Legal & General Group Plc (OTCPK:LGGNY) Q4 2023 Earnings Conference Call March 6, 2024 5:00 AM ET
Company Participants
Antonio Simoes – Chief Executive Officer
Jeff Davies – Chief Financial Officer
Michelle Scrimgeour – Chief Executive Officer, Legal & General Investment Management
Andrew Kail – Chief Executive Officer, Legal & General Institutional Retirement
Bernie Hickman – Chief Executive Officer, Legal & General Retail
Laura Mason – Chief Executive Officer, Legal & General Capital
Conference Call Participants
Dominic O’Mahony – BNP Paribas Exane
Abid Hussain – Panmure Gordon
Mandeep Jagpal – RBC Capital Markets
Andrew Crean – Autonomous
Farooq Hanif – JPMorgan
Andy Sinclair – Bank of America
Larissa Van Deventer – Barclays
Rhea Shah – Deutsche Bank
Andrew Baker – Citi
Nasib Ahmed – UBS
Thomas Bateman – Berenberg
William Hawkins – KBW
Antonio Simoes
Good morning and welcome to our 2023 Results Presentation. It’s a pleasure to be here as the Chief Executive of Legal & General. I’ve met many of you before, and I look forward to working and getting to know all of you over the next months and years ahead.
As well as our results you’d have seen in the RNS, we are announcing today that we will hold the Capital Markets event on the June 12 and that’s when we will share more details of our future strategy. But in a moment, I’ll give you a bit of a flavor of what you can expect from us at that event later this morning.
So before we get going, we have the usual notes on forward-looking statements. And in a very, very unlikely event that you hear the fire drill, there isn’t, if you hear the alarm, there isn’t a fire drill, so please make your way through reception and in front of the building, go back to in front of the building.
So turning to the results. I’m pleased to say that L&G’s 2023 performance illustrates the strength of our market-leading businesses and our resilience in what have been reasonably challenging markets in 2023. We had record new business volumes led by institutional retirement, our PRT business. Therefore, our future store of profits is growing. Our operating profit is robust at £1.7 billion, in spite of those challenging market conditions. And importantly, we are set to achieve our 5-year targets by the end of this year. We set those targets, if you remember, back in 2020. Our balance sheet remains strong with a 224% solvency ratio. And in that context, we are increasing our full year dividend 5% to £20.34. These results are a testament to the hard work of our 11,000 employees, so thank you to all of them. And I want to also give thanks to Nigel Wilson for his role over 14 years and, importantly, for the strong foundations that we have to build upon.
I’ll hand over to Jeff now who is going to talk you through the numbers in more detail, but I’ll come back to give you my early observations on the business and share what you can expect at – to hear at the Capital Markets event on the June 12. Jeff?
Jeff Davies
Thank you, Antonio and good morning everyone. Great to see you here. Hope everyone’s very well. In 2023, as Antonio mentioned, Legal & General delivered a resilient set of financial results in challenging markets. This illustrates the effective diversification across our business.
Operating profit was flat at £1.7 billion, driven by the predictable and ongoing releases of the contractual service margin and risk adjustment from our growing Insurance businesses, where we have seen record volumes in 2023, as Antonio said again. LGIM showed disciplined cost management in the face of lower AUM and, therefore, revenues were also down. And this was driven by higher interest rate in volatile markets.
In line with the half year results, investment variance mostly reflects unrealized mark-to-market as a result of those higher rates and the write-down of our modular housing business and holdings in Onto. We have excluded the investment variance caused by longevity releases, which is a quirk of the way IFRS 17 works and the accounting impacts of the buyout of our own pension scheme.
Even after record volumes, our balance sheet remains strong with a Solvency II coverage ratio of 224% and capital generation of £1.8 billion, well in excess of our dividend. Our future store of profit has grown by 9% over the year to £14.7 billion. In 2023, the contribution to our store of future profits from new business increased by 37% to £1.4 billion. A regular longevity assumption update added to CSM and risk adjustment balance. A growing store of profit produces a reliable stream of earnings for shareholders in the future, and we expect this balance to continue to grow as we capitalize on the market opportunities ahead of us.
As you can see, we are pleased to say we are set to achieve our 5-year ambition of £8 billion to £9 billion of capital generation, significantly exceeding our dividends paid. We would comfortably meet our 5-year ambition, generating £1.8 billion of capital again in 2024. Cumulative net surplus generation of £0.8 billion demonstrates our efficient business model, a material headroom above our ambition.
So now moving on to the divisions. Operating profit of LGRI was up 10% to £886 million. This strong performance had two main drivers. First, the growing scale of CSM being released into earnings, up 19% year-on-year and £591 million; secondly, the expected investment margin, which is underpinned by the ongoing reliable performance of our well-managed and geographically diverse annuity asset portfolio; and by asset optimization, where higher-return assets are sourced to further enhance the profitability of the in-force portfolio.
In 2023, LGRI wrote £13.7 billion of new business. This includes both Boots transaction in the UK at £4.8 billion as well as our largest-ever transaction in the U.S. at $789 million. These volumes were written at strain levels, in line with our long-term expectations, demonstrating pricing discipline. Demand is accelerating in this market, and we remain uniquely positioned to capitalize on this global opportunity.
Moving on to Retail. Insurance operating profit was up 22% to £436 million. This strong performance was driven by predictable and ongoing profit releases from our growing CSM balance and improving mortality experience in the U.S., where we continue to move to post-pandemic norms. Whilst Insurance operating profit was significantly up, total operating profit was slightly down due to fintech valuation uplifts in ‘22, which did not repeat this year.
We wrote record new business volumes, both in U.S. Protection, which delivered 36% growth and which continues to benefit from our use of technology to improve our customer experience, and in Individual Annuities, where volumes of £1.4 billion reflect increased demand given the higher annuity rates on offer. Workplace also continues to grow, reaching 5.2 million customers. Solvency II new business value increased by 17% to £265 million, driven by U.S. Protection and Individual Annuities. We continue to focus on leveraging technology and scaling efficiencies across all our retail businesses to deliver great customer outcomes and business growth.
