to achieve the resilience and scalability fundamental to LGIM’s future success and to generate operational leverage. Areas we are investing in include digital client portals, technology-enabled investment platforms and international expansion, leading to efficiency and lower unit costs as we grow. Going forward, LGIM-related project expenditure, currently reflected in group expenses, will be allocated to the LGIM result. Rebasing the 2019 financials would have resulted in a GBP 29 million transfer of expenses, increasing LGIM’s cost-income ratio from 54% to 56%. So GBP 394 million is the base 2019 figure to start projecting from.

To help you, in 2020, we expect the equivalent transfer from group to be around GBP 20 million of additional expenses. This allows better transparency and accountability of spend for management and aligns with the general practice in the rest of the group. And just to emphasize, there is no impact on the overall group results.

In LGC, operating profit increased 13% to GBP 363 million. Within this, the direct investment portfolio delivered operating profit of GBP 217 million, up 15%, with affordable housing delivering a profit in its first year of operation and existing assets performing well. Our diversified direct investment portfolio now stands at GBP 2.9 million — GBP 2.9 billion, up 22%, as we added GBP 0.5 billion of new investments during the year across housing, future cities and SME finance. Profit before tax was up more significantly at GBP 454 million, driven by the relative performance of the internationally diversified portfolio of equities.

Now moving on to our protection division, LGI. Operating profit was up 2% to GBP 314 million, with the U.K. and U.S. businesses collectively delivering stable growth and margins in highly competitive markets. The decrease in U.K. reported profits was largely due to a change in intragroup reinsurance of the U.S. business, as previously flagged. Consequently, operating profit in the U.S. was up GBP 29 million to GBP 91 million, primarily due to the same reinsurance change and a reserve release following improvements to the recently adopted IFRS methodology. This was partially offset by adverse mortality in line with experience across the broader U.S. life sector. Total gross premiums were up 6% to GBP 2.7 billion. The business continues to grow at good levels of profitability, with Solvency II new business value up 5% to GBP 216 million.

Looking forward, we expect continued stable earnings and premium growth in our leading U.K. and U.S. businesses as we invest in technology, enhance our product offerings and strengthen our distribution relationships.

Moving on to our capital position. At the end of 2019, the group Solvency II surplus stood at GBP 7.3 billion, and our coverage ratio was 184%. Despite recent market volatility, our balance sheet remains well capitalized and resilient. As of the end of February, the coverage ratio is estimated at 174%. We have consistently demonstrated a rigorous approach to risk and capital management. Since 2016, it is worth noting we have maintained solvency while paying a progressive dividend, investing in new PRT and navigating market volatility.

We’ve bridged the Solvency II surplus to help explain the movement during the year. As we said, operational surplus generation from the back book was GBP 1.6 billion. There are a number of well understood movements as well during the year, among them, the noneconomic impact of lower interest rates on the valuation of our balance sheet was largely offset by positive equity market returns and other market movements. And the mortality release, model refinements and management actions led to positive operating variances.

Net surplus generation was GBP 1 billion, even allowing for record new annuity volumes. We will, of course, remain disciplined in the deployment of our surplus capital to ensure we meet or exceed our return targets and remain within our risk tolerances.

So to conclude. We achieved record PRT volumes and asset management flows in 2019, with all our businesses producing a good financial performance and double-digit growth in key group metrics. Notwithstanding volatile markets, we have a strong and robust balance sheet, and this remains the case. OSG and earnings continue to grow attractively as we execute, giving us optionality to invest in new business. The synergies between our businesses are a unique source of competitive advantage, and we have, again, achieved a return on equity of around 20%.

Thank you. I’ll now hand back to Nigel.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [3]

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Thank you, Jeff. Turning now to our outlook. We will remain focused on delivering inclusive capitalism, economic impacts, commercial success and the socially useful outcomes, which give us long-term sustainability. These are not new themes for us. For example, Sacha and his team have been long-term pioneers of stewardship, active engagements and ESG investment. Our thinking is now becoming mainstream.

Equally, we have led in creating real asset investment outside London, a process now known in government as leveling up. We’ve invested in 15 cities to date, including: Edinburgh, New Castle, Leeds, Salford, Manchester, Bristol, Cardiff, with many more to follow. And more than any other institution, we have responded commercially to the aging demographic. Having led the process of change in many areas, and we are delighted others are following, we will accelerate our pace of change. Our 6 macro growth drivers are more relevant today than they have ever been. Markets are coming to us. The aging demographic almost everywhere illustrates the scale of market opportunities. If retirees globally were a country, it would be the third largest economy in the world behind the U.S. and China. PRT and individual decumulation markets will continue to grow. And in the U.S., we are growing our capacity to execute larger PRT transactions.

Across the markets where we operate, there are more than GBP 5 trillion of DB liabilities. LGIM has just 1.7% of global market share for AUM. In 2018, total global AUM was $74 trillion and is forecast to grow to $101 trillion by 2023. The U.K. DC total market AUM is expected to more than double to GBP 955 billion by 2028. The switch to DC is key to U.K. welfare reform. And we have built quality products and a trusted workplace brand with more than GBP 90 billion of AUM.

The next step will be to enable better investment outcomes for millions of ordinary pension savers, including modest allocations to new asset classes such as infrastructure, build-to-rent housing and venture capital. Decades of underinvesting in the real economy needs correcting. And we are in a strong position in U.K. housing, at urban regeneration, infrastructure and climate change. CALA Homes now have revenues of over GBP 1 billion, that’s 4x the size when we first invested. And we’re growing fast across other housing tenures, affordable housing, later life living and build-to-rent.