Moving on to LGC. Operating profit was level at £510 million, driven by a resilient performance from our alternative asset portfolio. In alternative finance, Pemberton continues to perform strongly, raising over €2.5 billion in 2023, taking the total amount raised to over €19 billion since 2014. Our diversified multi-tenure housing portfolio demonstrated the quality of its franchises, particularly against a more challenged market backdrop in the second half of the year. Profit before tax of £129 million reflects the unrealized mark-to-market impact of the higher interest rates and asset valuations. We remain confident in our ability to achieve our ambition of growing our alternative asset portfolio to £5 billion, while increasing third-party capital to over £25 billion by 2025.
Moving on to LGIM. Operating profit was £274 million, which primarily reflects the ongoing impact of the rate environment on AUM. Whilst closing AUM was only slightly down for the year, average AUM was down 12% over the course of the year, reflecting volatile markets. Revenue has been impacted to a lesser extent at just 7% due to LGIM’s conscious shift towards higher margin business.
Excluding UK defined benefit, where PRT is a beneficiary of improved funding positions, external net flows were positive at £1 billion, generating annualized net new revenue of £24 million, which demonstrates this higher margin point. We maintained a disciplined approach to cost management, with flat expenses in an inflationary environment. We continue to invest in modernizing our business and expanding our investment offering.
In addition, international AUM now represents 40% of the total, as we continue to diversify and extend our global reach. Our solvency ratio of 224% is strong and provides us with optionality. Over the year, we generated £1.8 billion of capital and deployed £0.4 billion to write record levels of new business. In combination, this resulted in net surplus generation of £1.4 billion, fully funding our dividend in 2023.
In closing, we have delivered a resilient set of financial results demonstrating, in particular, the predictable and growing earnings realized from our store of future profits within our Insurance division. We’ve continued to add to this store of profit in 2023 and expect it to grow further. We are confident of demand and so our performance in 2024. Our balance sheet remains strong, and we continue to see the benefits of the diversification and synergies of our business model.
Thank you. And I’ll now hand back to Antonio.
Antonio Simoes
Thank you, Jeff. So looking beyond the 2023 performance, what are my impressions on what is working day 47? Everything that I’ve seen in this first 2 months confirms what attracted me to Legal & General: a strong sense of purpose, the quality of our people and our performance track record.
Starting with purpose. I’m a firm believer that business strategy and culture cannot be separated. Legal & General this year will be 188 years old, and our proud heritage and our respected brand are huge strengths. And we have this authentic sense of purpose, which is reflected in the decisions that we take and in the work that we do. This purpose is also a big motivator for our people. It’s great for me to hear how people really love being part of Legal & General. We have a strong leadership team, and our people can grow their careers and thrive with us.
In terms of our performance track record, we have businesses that are market leading, but importantly, they have good synergies between them. And we have a great track record of both capital generation and a strong balance sheet, as we’ve just seen in our results today. We also have strong growth opportunities, and we have strategic optionality. But we cannot be complacent. Like all businesses, we have challenges, we operate in highly competitive markets and we are impacted by the changing macro environment. We need to continue to evolve and adapt to seize new opportunities, and we need to recognize where we can improve.
I’m very ambitious for our future. Macro trends that you can see on the left are creating dynamics and customer needs that Legal & General is well placed to address. First, as DB funding positions continue to improve, there is £6 trillion PRT opportunity in the markets where we operate, obviously, here in the UK, in the U.S., in Canada and the Netherlands. And of those £6 trillion, only 10% are currently with insurance companies, and we are well placed to capitalize on this. We had a record year in UK PRT last year. And in the U.S., as Jeff mentioned, we have written over $10 billion since we entered that market in 2015. Our position is supported both by our asset management client relationships. 88% of what we’ve done over the last 3 years in PRT came from LGIM, as well as our asset sourcing capabilities.
Second, global assets under management will continue to grow over the coming years. It’s a challenging industry, but the industry will continue to grow. And LGIM is the number one asset manager in the UK, with £1.2 trillion in assets, of which, as we’ve just seen, 40% are now international. Yes, we can prove our performance, and we are increasingly working with clients on higher-margin strategy. We saw that last year in the slide before as well as controlling our costs, which we did last year, despite inflation.
Thirdly, we are also expecting global private assets to continue to grow roughly by £9 trillion over the next 4 years. We have an established representation for investing in long-term productive assets, both here in the UK and internationally. And we have a portfolio of £4.5 billion in LGC. Fourthly, the UK DC pension pool is projected to reach £1.3 trillion by 2032, £1.3 trillion by 2032. So it’s actually crossing with DB in a couple of years’ time. And we are currently serving 5.2 million workplace pension members, and we manage roughly 23% of all the defined contribution assets in the UK. And finally, and linked to this, as savings responsibility shifts more towards the individual, customers need more support. And we have 12 million customers and members who trust us across Retail Protection and Savings.
So standing back, it’s clear that we are well positioned to take advantage of these opportunities given the combination of three things: our investments management expertise; our leadership in asset origination and sourcing; and our trusted brand and customer relationships.
So what are we doing about this? Over the last 2 months, I’ve been meeting shareholders and potential investors. I’ve been getting to know our teams and the business, and I’ve been working with the group management committee, my leadership team, to conduct a thorough review of all of our businesses and set out our future strategy. This work is still ongoing. It’s been 2 months. But at our Capital Markets event on the June 12, you can expect three things.
First, we will set out a clear strategy and a simpler investment case. This will continue to build on our strong purpose, that I mentioned earlier, and on our synergies between the different businesses. Second, an articulation of the growth drivers. Where is growth going to come from? As I said, we have significant growth potential in institutional retirement, in PRT, but we will detail our growth opportunities beyond PRT. This will include Retail, asset management in public and private markets, both in the UK and internationally. And finally, we will set out our capital allocation and our distribution policy and the financial metrics, by which you track our progress and hold us to account. I look forward to giving you more details on that on the 12th of June, but for now, back to the results.
Reflecting on this, our performance was resilient against a challenging economic backdrop. And importantly, we will achieve our 5-year targets by the end of this year. It’s great to be here at Legal & General. I like what I’ve seen in my first 2 months, strong purpose, great people and consistent performance, and there are significant growth opportunities ahead. We have started 2024 well, the year started well. And in June, we will set out how we will focus and invest to take advantage of those growth opportunities.
We now have time for questions, so I’d like to invite Jeff back on stage and also Andrew, Laura, Michelle and Bernie to join me here on stage, please.
Question-and-Answer Session
A – Antonio Simoes
So I think the easiest way to do this is to start from the right and then make my way to the left. So, maybe if you can state your name and institution. And then if you could stick to the usual three questions, that would be great. You can group them into three and they can be nine at the end of the day, but yes, yes.
Dominic O’Mahony
Dominic, BNP Paribas Exane. Antonio, I’m really excited to hear your more detailed thoughts in June. In the meantime, just firstly, a question on, I guess, the impact of bond yields on expected returns. So both in the PRT and, I guess, the Individual Annuities business and in LGC, are you seeing the market adjust for the sort of the 300 bps improvement in – or increase in bond yields, thinking about what IRR, the market solves for lock annuities? And similarly, in LGC, targets in 2021, the 300 bps ago, I’m wondering whether we should expect the 10% to 12% yield on the alternative assets to be higher. I guess the same for the non-alternatives. Second question just at LGC, Laura, when you think about the binding constraints in your growth in allocations to the alternatives, is it the availability of investment opportunities? Or is it the availability of cash? Is it essentially to muddle supply?
Third question, just on the annuity in-force book, going gangbusters, really volumes, CSM growth, what I observed is if you look at the OSG release from the in-force, you showed us the outlook for the OSG release from the in-force, it actually seems to have gone ever slightly backwards. And in fact, actually, I think it’s 0.8 delivered in ‘23. The disclosure is showing 0.7 for next year – or sorry, for 2024. Can you just walk me though what’s going on there? Am I just missing a feature there? Where is the growth actually landing in the OSG?
Antonio Simoes
Great. Thank you, Dominic. Maybe Jeff, I’ll come to you on the third question, and maybe you can also mention the impact of bond deals and expected returns. And then Laura, I’ll come to you on that, but also the second question on LGC, yes. Jeff?
Jeff Davies
Sure. Yes. I’m going to do this in reverse order, if you like yes, the OSG, yes, we’ve had lots of debate over this. It’s trying to compare like with like is what’s difficult. So the – what’s really happened is we’re earning more returns on free assets, if you like. But the SCR, the capital requirement has fallen. And so more of the capital requirement is being covered by asset in the Annuity business, and less is being covered by assets from LGC, if you like, where we get the higher returns. So there was more – there’s more cash and slightly lower return assets, which are sitting in Andrew’s business being allocated to that business. So again, slightly lower returns as well as a slightly lower SCR running off.
So on a like-for-like basis, you would have only have seen a smaller amount of capital running off. But actually, there’s two things happening: the total cap requirements going to a back, and it with slightly lower return. We still got the assets elsewhere, which is why the total OSG stays the same. But if you just look at the Annuity business, it’s almost more self-financing, if you like. And it’s using less of the extra assets sitting around in the Insurance business. So it’s really just how you compare those. Interesting on yields, yes, the PRT market, to some extent, is obviously – it’s always driven spreads, I mean, rather than actual yields and what you’re looking for there. I mean, at big picture level, we compare to our cost of capital, cost of equity, cost of capital when we’re looking at these returns. And to the extent risk-free feeds into that, that’s clearly reflected in what we’re looking for. And so we’re very happy with the returns we’re making on the Annuity business, PRT business. I think we actually said at the half year, we had slowed some of the investment in LGC, and Laura can pick this up, because we weren’t seeing the returns commensurate with what we would expect. The market hadn’t repriced quickly enough. And to some extent, even some of the DI back in Annuity book as well. Laura?
Antonio Simoes
And that’s true for the market overall, right? So that has happened to us and to everybody else. Laura, on LGC?
Laura Mason
Just in terms of your key points, Dom, in terms of the 300 basis points higher Jeff’s alluded to it, we did slow down investing because we’re waiting for the market to reprice. And you’re right, we should expect higher returns for the risk going forward. And I think in terms of your question on availability of cash versus investments, I mean, we very deliberately positioned our strategy around sectors where we knew there was a huge demand for investment. We saw it plays very nicely really to our strategy, where we’re now starting moving from just investing in our own balance sheet to bringing third-party capital, in conjunction with LGIM. So the opportunities for us there, I’d say if anything, are continuing to grow from where we set out our strategy a number of years ago.
Antonio Simoes
Thank you.
Abid Hussain
It’s Abid Hussain from Panmure Gordon. Three questions, if I can. First one on LGIM, it’s actually a two-part question, apologies. The cost-to-income ratio has been elevated for quite a while. Do you see a path for that coming down materially? And so what is that path? And the second part is, does it make sense for you to continue to push into active mandates given the general pressure on margins in that space? So that’s the first question. And then the second one is on GP Investments. I saw that there’s a write-down on the Onto investment. Is there any other investments in the amber or red bucket in terms of outlook or valuations? Any color on that would be helpful. And then just, finally, on longevity. I thought the general trend here was that life expectancies more recently have started to shorten. So, just slightly confused with the negative variance in the U.S. So – and if they are shortening, should we not also have seen a release – longevity release on the annuity book?
Antonio Simoes
Yes. Thank you, Abid. So I’ll take the first and comment on the second. I’ll ask you, Michelle, if you could add to LGIM. And then Jeff will come to you on longevity. So on LGIM, so you know this because you know the industry, it was a challenging year for the industry. Actually, interestingly, we finished the year with the rally that we had towards December. We finished the year with AUM more stable. But overall, we had AUM on average down 12% compared to 2022. So the – I know you asked the cost-to-income question, but there’s a ratio.
So starting with the revenues, that was the challenge. But you can actually see, and maybe this links to the second part, 1b of your question, you can see that taking out the outflows of DB, which we benefited on Andrew’s business on the other side because a lot of what’s left from LGIM became PRT, you can see that excluding that, we had £0.9 billion, so almost £1 billion of positive net flows that generated £24 million of positive ANNR. So our strategy to go towards more higher margin products, it’s working. There is more to do there.
And then second, the cost control, and Michelle can talk to this, in 2023, despite inflation, we held costs broadly flat. So yes, our revenues came down. And therefore, our cost to income came up. You see there what I’ve just mentioned. Going forward, today is about the full year results. On the 12th of June, I will talk about strategy. But it is a business that is a strong contributor to Legal & General, and we want to build on it.