Westminster may have only just discovered the north, but we are already the people who know how to invest there, and in the Midlands and in the west, and in Wales and indeed in Scotland. So we are perfectly positioned to leverage the expected expansion of public capital spending.

Technology will continue to drive market evolution, and we continue to make strides with digital and with data, for example, in protection, but also through retail products like salary finance, intermediated mortgages and surveying. We’ve added climate change as a growth driver. Climate change will simply be the defining financial challenge of our generation, with huge investment, CapEx, ESG and stewardship opportunities as risk — as well as risk management challenges for the whole sector. I will return to this topic with a later slide, but as Mark Carney has made clear, there will be both financial winners and losers. We intend to be the winners.

This slide illustrates the strong growth and growing scale of PRT markets in the U.K. and the U.S., GBP 40 billion and GBP 30 billion markets in 2019, respectively. But equally, the fact that in both cases, 90% of the DB markets remain on corporate balance sheets.

Market leadership in global PRT requires several characteristics which Legal & General already possesses: actuarial and longevity expertise; asset management scale; the capacity to source attractive, regulatory compliant real assets, like our GBP 4 billion investments in the world’s leading university in Oxford; and the ability to execute and administer large schemes. We also have the ability to work with schemes on a derisking journey through LDI and potentially innovative capital-light solutions towards full buyouts, as our recent AIB transaction illustrated. This is solving the issue that consolidators are trying to address.

This slide is a new disclosure, enabling you to see the strongest growth areas by product, by geography and by channel, as we diversify LGIM’s expansion and lean into globalizing asset markets and growth. Compound growth in the high 20% and 30% ranges in multi-assets, the U.S., Europe, U.K. DC and through international channels illustrate the increasing breadth and depth of our coverage and our ability to win mandates. LGIM is more diversified than is generally recognized. Index at only GBP 404 billion is 1/3 of our AUM. LDI is an obvious step, as Jeff highlighted, on the path to buyout. And indeed, the majority of our PRT business comes from existing clients, 60% plus by number and 90% plus by volume in 2019. Multi-asset funds are aligned to grow with the expected growth of DC, and more than 90% of our AUM is external. We have GBP 100 billion of internal funds, mostly annuities, or nearly GBP 80 billion excluding Mature Savings, which is shortly to be sold. That’s only 7% of total AUM.

Kerrigan has updated you on LGC’s growth at recent results presentations. The division continues to make strong progress now with GBP 2.9 billion in diversified direct investments, and it’s on track to achieve GBP 5 billion in the next 3 to 5 years. We are building a number of alternative asset businesses across 3 broad asset classes. That’s future cities, housing and SME financing. In housing, for example, we have a diverse range of businesses which provide solutions by life stage, by affordability and by tenure. These include affordable homes, later life living and build-to-rent.

Our alternative asset businesses are at various stages of profit maturity, as shown on the slide, and therefore, have significant future growth potential. We’re also building them to attract LGR funding and third-party capital. This year, as we said earlier, we are formally adding climate. Specifically, the challenge of addressing climate change to our strategic growth drivers. This is where our combination of profit and purpose can combine to the greatest effects and where we can mobilize the skill and enthusiasm of our best people to produce inspiring results. As you will see when we publish our TCFD report next week, we start from a strong base and are making real progress. Among the scale players, LGIM is rated as a leader in ESG investing. We haven’t just discovered this. We were pioneers in the field, in the E, in the S and the G, and we’re further strengthening our analytical and product capability. But also where we invest our own assets as a principle, we are using the investment capability of LGC to back new technologies, for example, in photovoltaics, electric vehicle charging and upstream energy management. We also set new market-leading carbon standards for the housebuilding industry through our housing businesses.

Transitioning power generation from hydrocarbons to renewables, like on or offshore wind, involves a transition from OpEx models to CapEx models. The cost is upfront and the investments is long term. This is highly suitable for debt capital market financing and where the technology is established and the economics proven, as in wind, highly suitable for LGR’s annuity portfolio. We have already GBP 1.3 billion of renewable energy assets in the portfolio. But all of us, institutions and individuals, have to step up. What the finance sector has done collectively so far has not slowed the pace of global warming. We all fall a long way short. The stakes are high for the planet, but also for business and the financial sector. Addressing climate change is, therefore, the next consistent step in the delivery of inclusive capitalism.

Our track record since 2011 is very strong. From 2011 to 2015, we delivered 10% annual growth in EPS. Then we set out our ambition for replicating that growth from 2015 to 2020. We have achieved the current goal in 4 years, not 5. Our growth in operating profit, ROE, EPS and DPS and book value has been achieved through a period of serial changes and challenges. We’ve had Solvency II, pension freedom, lower-for-longer rates, Brexit and various political instability. But despite concerns around each of these at the time, none of them have dented our ability to deliver good business or eroded customers’ trust in our brand. Legal & General has shown itself to be not just a highly resilient business, but one that is quick to adapt to change and to evolve.

The latest challenge is now coronavirus. So far, there’s been no direct effect on our business. Our exposure to the most exposed sectors is very small. And our balance sheet, as Jeff has explained, is strong. We have ridden through previous challenges precisely because of the consistent relevance and application of our strategic macro drivers of growth and the capacity of our people to execute that strategy effectively. This remains the case today. Despite the effect of the virus on markets, we are now emerging into a period of greater political stability in the U.K. And the government’s economic and policy direction as well as markets and public sentiment is increasingly aligned to the inclusive capitalism program we have been pursuing for almost a decade.

Having done 5 years’ work in 4 years, we do not intend to spend the next year resting on our laurels or coasting. In the autumn, we will set out our ambitions for the next phase of our development for you. Headlines will include: how we intend to build on our global leadership in pension derisking for corporate clients and retirement income provision for retail customers; how we accelerate the deployment of patient capital to improve the built environment, investing in our cities and infrastructure; how we grow, diversify and modernize to become a world-class global asset manager; and how we deploy data and digital technology across our whole insurance and investment infrastructure; in summary, how we build on our established strengths to become more international, more technology-focused; and most importantly, how we will rise to the challenge of the era, financing transition to low-carbon and in delivering inclusive capitalism.

Jeff and I are now very happy to take questions. And as usual, our senior management team is here to pick up the really difficult ones.

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Questions and Answers

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [1]

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I’m going to start from the front this time. Andy?

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Andrew Sinclair, BofA Merrill Lynch, Research Division – VP [2]

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It’s Andy Sinclair from BofA Securities. Three from me, as usual, if that’s okay.

Firstly, on LGIM. The — you’ve given some pretty confident outlook on the floors pipeline for the U.S. for 2020. I just wondered if you could give us a bit more color on what you’re seeing in the pipeline, what’s in the mix and what that could do for the cost/income ratio as well.

Secondly, I realize you’ve given a Solvency II number as at 28th of February. But I just wonder if you could confirm, after recent market moves in the last few days, that you’re still above 170% and give some more color.

And thirdly, just on the annuity book. You’ve talked in the past about that book becoming self-sustaining in that kind of GBP 80 billion to GBP 100 billion range. You’re now at GBP 76 billion, so getting close. I just wondered if you could give some color on the uplift to cash and organic capital generation as you get towards that level?

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [3]

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Okay. I’ll take the first one and Jeff will take the second and third one.

I’m not going to try and steal Michelle’s thunder, to be fair. I mean she’d love to be in here today but sadly, she had a very serious skiing accident, so she’s not with us to answer that question. We tried to use a couple of slides to give you the direction of travel that we’re going in. Clearly, we’ve — we’re delighted with the success that we’ve had in Japan, breaking into China and continuing to have great success in the United States. I think the new asset classes that we’ve been entering into, the real assets, are going to help LGIM, that will help drive more revenue and more profits going forward.

We’re very happy with the multi-assets and the way that’s aligned with the DC business. Clearly, LGR is a great driver as well for LGIM. The bigger it gets, the higher quality and the longer the returns — longer revenue streams that LGIM receives. So we’re very happy with that.

I think the cost-income ratio has risen, as you pointed out, for 2 reasons. I think underlying costs have risen in the business and they’ve been a little bit ahead of where we’ve expected. And Michelle will address that when she presents. And as Jeff mentioned, we’ve still been investing in the business to create this global business and expect that investment to continue over the next 2 to 3 years.

Jeff, do you want to take 2 and 3?

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Stuart Jeffrey Davies, Legal & General Group Plc – Group CFO & Director [4]

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Yes. It really is the hot seat, though. That’s why I sat over there. Yes. Solvency II now. Yes, I mean even with the most recent movement, you’re talking a 1%, 2% movement, so we’re well over 170% We continue to monitor it. There are many offsetting impacts: equity, rates, spreads, inflation. So they all are in the mix around that. It’s never as simple, as you all know, as just following our sensitivities. But yes, so we’re comfortable with that. We’re in a strong position, and we monitor it regularly.

Yes. Annuity self-sustain, I have talked about this quite a bit. That definitely stands, but it’s borne out by our planning. When you’re at certainly GBP 90 billion, GBP 100 billion portfolio, then that business covers the strain for sensible levels of volume in line with our ambition, the GBP 40 billion to GBP 50 billion, and also covers its contribution to the dividend. And so that is something we’re aiming at with that GBP 40 billion to GBP 50 billion. And we’ll actually give more detail of that probably in the Capital Markets Day. So we will share more on what it looks like, some of the dynamics, et cetera.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [5]

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Andrew?

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Andrew John Crean, Autonomous Research LLP – Managing Partner, Insurance [6]

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It’s Andrew Crean. Can I ask 3 questions? One, slightly delicate.

Firstly, LGIM. When are you going to reaffirm the 8% to 10% growth target which was mentioned a couple of years ago?

Following up on that question, Jeff — or the last question, when you talked about covering the strain and its contribution to the dividend, what are you talking about in your business strain? Is that at 100% or something like 150%? And what is the contribution to the dividend?

And then thirdly, the indelicate one. Your base mortality improvement was about a 1% improvement. With coronavirus, are you doing any scenario testing? Or can you give us any scenario testing for potentially what that could do? Because certainly, its — death rate, the older ages is a lot more than at the younger ages.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [7]

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Yes. I’ll say a little bit on the last question, and I’ll go — I think to be fair to Michelle, she’s not here today, and I think she wants to — she’s got a very long and worthy presentation which you’re all going to get at some point when she’s back to work, when she’ll go through the whole strategy for LGIM.

On the whole issue, it is quite interesting from a social point of view that we’ve been talking a lot about people dying earlier than expected. And in our cities and towns across the U.K., typically, the poorest areas, people die at 58, and the richer areas about 85. And we’ve had very little social concern of much debate about that in the last 20 to 30 years. But coronavirus has sort of resulted in us getting hugely interested in this particular topic. And we’ve agreed an enormous — and I think the largest private sector partnership with Edinburgh University to do a huge amount of research on this very important topic as to why people are dying much quicker than we all expected. Indeed, all of my brilliant actuaries that sit in this room got that one wrong.

And I’ll let Jeff answer the really technical questions that you asked as well, Andrew.

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Stuart Jeffrey Davies, Legal & General Group Plc – Group CFO & Director [8]

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Yes. The self-sustaining point. Yes. I mean that’s not at the 4% level. That is holding a sensible solvency ratio and so that’s what we factor in there, that is fully financing itself. And equally, on the dividend, it’s our own current projections on the contribution, what it has been historically, what that business has been contributing via LGAS and our views on how we want that to grow over time.