Just – I’ll come to Michelle, but just Onto. Onto was a first half. So in the second half, we didn’t have any other similar write-downs. I said – just I’ll repeat exactly the same words, we are doing a full review of all of our businesses. As you’d expect, there’s a lot of strong businesses to build upon. But what we’ll come back to you on the June 12 is where are we growing, what are the growth opportunities. But also you’d expect me as a new CEO standing in front of you to do a full review of all of our businesses. So, not anything else to say today in terms of 2023 results, but you can expect to hear more on the June 12. Michelle, do you want to add a bit more on asset management? And then I’ll come to Jeff for longevity.
Michelle Scrimgeour
Thanks, Antonio. I mean – and we should recognize it’s a challenging industry. And actually, when I look at cost-income ratios across the board, we’re in the pack, so elevated, but in the pack. And as Antonio has said that it is not about cost, it’s about revenue. And actually, the long-term strategy to diversify our business to internationalize our business is beginning to pay back. We’re confident that is the right strategy. And so I, too, have an important part to play in that. What you’ll continue to see from us there is discipline and focus, and execution, and that will just be part and parcel of how we run the business day to day.
Antonio Simoes
Jeff, longevity.
Jeff Davies
So you’re right. As in, we are seeing a slowdown in longevity. We have seen adverse mortality. It was mostly the front end of ‘23. It was – if you really get into by the end of ‘23, we’re back at sort of 2019 levels of mortality, especially in the Annuity portfolio. But we absolutely think that we will see that continue to trend down to old levels with flu, COVID backlogs in general, in the health services of U.S. and UK. What you see in our numbers is you see we had a provision, and so – but we still had slightly more adverse experience in the U.S. It didn’t – we said it didn’t improve quite as quickly, but it’s significantly better than the previous year. Towards the end of the year, actually and the start of this, we’re starting to see more positive results in the U.S., how long may that continue for many reasons.
That pesky IFRS 17 means the release on the longevity that we did put through gets put into the CSM and deferred over time. So you don’t see as much coming through in the P&L, whereas you recognize the adverse mortality experience in the U.S. straight away. So yes, we put through, you saw in my slide, the CSM increase as a result of the longevity increase. And so that is already coming through. And we took, again, a prudent move to the next table. We believe that there will be adverse experience and poor mortality for a period of time before we return to normal levels.
Antonio Simoes
Yes. Thank you. Good. To your right, and then to the end.
Mandeep Jagpal
Hey, good morning. Mandeep Jagpal, RBC Capital Markets. Three questions for me, please. First one on the SII margin for UK PRT, looked like it came down from 7.4% – from 8.9% last year to 7.4% this year. What were the drivers there? And what is the outlook for this margin going forward? It looked like the IFRS margins were flatter. Second one is on funded re. You’ve utilized an increasing level of funded re last year. How do you evaluate which deals to use funded re on? And what level should we expect to be utilized going forward, especially with some of the large deals in the pipeline? And finally, on LGIM, outflows from UK DB were the key driver of overall net outflows. Aside from offering these clients PRT, are you looking at whether there are other asset management products that you could develop to keep these flows within the group?
Antonio Simoes
Yes. Thanks. Actually, that’s all very good questions. So why don’t I just do the key points first. And then I think, Andrew, I’ll ask you to comment on the first and the second. Maybe, Jeff, you want to cover particularly the difference between the IFRS and Solvency II sort of different evolution of the two margins. And then I know that we have some exciting plans we’ve announced to the market in terms of Bridge, I think it’s called, Michelle, so I’ll come to you on that.
So in terms of funded re, I want to make a point on that. So as you know, we use funded reinsurance as a way to diversify risk. And overall, it’s still a small proportion of our overall annuity book. And we want to continue to do this in a controlled manner, but it is a logical tool for us to continue to use. And as you saw, we did that in the Boots deal and more in 2023. Do you want to cover, maybe in order, maybe Jeff, first, just the difference between the margins? I’ll come to Andrew, and then I’ll come to Michelle.
Jeff Davies
Sure. Yes, we’ll do it that way. Yes. So you’re right. It’s funny because it went down for Solvency II, but went up for IFRS. It was broadly flat you said, but it definitely went up. And it’s just a different basis around the different use of funded re and the different asset mix as a – one has more prudence in one basis, one doesn’t in another basis. The way we look at it is these are broadly in-line with where we’d expect them to be, long-term average. They’re very dependent on the mix of business with duration that you’ve got in there, the sort of assets you put to work. So we are absolutely in-line with what we’d expect our returns to be.
And you say what’s the outlook for them, Andrew will talk about it some more. I’m sure about the big demand in the market, but we will only do the business if it’s hitting the returns that we wanted to. And so we – you expect a certain level of returns from us in line with these metrics. We continue to do that. We continue to focus on low-strain levels, good VNB metrics, good IFRS, CSM being added each time. And so we’re very comfortable with where these are. I mean, it’s – any half period or even a year, it’s very difficult, the movements between them, because there’s so much that goes on behind them.
Antonio Simoes
And Mandeep, thank you for the question. We did debate that a lot, actually, the two numbers. But I think the point that Jeff is making is very important. The discipline, and this is important for me as a new CEO to say, our discipline in pricing is the same that it was 6 months ago and 12 months ago. So we are – Andrew should talk to what is a very healthy pipeline of PRT, but we’re being disciplined from a pricing perspective. And what you see in the second half is good pricing in those two metrics, good profitability. Andrew?
Andrew Kail
Yes. So you’re right. You’ve seen this year a high level of funded reinsurance in the book than we’ve used before. We think about that be carefully. It’s part of the strategy compared to our own – sort of our own assets, our own returns, making sure, as Jeff said, we get the right return on our capital. And funded reinsurance has been important for us to deliver the results we’ve delivered this year. We look at it at a portfolio level and an individual deal level, too, so depending on the size of the deal. And as you say, the larger the transaction, the – maybe the more likely we’ll be to use funded reinsurance. But it’s something we think about very carefully. And certainly, that controls the processes and how we think about that is something we evaluate, say, across the business.