Obviously, there’s a whole load of variables, what level of strain, what mix of business, what volumes, and that’s why we’ll need to give a bit more color in a future presentation.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [9]

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Oliver?

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Oliver George Nigel Steel, Deutsche Bank AG, Research Division – MD [10]

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Oliver Steel, Deutsche Bank. The slide, Jeff, you showed about the solvency ratio over the last 4 years holding pretty steady or actually, I think even moving up slightly over that period. I mean that has benefited, in the last few years, from a number of disposals, quite a lot of management actions. And I suppose linked to the question that has been asked already about the self-sustainability of the annuity book, I mean you’re talking here about GBP 40 billion to GBP 50 billion over 5 years, which would actually imply slowing growth in the annuity book.

So I’m just wondering, should we then assume slowing growth in that respect? Or do you have levers to pull that can enable you to grow faster than that GBP 40 billion to GBP 50 billion? That’s question 1. Sorry, a bit long.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [11]

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Yes. I might get Laura to talk about the growth of the annuity book and then Jeff can pick up on the technical point that you raised.

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Laura Mason, [12]

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I mean we certainly see the pipeline in the U.K. and U.S., meaning that we can sort of have a very safe target of GBP 45 billion to GBP 50 billion. I mean I will let Jeff comment on what other levers we have to pull to go above that level, but the market certainly is there in our 2 core markets. Our pipeline in the Canadian market is also growing, which we haven’t factored into that GBP 45 million to GBP 50 million.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [13]

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She’s doing a me. It’s the GBP 40 million to GBP 50 million went from GBP 45 million to GBP 50 million without anybody batting an eyelid. That’s — I’ve been doing that for years with the Board but suddenly we’ve got a Chairman now who notices those things and says, “That wasn’t quite what you said at the last meeting, Nigel.” Jeff?

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Stuart Jeffrey Davies, Legal & General Group Plc – Group CFO & Director [14]

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Yes. As I’ve said many time, we always have a wide range of management actions. We certainly have levers to pull. We — they take many, many different forms, whether they’re the model refinements, et cetera, that we see. But more substantially, partnerships, temporary capital provision from people who are very happy to give us third-party capital reinsurance arrangements. We have some quite innovative reinsurance structures that give us temporary financing at pretty low-cost of capital. So there’s always no shortage of parties wanting to talk to us and no shortage of brains to put together those structures. So yes, we’re comfortable we can allow those different volumes.

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Oliver George Nigel Steel, Deutsche Bank AG, Research Division – MD [15]

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Can I ask my second question then?

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [16]

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You’ve got 3, I believe.

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Oliver George Nigel Steel, Deutsche Bank AG, Research Division – MD [17]

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No, I’m going to cut it down to 2. The second question is, you’ve said again that interest rates are economically not that important even though they affect your solvency ratio. Given that the share price panics every time bond yields falls, can you just sort of talk us through what impact lower bond yields really has then in practice? So if it — I mean if it’s not the Solvency II ratio that matters for you, what does matter?

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [18]

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Yes. I think people have always been concerned about defaults. And that, for many, many years, that was the discussion here. It’s what’s the defaults going to be, what’s going to arise in the economy? Now we’ve had many years of no defaults. And as Jeff said, we’ve only had GBP 25 million since 2007, and the provision is now GBP 3.2 billion. That sort of disappeared from everyone’s economic understanding. It hasn’t changed sentiment or perception. And when rates or credit spreads move around, our share price seems to move disproportionately. And I suspect that’s not through buying and selling by people, that’s much more by algorithms. And I think we all have to get used to the algorithmic trading world in which we live in now. When you go to your own rooms, there’s very few people compared to what they were 10 or 12 years ago. So that’s — I think that perception’s, hopefully, over time, will diminish. And to a certain extent, it — no matter of what we’ve said about it, what empirical evidence we’ve produced to it.

The second important thing about our business model which people forget is we encourage people not to own BB assets. We have a system which, in fact, LGIM trades out of assets if they think they’re going to go down to BB because we don’t want to lose that reputation that we’ve got for outstanding credit management. So we hold a lot of very good quality BBB assets, but very, very few B — BB assets.

And to get to be held as a BB asset, you got to have a pretty good prospect of getting upgraded again. And Tesco would be a very good example of that. When they got downgraded to BB, we held onto quite a large part of our Tesco holding because we had a lot of confidence in the management that they get the credit rating back up.

So we have — Simon can go into it because he’s been involved with this for many years, go into the details of how we’ve set that up and managed it, I think, very successfully over the last 10 years. In fact, Kerrigan was around 10 years ago as well, when we were thinking through how — what was the best way to avoid to jump to default types of situations.

Do you want to pick up the economic stuff, Jeff? Is there anything else?

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Stuart Jeffrey Davies, Legal & General Group Plc – Group CFO & Director [19]

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Yes. I mean it’s more reiterating, yes. The rates itself doesn’t do anything. It’s discount in a very, very, very long liability. You get some risk margin impact, the SCR simply gets bigger. We have the same pound sterling the day after as we had the day before to pay the claims. The ratio, as you know, is reasonably sensitive therefore. But actually, the total surplus doesn’t change that much in the grand scheme of things, so…

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Oliver George Nigel Steel, Deutsche Bank AG, Research Division – MD [20]

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(inaudible)

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Stuart Jeffrey Davies, Legal & General Group Plc – Group CFO & Director [21]

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No, because they’ve run up an IFRS model. It doesn’t have much impact to that. It’s much slower over time. So we don’t really see that. It’s the same as the non-economic effect. It’s simply the accounting on the term life business where you see that coming through in the investment variance. We don’t lose any money economically. We don’t pay anything out of the door when those rates go down.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [22]

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[Jon]?

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Jonathan Michael Hocking, Morgan Stanley, Research Division – MD [23]

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Jon Hocking from Morgan Stanley. Three questions, please.

On LGI, Jeff, you mentioned that you’ve had this sort of investment variance because of rates. I wonder if you could give us an update, given what’s happened to the U.S. curve recently, given what you’ve just said, I’m presuming that’s a linear impact rather than anything which is geared.

And the second question. On your Solvency II sensitivities, we still got sort of curiosity for the sector where the annuity companies have got a positive solvency impact when spreads widen. We’ve had about a 25 bps move, I suppose, on credit spreads. Your sensitivity is for 100 bps. What would you actually have to see in spread widening before you’d actually see a negative impact on solvency?

And then finally, the EIOPA risk margin changes, which came out sort of a day or so ago, which looked like sort of tapering the risk margin for long durations, have you had a chance to look at that? And if something does change the risk margins, is that just a wash of the transitionals or is there any sort of economic benefit to you?

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [24]

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Yes. I’m going to ask Simon or Tim to take the third question and Jeff can take the first 2 questions.

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Stuart Jeffrey Davies, Legal & General Group Plc – Group CFO & Director [25]

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All right. I don’t have the answer to third one anyway.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [26]

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Sorry. Yes, yes.

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Tim Stedman, [27]

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Yes. The risk margin change we would expect to wash through the transitional. The impact is helpful, but probably not quite as much as we would have hoped. Not sure it’s necessarily going to change the economics for the annuity business and reinsurance will still be a preferred option.

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Stuart Jeffrey Davies, Legal & General Group Plc – Group CFO & Director [28]

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Yes. It’s relatively small, as set out. First, on the IV. Yes, it’s reasonably linear, especially on Bernie’s business, slightly — possibly even slightly dampened from linear in the U.S. because they hold some assets to back it, whereas Bernie doesn’t have any at all.

And the S2 spread, yes, we show the sensitivity. You’d have to go well beyond that. I’d say there isn’t a simple answer because it depends the dispersion between A, BBB, BB and what we’ve already seen or assumed for downgrades at that point. So it would be wrong to try and give an answer to that. I mean Tim can talk you through some of the dynamics if you like, because we look at it constantly, how do those sensitivities hold up? We present them to try and get the clearest picture we can within a sensible range of movement. Obviously, if we ever get beyond that, we’ll update the market if we thought it wasn’t appropriate to use them.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [29]

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And yes, Abid?

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Abid Hussain, Crédit Suisse AG, Research Division – Research Analyst [30]

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It’s Abid Hussain from Crédit Suisse. Just 2 questions, please, if I can.

Firstly, on assumption changes. Can you just talk to the GBP 390 million valuation change that’s coming through the LGR operating profit numbers? I think a part of it is the move to the CMI ’17 tables, but there’s a larger part due to the move in base tables. And I just want to understand to what extent can we assume that’s repeatable going forward. So if you could just help us in terms of thinking around there, please.

And then sort of related to that, the second question is on the mortality reserve release outlook. So previously, you guided to around GBP 200 million. It’s a little bit weaker, I guess, in light of the latest CMI ’19 projections. Are you giving any more guidance going forward?

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [31]

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Jeff, do you want to deal with it?

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Stuart Jeffrey Davies, Legal & General Group Plc – Group CFO & Director [32]

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Sure. Yes. So yes, you’re right. The experience — or the assumption changes in LGR is a combination of the GBP 155 million. We talk about this close to GBP 200 million for the base table change. That is almost entirely mechanical. We’ve said before we set our base table assumptions based on a rolling 5-year average. We don’t like to put too much weight on the most recent experience. Clearly, we were bringing in 2018 when we did that calculation and therefore dropping off 2013, and you all know that there was heavier mortality in 2018, so therefore, that flows through. We flow through it. It’s — that’s why it’s characterized as a sort of business-as-usual. We did the same in the previous year. It was less of a move. It depends what you see. You can already tell 2019, 2014 were quite similar, so you won’t see so much. We’ll see what happens in 2020 and how that compares to 2015. So it’s very much a rolling average with judgment, obviously, of how is it appropriate, what are we seeing in our own book of lives, how do we think things are changing. But it’s that base assumption set in a reasonably mechanical way which is why it falls there.

The one with more judgment is the trend because none of us know what’s going to happen in the future. And so yes, we’re not going to guide yet on the number. There’s a lot of work to be done on that. We definitely benefit from being a year behind. So we have now seen what 2019 does, again, mechanically to that table. It’s a small change. I think it’s about a month of extension to the life expectancy. So we are in a strong position. I’ve been able to look at ’18 and ’19. And by the time we set our bases, we have a pretty good view on what’s happened in ’20 as well and therefore, be able to reflect all of that. And certainly, therefore, make sure we’re never overshooting without doing something wrong. We’ve been able to see almost 3 years of tables into the future from where we are. So we’ll give an update around the half year when we’ll have developed our thinking with some idea as well what’s playing out in 2020.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [33]

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Greig?

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division – MD, SVP and U.K. Analyst [34]

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Greig Paterson, KBW. Three quick questions. One is, you mentioned you’ve invested in structuring, and we’ve got this example of this shared payment policy. Obviously, when you bring in third parties to help with the financing, you give away a portion of profits. I was wondering how — as we increasingly bring in third-party financiers, how the PV new business premium margin would progress over time?

Second question. I noted — well, we noted that the lifetime mortgages have come quite dramatic — well, the sales of them have slowed, increased competition. I mean that is a unique duration. I was wondering why we haven’t really seen any impact on the margin from the — say, in annuities on — also on the PV new business premium, given that we’ve seen a reduction in lifetime mortgages.