Antonio Simoes
Yes. And the final question was on DB. Just to mention the statistic again. Over the last 3 years, 88% of everything we did on the PRT side came from LGIM. So not all of those schemes were just dealing with Belgium. Of course, they had other clients. I’d love for us to be the single asset manager working with them. But there is a huge overlap. Actually, last year, that overlap was even higher. It was close to 100%. And Michelle, maybe you want to talk about Bridge, the launch…
Michelle Scrimgeour
Yes. And maybe just to develop that a little bit. So I mean, important to say that it’s not a surprise what clients are doing, entirely rational response to what’s going on with rates. And the way that LGIM works with clients over many, many years is to get them into a position that, at some point, they could go to transfer – the pension was transferred. And so that works very well. So what you’re seeing from clients is an entirely rational response to reshaping. And it’s important to know that the – that some of these outflows are actually reshaping our portfolio. So it’s how do they take what they have today and get themselves in a better position given where rates are. And that is something we pay a lot of attention to.
What Antonio is referring to here is, is that works better for some of our larger clients. There are a bulk of medium-sized and smaller clients who can’t necessarily access that. And we are looking at ways in which we can work with them to bring them to a similar outcome. And actually, I think it’s really exciting. But part of what we also do, so the LDI and Solutions book is a big part of what we do. There is also how do we think about alternatives for many of those clients depending on where they are and how well funded they are, but that’s when the whole organization comes together. So actually, it is – I’d say it’s an entirely rational response. It’s something we think about very, very carefully and work closely with our clients on.
Antonio Simoes
Thank you. Thank you, Michelle. Thank you, Mandeep. Andrew, behind you, yes.
Andrew Crean
Good morning. It’s Andrew Crean, Autonomous. Could you tell us, on the treasury HoldCo assets, what is – how much do you want to hold at HoldCo? Secondly, could you talk a bit more about development of private assets? You’ve got an awful lot of PE competitors who are looking for liabilities. You have the liabilities, but do you need to build your capability in private assets? And then thirdly, you talked, Antonio, about a simpler business model or a simple way of communicating. And I just wonder, there’s an awful lot of noise now in solvency – in IFRS 17 as to whether you switch the emphasis and communicate to us through Solvency II metrics.
Antonio Simoes
Well, thank you for the suggestion on the last one. But Andrew, to your point, I think, maybe a reflection, and I’ll ask Jeff to answer HoldCo and maybe both Michelle and Laura to say a word about private assets. But just on your point, I have been meeting shareholders, but also potential investors. And in this side of the Atlantic as most the shareholders on the other side was mostly potential investors. And I think there’s something about – that comment for me is about simplifying the investment narrative, the investment case. I think we need to talk about our strategy first, and I was very deliberate about saying a clear strategy, and then a simpler investment case. And to your point about metrics, I’m sure we’ll take that on board. So without commenting on that, Jeff. So treasury HoldCo. And can you answer that? And then I’ll jump to Michelle and to Laura.
Jeff Davies
Sure. Yes. I mean, the simple answer is how much – is as much as we need. But I don’t mean that in that the way we absolutely run the business is we remit from – especially the Insurance business from LGAS, what is required to the business. I mean, treasury only has a mandate to sit on cash. So we don’t want to be sitting on cash, whereas we can plan the liquidity requirements for the insurance business and invest in higher-yielding assets as required rather than move them out and just sit on them, the group. So what we do over our plan period, over each year is we remit, we see how much LGIM makes, how much it’s passing up, a couple of other avenues, and then we basically move the rest out to the Insurance business, so we have what we need at HoldCo cash.
Should we change our view of how much we need over a 12, 18-month period, we will remit more up and, therefore, sit on that for a while before we spend it. So it’s not that there’s any issue in liquidity or access to cash. It’s a case of it makes sense for us to hold a sensible amount there that we need over a period of time, subject to the next dividend that we’re going to then bring out of the Insurance business. So you’ve seen the levels. It usually is about the same level, £1.2 billion, £1.5 billion, £1.7 billion, depending on the timing of dividends that we passed up will be what you’ll see if you look back over the years and what we’ve been holding there. And then the rest of the cash and liquidity sits in the Insurance business.
Antonio Simoes
Michelle, do you want to start with real assets within LGIM? And then we could, Laura, talk about LGC, please?
Michelle Scrimgeour
Yes. And Laura and I work very closely together. I think it’s just as important that as we’re going out to clients, that is how the market sees what we do. On the investment management side, we have a strong position in real estate equity. We have a very strong position in private credit. Of course, we are managing assets on behalf of the firm’s own balance sheet and on behalf of the annuity book. We are externalizing that, and part of that is by adding capability. We bought in a team in the U.S. to put out U.S. real estate equity. It’s also about how we take what we’ve originated already out to clients, some of the partnerships that we have already. A really good example of that is with a fund that we have launched with NTR. It’s an investee company of LGC. We’ve raised €400 million, so far, and clean power fund, and we expect that to continue to grow. That’s one example of what we’re doing to bring LGC’s capabilities to LGIM third-party clients.
Laura Mason
And the only thing I would add is just in terms of, I suppose, one of the – one of our secret sauces on – in winning PRT business is being understanding – having the understanding of liabilities that we do and the ability to originate assets that work extremely well for PRT in terms of the duration, the spreads, the inflation linkages, which I do think we have quite, I suppose, an advantage over some of the newer players. But the short answer to your question is, yes, we need to keep evolving that to keep ahead.
Antonio Simoes
Yes. And Andrew, in my £9 trillion number I gave earlier, giving quite a lot of big numbers, we see in the global asset management industry, private assets to continue to be a big growth. And implied in your question was do we need to do it ourselves or do we do it through others. We believe we should be doing it to ourselves, and we’ll come back also on the 12th of June in terms of what that – what role does that play from a strategy going forward. Thank you. And we finished that section. I’m going to move the – and then I’ll do some online. Farooq, yes. Sorry, yes, starting in the front. I’ll come back to – sorry. Very orderly.
Farooq Hanif
Hi, thank you very much. You – I think in the presentation, Antonio, you gave on flavors around the CMD. You’re talking about your kind of existing franchises, and I think you’re being quite careful about that. But it’s normal for the markets to worry when somebody new comes in, that you might look to build inorganically. So what can you say about that transformationally or bolt-on? Do you think, for example, you mentioned private assets, would that be something to look at?
Secondly, maybe a slightly question. Do you think you have lots of surplus capital? So I mean, there are lots of ways of looking at that. You’ve reduced your interest rate sensitivity. So I would say, yes, you do. What about rating agencies? What about leverage, cash? I mean, what – how would you answer that question basically, I guess? And maybe a very last question. Given all the PRA noise on funded re, are you very happy that you’re doing all of the stress tests and doing all of the modeling around that already that the PRA is going to ask for anyway? Thank you.
Antonio Simoes
Thank you for the very good questions. Maybe on that, the easier answer starting from the last one is, as I said, we use it in a considered and controlled manner, and it is a small part of our overall book. So we will continue to work with the PRA, and so we’re reasonably comfortable there. Just on the other two. So in terms of M&A, I think there’s a sequence to this, right, which is we set out our refreshed strategy to you on the 12th of June, which I don’t believe in M&A for the sake of M&A. We need to be very clear about how do we build on a very strong set of business. And so would bolt-on acquisitions be part of that potentially? But I would – I’m – I have a healthy skepticism about M&A in general, so I think we really need – we have a great business to build on. A lot of the opportunities in front of us are organic opportunities, as I mentioned in my other slide earlier. None of that necessarily implied M&A, but we may need at some point to literally bolt-on capabilities that we don’t have. So I would be open-minded about that.
In terms of Solvency II, I think we need to overall capital position. So we need to step back, which is – well, first, we’ve just paid a 5% dividend, and the Board is committed to paying a 5% dividend for 2024. And what we will do in June again is to outline what is our strategy and what is our capital allocation and capital distribution policy, which actually is in line with what we said at the half year. We compare the returns of growth opportunities with the alternative, which is to return capital to shareholders, either through dividends or share buybacks. So that is our position. You’re right that within that, we then look at both capital and liquidity and other aspects. But I don’t think there’s much more I would like to say on that, unless you feel strongly that there’s something you want to add.
Jeff Davies
No. Except I would – just a slight word of caution. I know it’s very exciting that we’re in a downturn, and we’ve lowered the sensitivities. We do think they’ll go up a tiny bit. We were a bit longer at the year-end. And so we’re – it’s 10% or 11%. It might be 13% in our sort of medium-term is where we’d possibly look at.
Antonio Simoes
Yes.
Jeff Davies
Maybe not. I mean, it’s a great position to be in, as you said. We’ve removed a lot of sensitivity from the balance.
Antonio Simoes
I agree. I think the number today is good news in that from a sensitivity perspective. It gives a strategic optionality. We need to come back clear – clearly on the 12th of June what is that capital return framework, which, by the way, was also one of the comments we have from Fahad, so I can just take that one off.
Can we expect the capital return framework on the 12th of June? I’m reading this from the online questions. So Andy. And I’ll come back to you.
Andy Sinclair
Thank you. Three for me as usual. Andy Sinclair from Bank of America. My first question I always ask is LGC’s cash generation. Can you give us that figure and how that compares to operating profit, some – the sources of that cash? Second question was just on the solvency UK reforms coming through. From what we’ve seen so far, what’s actually changed in practice for Legal & General? Has anything really changed, other than getting a few extra percentage points to the Solvency II ratio? The third question was just on property revaluations, real estate. What have you seen over the past year? How have you revalued the portfolio over the past year? Thank you.
Antonio Simoes
Jeff, can you…
Jeff Davies
Sure. Yes. I can do all of those. Yes, the LGC cash, I knew it will come. So yes, it’s a good, healthy number. In excess of the operating profit, we’re looking at 600 plus. And so as we’ve said, it’ll vary period-on-period, and we choose to reinvest a lot of that back into the business. So that’s a good healthy number, which again gives us optionality over time, what do we decide to do with that, when do we choose to invest it, when do we choose to slow investment around that. Yes, Solvency II reforms and, of course, the only part that’s really been enacted so far is the risk margin. So that’s really all that we’ve seen. We’re still working very, very closely. Mr. Stedman is still here and working with Brian in his new role, working with the PRA and with the industry about what it means. We’ve got people in Andrew’s team really challenging what that can mean for what are the right asset classes to go in. I think there are a couple of asset class we’re potentially looking at that could benefit from the sort of highly predictable.
But as yet, there’s no real economics we’re putting through. But clearly, we like the removal of what was called the BBB cliff. The risk of downgrade to sub-investment grade is good around risk management. It’s a good thing for the industry. It removes some of those cliff-edge risks that would be there and selling in extreme events, etcetera. So that’s very positive in the way that we look at things. But we’ll continue to work with the PRA and when the next version comes out, we’ll be able to put numbers on it ourselves and think about what does that really mean. And we’ll start to see that coming through in assets.
Property revaluations, as ever, there’s no one single number. But you saw our investment variance, quite a bit in the Annuity portfolio is the residual value notes, as we’ve called them, the residual bits of property that we have on the very long leases. So for example, 80% of our offices are to the government, HMRC. They have 22-year leases, but some of that is a vacant possession value of the bit of property that we don’t put back the annuities. If those have come down about 10% or so, just because you just reflect higher rates and higher return assumptions, that gives you a couple of hundred million in there. It’s just mark-to-market that then cash flows for 20-something years. So this is about what is that property worth in 20 years. Do we really expect to have it on our balance sheet at that point, etcetera? So that’s really what happened. A lot of the assets in Laura’s world have been something more resilient because these specialized commercial real estate, we’ve definitely seen that. Some of it has been catch-up because private assets takes a bit longer to come through.
Antonio Simoes
Thank you. Go to the second row, yes. I’ll come back to you, yes. I’ll come for you, yes.
Larissa Van Deventer
Thank you. I’m Larissa Van Deventer from Barclays. Three questions, one on Bulk, one on LGR and then one on LGC, please. In the past, we have seen bulk annuity volumes heavily weighted towards the second half of the year. With the current momentum in volumes, do we expect that to be the same? And can we reasonably assume that L&G will continue to purchase those aggressively until we have the new capital plan?
On LGR, if we consider the CSM runoff, if you look at the accretive interest and the new business, and you take off what was recognized in earnings, it was broadly flat, and then the positive growth came from assumption changes. How should we think about the drivers of growth for the LGR CSM going forward? And lastly, on LGC, tough half year for housing. Shall we expect you to remain housing dominant? And how do you – I will and if – and how do you see the release of component parts of that portfolio evolving over time?