And third, I wonder if you could upgrade on the downgrades sort of situation? Have you had any downgrades this year? What’s the prospect for downgrades in 2020? Because obviously, that’s the key issue with your Solvency II ratio.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [35]

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Okay. Laura, you want to answer the first, Chris, the second, and I’ll do the third.

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Laura Mason, [36]

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I have to stand on the stage, I’ve been told. So the APP policy, Greig, is actually an insurance policy covering, as Jeff said, all market risk of a pension, a particular part of a pension scheme. So in that particular example, we haven’t brought any other third-party financing in.

It’s quite a neat way, as Nigel said, of finding one of our solutions to the sort of dilemma that their consolidators are trying to address. So that is a sort of good capital-light solution for us where we didn’t pass any of the financing or profits to anybody else.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [37]

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Yes. On the third-party, build-to-rent would be another example where PGGM are our partner in the development phase. We’ve got a lot of expertise through all their continental efforts in build-to-rent. We will be using LGR to provide the debt financing for that increasingly on a go-forward basis. And LGIM also have an investment product open to lots of different institutions to invest in build-to-rent, many of whom don’t want to be involved in the development phase, but actually do want to hold on to the assets over the longer term.

We view that as a big asset opportunity. The equity for that — initial equity provided by LGC and PGGM, long-term equity provided by LGIM’s clients under a proportion of the financing, a long-term financing is provided by LGR. Jeff mentioned it in his presentation, that’s kind of how it works. Affordable housing is very similar, and I suspect later life living is going to go down the same route where we create these new asset classes through a combination of third-party equity, our own equity from the multi-annuity businesses, and a mixture of LGC, LGR and LGIM. These are the sort of sweet spots for us to invest in.

You want to talk a little bit on lifetime mortgages, Chris?

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division – MD, SVP and U.K. Analyst [38]

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I was specifically interested in that you’ve — suddenly you’ve taken over the longevity swaps, I think, circa 90%. I’m talking about bringing in (inaudible) some credit risk and raise some of the third-party capital to reduce strain, is what I’m interested in… back to that, Jeff? Obviously, you’re giving away profit, you’ve maxed out longevity in terms of 90% longevity swaps, so you’re now going to bring in potential third-party…

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [39]

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Well, I think there’s lot — I think that we’ve mentioned lots of other third parties who want to provide capital in different forms at this market. And we’ve got lots of innovative solutions because the — I think we all agree, the size of the market is so big relative to our balance sheet. We have to come up with innovative solutions which solve the problems for clients, but also solve the issues for our balance sheet. And the number of solutions and the innovation that our team has shown in developing those solutions has been incredibly high. And I think each time we set up and present, Laura will have yet another interesting structure for us to talk about.

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Chris J. Knight, Legal & General Group Plc – CEO of Legal & General Retail Retirement [40]

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Thanks. On lifetime mortgages, we could see from about Q2 onwards last year, it was a soft market. And for us, volume is not the be-all and end-all, as the Chairman reminds me on a monthly basis. We can also see from the market that we are achieving some structurally higher margins than our competitors and that in itself, of course, feeds into annuity pricing and margins. So that would have been supportive in the round on margins. And I think while other people are sort of dipping into and out of the market, our focus is building a long-term, sustainable business that balances in the right way between risk and margin and customer value. That’s our focus.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [41]

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Okay. And…

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division – MD, SVP and U.K. Analyst [42]

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On downgrades?

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [43]

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Any downgrades? No. I mean the only interesting thing I think that’s happened is in the BBB market in the United States where we’ve seen 2 trends. One is that self-help by a lot of the players, including GE, AT&T, and that’s proving to result in some upgrades in the United States.

The downgrade has been Kraft Heinz, who, as you know, didn’t execute on their plan and fell behind in terms of — fell behind in terms of their plan, got downgraded, and their share price reacted very negatively to that, which we thought actually in the round, was quite a positive outcome for us as a firm. And we’ve had no other major events. Then…

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Johnny Vo, Goldman Sachs Group Inc., Research Division – MD [44]

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It’s Johnny Vo from Goldman Sachs. Just a couple of questions.

I guess the trend in your asset portfolio has been pretty clear. There’s been a great proportion of internally rated bonds which has obviously supported the business, but also there’s a notable increase in BBB. So can you just talk about the general trends? That’s gone from 30% to 33%. So can you just talk about the trends there? And certainly, if there’s a dislocation in the market, should we see a change between the internal rated sort of bonds to more liquid credit within your portfolio? That’s the first question.

A second question is just in terms of the MA. I think at the half year, you had an MA spread of around 121 bps. It’s 110. Is that just driven by spreads in the market or was that a portfolio shift? And second thing, could you tell me what the MA spread is currently, if you have that available?

And the final question is just in regards to treasury assets. It’s declined by about GBP 500 million. I guess Legal & General Finance has that liquidity position. Has some money been injected in some businesses or investments elsewhere? If you can talk about that.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [45]

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Yes. The third one, Kerrigan will talk a little bit about, what we’ve actually used the money for. Most of the money is actually being given to Kerrigan in — for a number of start-up businesses. He can talk about that. Jeff, do you want to answer the second one, and I’ll answer the first one?

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Stuart Jeffrey Davies, Legal & General Group Plc – Group CFO & Director [46]

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Yes, you’re right. Spreads came in, and therefore, the matching adjustment went down. Spreads have gone out since then, so it will be a bit higher. We don’t — I don’t have the exact number. I suspect Tim doesn’t even have the exact number. But you can know that it basically moves in the same way. The deduction doesn’t change the fundamental spread, so an average bond portfolio, added on to the 110. Anyway, nothing much will have changed since the year-end otherwise.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [47]

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Yes. I think the long-term trends in the amount of BBB that we have is about the same. Some of the BBB is actually assets under construction which is going to become AA assets. A lot of the government stuff is actually assets that we’re constructing for them which would get rated BBB. That’s the only delta really from portfolio changes. Thank you. Sorry, Kerrigan, go on.

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Kerrigan William Procter, Legal & General Group Plc – CEO of Legal & General Capital and Director [48]

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Yes, just on the treasury assets, the overall cash position for the group really, so GBP 2.5 billion, GBP 2 billion is cash. We’ve got plenty of cash there. We’re always looking for interesting investment opportunities at the right time to invest. So many pluses and minuses in that figure, but the net GBP 500 million or so invested in across our portfolios of data centers, Pod Point at the start of the year. And then later in the year, things like the Affordable Homes business and the Later Living really is interesting areas in which to put money in the ground and then things come out…

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [49]

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You got to say a little bit more about the Affordable Home business and how excited we are about the prospects.

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Kerrigan William Procter, Legal & General Group Plc – CEO of Legal & General Capital and Director [50]

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Yes. I mean a really, really interesting business for Affordable Homes that I think really brings to life a lot of what we’re doing on inclusive capitalism. It’s a very simple model of plenty of pension money looking for a home and plenty of affordable homes need to be built. They pay CPI-linked rent, which is fantastic to back pension risk transfer deals. So with that simple model we set up, over the course of the year, this ability to use pension money now invested in this business to create these affordable homes and create that great commercial outcome for the people here and also a great social outcome in terms of more affordable homes.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [51]

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There’s about, what, 1,000 homes this year?

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Kerrigan William Procter, Legal & General Group Plc – CEO of Legal & General Capital and Director [52]

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Yes. Yes, so 1,000 homes this year, rapidly growing to 3,000 homes. GBP 750 million pretty much in the pipeline in terms of those homes, and we think we can scale this up commercially pretty quickly. So very exciting.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [53]

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Yes. We think these are sort of points of differentiation between us and the competition. Yes. I think you’ve got no one there, right? Colm?

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Colm Kelly, UBS Investment Bank, Research Division – Director, Co-Head of European Insurance & Equity Research Insurance Analyst [54]

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Colm Kelly, UBS. Just on the LGAS solvency ratio, I’m just wondering if you’d mind maybe giving an update on — even a broad range around that, given it’s a high proportion of the cash flow.

And then just secondly, on the subsidiary dividend from LGAS. It’s fallen 10% year-on-year now. It remains at a healthy level. And clearly, these things are not linear. So I’m just wondering what the decision-making behind that was? And do you remain confident in the ability to grow the remittance from LGAS in line with the strong growth in annuity and new business volumes?

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [55]

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Yes. I think we — there isn’t really a target for the internal dividends on a year-to-year basis, and we’re basically using it to pay the external dividend.

At one point, a few years ago, we used the dividend, a lot more of it and we have done that less. We are, to a certain extent, investing some of that in some of the areas that LGAS uses. And the LGAS balance sheet is about 20% less than solvency ratio than the group balance sheet. It seems to hover at about that level. It might go up or down to a couple of percent either way. Yes?

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Ashik Musaddi, JP Morgan Chase & Co, Research Division – Executive Director and Co-Head of European Insurance Equity Research [56]

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Yes. This is Ashik Musaddi from JPMorgan. Just one question.

Now your 5-year charts are pretty interesting, but it also shows a clear trend that there is a straight line up growth in annuities and related business, like LGC, which I would say is capital backing annuities. But if we think about asset management, LGI, it is not growing as fast as that. So if I fast forward 5 years, I think your annuities business will be 80% of the group. How do you think about diversification benefit that is captured in Solvency II if you keep moving one business much faster than others? I mean do you think that you’ll be losing diversification benefit? Is it already captured in past 5 years, how it has moved? Or the diversification benefits are still accounted at the same level, which it was like 2, 3 years back?

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [57]

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Yes. Thank you. I think I’m going to let Bernie give you a little prequel of his presentation later in the year on what we’re going to do to accelerate the growth of LGI. And because you’re right, we got a very good diversification benefit off it. It would be very beneficial to us if Bernie could grow a little bit quicker. And here’s how he’s going to do it.

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Bernard Leigh Hickman, Legal & General Group Plc – CEO of Legal & General Insurance Division [58]

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This is how our one-to-ones go.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [59]

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That’s an upbeat one.

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Bernard Leigh Hickman, Legal & General Group Plc – CEO of Legal & General Insurance Division [60]

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Yes. That’s an upbeat one, yes. No. I’m in the privileged position of being able to focus on growth. Also in a great position of being really strong in several markets. But it is mathematically harder when you’re at 24% market share to be delivering the growth. The good news is we’ve got great positions in the U.S. protection business where we’ve got a business at scale, but with great — plenty of growth potential. I mean really their market share is 3%, 4%, and so it’s got plenty of room to grow there. And so yes, I spend a lot of my time focused on how do we get that U.S. business growing faster. And the great news there, we’ve got lots of technology developments just going into the market now being really well received. And we’re really hopeful for that to really lead to even faster growth from our U.S. business. The other trend and theme is technology investment in FinTech. And so investments like in salary finances, it’s really closely aligned with what we do as a business. It’s got a great social purpose, bringing financial well-being via employers. And it’s been going well, and we’ve got great hopes for that going forwards. And so that’s a business we can help to grow and really is great synergies in the workplace, both within LGIM workplace around group protection benefits business as well.