Antonio Simoes
Great. Thank you, Larissa, and thank you for being patient earlier because I know you had the microphone, and we took it away from you. So first was the second half – first half, second half from a PRT perspective. Then Retail, we will come to Bernie, and then Laura in terms of LGC. Just on – and maybe Andrew and/or Jeff may want to comment. But we do this – see this profile skewed towards the second half. It’s true, this year as well. But as Andrew, you mentioned earlier, the – we have a healthy pipeline of PRT into 2024. As you know, the – we had a record market as well, not just us as Legal & General. And we expect the projections are the same for 2024. Do you want to add anything on that, Andrew?
Andrew Kail
Yes. Maybe just a few comments on the general pipeline, Larissa. I mean, I think in the industry there’s also a sort of deep intake of breath and people relax for Christmas, and you start to get in the new year. I mean, if you just look at generally, and everyone in the room will see the estimates like I do, the size of the pipeline, the most interesting stat I heard in the last few weeks is one of the employee benefit consultancy segments, some £250 billion of schemes now in the UK that are buyout funding.
So if you think about the level of potential demand, that will be 5 years of transactions, if you go on ‘23 volumes and a much higher multiple of previous years. So I think it’s fair to say, at current levels of funding, there’s the ability for the trustees to look with their advisers for buyouts is very high, and that’s what – we would expect that the ‘24 volumes will be at or around the ‘23 level, so £50 billion or so of transactions, potentially even higher.
I mean, a few things to remember. One is it is definitely seasonal and that we are seeing now at the current time, probably 15 transactions that are being shown to us over £1 billion. Those big transactions are likely – not many of us will complete in the first half, which is even if they’re live now, they’ll take some time to complete while you get the – you’ll get the weighting. And then when it comes to the very large schemes, how they transact and when their transact makes a big difference to the market. And so if the very large schemes don’t quite get over the line by the December 31, they’ll go into next year or they split the transaction to multiple parts. And therefore, the very large scheme becomes a small – a number of smaller schemes. I think it’s still second half weighted, but still very high levels of demand out there from trusting their advisers to ask us to quote on transaction, which obviously we are.
Antonio Simoes
And just to manage expectations, and this is an important point, it is very lumpy, right. Maybe that’s an obvious thing to say. But if – have we not done Boots right at the end of the year, and let’s say the Boots had ended up being in January, we would be showing you a very different – well, we would probably be talking about that number. But so for 2024, expect the same thing because some of the schemes are quite lumpy. So, in a way, it may well be that I am here in August talking to you about a great first half, where some of those deals might end up being in the second half. So, it’s lumpier than, let’s say, Bernie’s business, right, where we know what is happening in individual annuities or in protection because it’s more of a retail business, so just to state the obvious. Maybe on the second question, maybe do you want to give a broader view on CSM, and I am – we haven’t talked about retail, but maybe you should answer first, Jeff, and then Bernie.
Jeff Davies
Yes. I think, Larissa, your question was more the bigger picture that we had added how much CSM, how much did we run off and then where the – where does the growth come in. It was interesting because Andrew did a different number. He said it was growing at 4%, so yes, exactly. When is the LGR, in the retail piece with the individual annuities in it, yes, that’s right. Well, actually that’s – there is a general point on CSM runoff, and Bernie can comment, because actually, the biggest influence was retail protection probably last year, I would say. There is a general point that, yes, we are showing good growth without the longevity. And I think it’s important to say that even without the profits of the businesses grow at a faster rate than the actual CSM because you get growth in the expected returns, you get some of the back book optimization, the risk adjustment growth. And so we are in line with sort of where we had said before that we would expect a profit, say, on the annuity book to grow 6%, 7%, if you are writing £10 billion per annum from what you are adding. And actually, we are seeing more of that come through in the higher rates as well because you get slightly faster runoff, etcetera, and higher investment accretion around that. So, I think that’s – it’s useful to look at that rather than just the pure CSM growth placement of the stuff.
Antonio Simoes
Yes. It’s a good point. On retail, Bernie?
Bernie Hickman
Yes. And there is, I think a new disclosure, Jeff, on the CSM kind of runoff, so that’s in there for you. But I mean end of the day, it’s going to follow the performance of the business. And last year, we have got three great reads that protection businesses, obviously, U.S. is doing really well, and that’s adding healthy amounts of CSM from new business perspective. Group protection is also well, but it’s quite short-term business. And retail protection was – one was impacted by higher interest rates, and the mortgage market was also very subdued last year. And so volumes were down. As we say frequently, we take a very disciplined approach to pricing as well. And so there was some poor quality business that we deliberately brought back from last year. We are happy for our competitors to take on, and that will be coming through to their book going forward. So, we are expecting an improvement in margins, and that will flow through to the CSM going forward.
Antonio Simoes
Thank you, Bernie. And housing, LGC.
Laura Mason
Yes. So, you are right, housing has been a tough year for housing, particularly private for sale. And having said that, I do think Cala has performed relatively well. I mean there has been a lot of analysis of the listed house builders. But to put that into perspective, sales rates for Cala are at a level that they were sort of pre-COVID, so a very good sort of sales rate per site. Our average sales price is sort of above or just tiny a bit above where it was in 2022, so relatively really good performance. I think in terms of the second part of your question in terms of the sort of overall portfolio and the sort of weightings, probably the best way to think about that is sort of three buckets. Yes, housing, Cala is part of that. We also have our affordable housing business, our rental businesses. The second bucket being around clean energy, climate transition and specialist commercial real estate, so digital infrastructure, what we are doing in life sciences and with universities. And the third, alternative finance, which includes both Pemberton and venture capital. So, some really good tailwinds in those other buckets, particularly private credit in Pemberton and climate transition and commercial real estate, where it’s going in terms of the need for digital infrastructure, the need for universities to have different types of accommodation, which we are working very closely in some of our partnerships with – in both Oxford and Manchester. So, definitely the portfolio is becoming more diverse in terms of the different opportunities we have going forward.
Antonio Simoes
Thank you, Laura. Thank you, Larissa. I think Rhea had a hand up there. Yes. Thank you.