So yes, we’ve got plenty of growth to look at. Yes, I have to say we benefit enormously in LGI from a fantastic diversification benefit from annuities and it is a truly synergistic capital position and we’re trying to grow as fast as we can, but with all the usual caveats around making sure we’re, yes, optimizing things and doing it in a really risk balanced way.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [61]

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Yes. There are a couple of comments that I should have on that. I think the first one is, each of the businesses have these adjacencies. Kerrigan mentioned the likes of Pod Point which exists there. Chris has got some care businesses which people don’t know very much about. Bernie’s got salary finance and a whole bunch of other things.

When we come to November, we’ll talk a lot more about those sorts of things which will help accelerate the growth. And we all, I think, share the feeling that our U.S. businesses, all 3 of our U.S. businesses could grow a lot quicker. We’ve been very measured in our expansion, get the right people, get the right system, get the right technology, build the brand, and that’s been really successful for us.

I wouldn’t quite agree with the point that you made about LGC’s fortune being totally tied to LGR. I think there’s a lot of great things that LGC is doing outside of the LGR. Yes, there’s a big synergy with LGR. But there’s a lot of very exciting things that you’ll hear more about. In fact, there’ll be a lot of releases about that during the course of this year.

Two more questions? I think there’s 2 more hands up. Well, 3 hands up. 1 — 2? 2.

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Dominic Alexander O’Mahony, Exane BNP Paribas, Research Division – Research Analyst [62]

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Dom O’Mahony, Exane BNP Paribas. I’m afraid I’ve got 2 more questions on bulks, if that’s all right.

So the first is, in terms of the results in ’19, it looks like new business margins on an IFRS basis was slightly higher than expectations and maybe strain was slightly higher. I think that’s consistent with insuring younger populations. Tell me if I’m wrong. And is that a trend that we’re going to see, presumably, younger populations, the value creation per pound of premium over the lifetime is higher.

A second question. You’ve very helpfully given us some targets for growth in that business, GBP 40 billion to GBP 50 billion over the next few years. You also showed us that you actually think the market will grow — the U.K. market will grow in 2020. If you maintain your share of that, then actually that suggests quite a large decline in 2021 and beyond. Are you hiding your light under a bushel, as people say in this business?

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [63]

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Never knowingly. And I’m not dull but worthy either, which is the headline that I seem to get associated with, courtesy of Mr. Godfrey. Do you want to just take the first question there, Laura?

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Laura Mason, [64]

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Yes. Thank you, Dom. I mean I think it’s easy to read too much into the sort of slight change in both IFRS margin and the strain. And I think on balance, we definitely did one large deal last year with slightly shorter lives, but we also did some longer-duration deals as well. So probably in balance, there wasn’t a huge change from 2018.

There was very slightly less inflation, which we talked about this time last year. So I think we do aim to keep relatively steady on both those 2 metrics and sort of write business that means that we keep relatively steady on both of them. And therefore, work through reinsurance and other things to make that happen.

I mean — I think it is — I mean, it’s a hugely exciting market for us. We have a really good sort of strong, steady pipeline. We’ve mentioned we have been able to write larger deals in the U.S. last year as our balance sheet size has grown. And we are starting in Canada. It wasn’t actually on the slide, but that is a sort of CAD 1 trillion market and only sort of, I think, 5% of that market has gone to insurers so far, and it is increasing in terms of the overall levels that are going to insurers. And we have — as was clear on the slide, we have a partnership with Brookfield where currently, we’re reinsuring and a good, strong pipeline with them at the start of this year.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [65]

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Okay. Thank you. Last question?

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Andrew Baker, Citigroup Inc, Research Division – Analyst [66]

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Is this on? Okay. Andrew Baker, Citi. So just 2 questions, please.

First, on the risk margin. So previously, the PRA has expressed the concern about the amount of longevity that’s being offshored. Is there — with the potential change to the risk margin, it doesn’t sound like it’s changing your view on whether you would use reinsurance. Is there a potential risk that the PRA will change their view on how much they are comfortable with across the industry? That’s first.

And then second one, just on Mature Savings. There’s obviously been a delay to that close. Is that specific to the Part VII transfer? And what’s going on there, please?

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [67]

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Yes, yes. On the risk margin, incidentally I have a meeting with Sam Woods on Monday, so I’ll ask him that question myself and see what he has to say about it. But it’s one we’ve been asking for a long period of time. As you rightly point out, there’s a trade-off between how they adjust it and the amount of longevity that’s taken in the U.K.

Our preference would be for us to take more longevity in the U.K. We’ve always said that. But unless they move the terms and they move them slightly independently of what EIOPA is suggesting, that’s unlikely to happen.

I don’t know if there’s anything you want to add?

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Stuart Jeffrey Davies, Legal & General Group Plc – Group CFO & Director [68]

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No, no. That’s right. I mean I think that last point is the most relevant. This is very much in the EIOPA consultation that’s put out, which may or may not involve trade-offs against other items within there. It’s not necessarily where the PRA’s thinking is on risk margin and not reflective of discussions we have around that. I mean they have the drivers that you talk about and who knows what flexibility there may or may not be in a post-Brexit world.

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Nigel David Wilson, Legal & General Group Plc – Group CEO & Director [69]

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Yes, and thank you. We’ll all be around for a bit afterwards to answer any further questions that anybody has. I’d just like to say a big thank you for all of your support, all of your very detailed questions, which amazingly, you’ve managed to conjure up in just the few hours since the release came out, and we thank you for your enthusiasm for all of that. We’ll be seeing you at least twice during the year when we do the half year results and our Capital Markets Day in November.

And a thank you, a big thank you to all my colleagues for answering the questions today, and for delivering a stellar set of results in 2019. And let’s hope we can do something similar in 2020. Thank you.