Rhea Shah
Thanks. Rhea Shah, Deutsche Bank. Three questions, so the first, just going back to LGC. During your Capital Markets Day a couple of years ago, you mentioned the ambition for £500 million to £600 million of operating profit for 2025. Are you still on track for that, even with housing maybe being a bit slower? And then secondly, around LGIM, I mean 40% of the AUM is now international. Do you intend to grow that a bit more? And if you do, would that be more towards higher-margin assets and to grow the revenues? And then thirdly, just around consumer duty. The back book implementation will be happening in July. How does that affect you? And just more broadly, Antonio, you mentioned that you have 12 million customers. How are you thinking about that from a wider consumer duty and support standpoint?
Antonio Simoes
Thank you, Rhea. So Laura, if you can answer on LGC just – and then I will ask – briefly, let’s make the question – the answers brief and shorter. From an LGIM perspective, we did say that not only it’s 40%, but it’s been growing 80% since 2018. So, the international parts of LGIM has been growing faster, and you would expect that to continue. From a strategic perspective, we will come back more on the 12th of June. So, maybe there is no need Michelle to repeat that. And on consumer duty, we have implemented, we are implementing, we have implemented consumer duty. Maybe Bernie can give us sort of just a quick word on that because it impacts most – all of our businesses, but particularly retail, Laura, £500 million to £600 million?
Laura Mason
Yes. I think we actually said that by the end of 2025, we would have £600 million to £700 million of operating profit in total in aggregate across LGC as well as having £25 billion of third-party assets under management, and we are on track. So, both – hitting both of those targets despite, as you say, some – of the sort of headwinds we have seen, particularly in the housing market over the recent year.
Antonio Simoes
Thank you. And Bernie, on customer duty?
Bernie Hickman
Yes. So look, there has been a huge amount of activity, as you would expect, you would have seen from other companies as well. It has raised the bar, and we – the Board has been giving it a lot of focus and attention as is quite appropriate. What we would say on the back book, we have done a number of transactions over the years, which meant we have sold, yes, three back books, personal investing and LGIM mature savings as well, so the GI business as well. So, we don’t have a lot of back books customers and policies to look at, which is a good thing that I think they are going to be even more challenging than the front book given, yes, they go back over a long period of time. So, we are feeling quite happy about the transactions that have been done a few years ago from a consumer duty point of view. But generally, raising the bar across the board, yes, new MI packs, new Board reporting is going on. So, huge amount of activity from the team to make sure we are really focusing on delivering great customer outcomes over the long-term, which will have a lot of positive commercial benefits as well. So, we are focusing on that, getting really – yes, and understanding where our customers do and don’t understand our policies, and our policy literature is an ongoing task that is really going to help our communication to our customers. So, it’s delivering a lot of good things as well as it has been, obviously, a lot of new activities to generate.
Antonio Simoes
And just to add, it is a big focus of mine as the group CEO and of the Board. So, just to reassure you on that.
Andrew Baker
Hi. Andrew Baker, Citi. I will stick with the trend of three questions, if that’s okay. First is on the BPA market. So, I appreciate your comments on the high demand. What about on the supply side, there has been some headlines around three potential new entrants in the UK this year. Do you expect that to have any impact on the competitive environment there? And then the second one, I guess just a clarification of your thinking around the dividend and specifically around this – the nuance around the longevity assumption changes and the negative drag from investment variances if you continue to have longevity assumption changes. I understand that IFRS profits isn’t really the driver of your dividends, but that will reduce your dividend cover on that metric. Does that – does the IFRS dividend cover come into your thinking, if at all, when you are thinking about that dividend going forward? And then third one, just a quick one on the LGRI investment margin, it was down second half versus first half, can you just talk through some of the moving pieces there and how we should think about this one going forward? Thank you.
Antonio Simoes
Thank you, Andrew. Just on – maybe I will take the first one, actually, and the other two, Jeff, I will ask you to cover, so the dividend cover point and the LGRI investment margin. On the supply and demand from a BPA perspective, first, I wouldn’t comment on rumors of other players coming into the market. But there is quite a lot of interest in the market, which I take from a positive perspective. Both public and private capital wanting to come into this space validates what is a key part of our own business model, and we have been doing this longer than anybody else. So, I think I see it from a strategic perspective as a good thing. What we have seen so far is that sort of supply-demand is not changing the economics that we have seen in 2023. The market continues to be very competitive. It was already very competitive. And there are deals that we want to from a pricing discipline perspective. Yes, we will need to keep on watching the space. There is nothing that now, standing here on the 6th of March, changes the dynamic of what we had in 2023. But it may well change, and we need to keep close to that. Jeff?
Jeff Davies
Dividend, that’s fine, yes. Yes, I mean broadly, you answered it yourself, yes, we don’t pay that much attention to it. We have plenty of distributable reserves, etcetera, and we talked about that on the transition to IFRS 17. We would look at what’s the underlying growth and profitability of the business. And clearly, we would take those sorts of impacts from the longevity releases out. That number will change, of course, as rates environment. So, if rates come down a bit, and we have locked in more business, then we will have – it could – the rate could be positive. If rates were over 0.5%, again, let’s hope not. And so we, therefore, would sort of take that out in our thinking because it’s not a constraint on there and then look at some sort of underlying. On the margin, I mean there is always second order impacts, but I think there was certainly more back book optimization probably in the first half than the second half. So, you certainly couldn’t double that up, if you like. Some of that was, as someone has said before, a lot of volume done in the second half. And also the assets we are sourcing, we have put those to new business versus putting them against back book optimization. So, that’s broadly what’s happened there.
Antonio Simoes
Perfect. Thank you. Next question?
Nasib Ahmed
Nasib Ahmed from UBS. So, first question on basically the government’s focusing a lot on DB Solutions via public sector consolidators or super funds. How do you see L&G competing with that? Michelle, to your point, you are helping some of the smaller schemes. What solutions do you have? I think you have got APP and ISS. I hope I have got those acronyms right. Are those helping in that space? And then secondly, Jeff, you mentioned the sensitivity on interest rate is going up on a Solvency II basis. But I think in the IFRS disclosure in the footnote, you say January 2024, you are putting more inflation and interest rate hedging. So, does that come down again in 2024 on the Solvency II basis as well? And then on the investment variance, I noticed in LGIM, there is a cost provision for some of the partnerships. I think State Street and Charles River, are there more to come, or any more details on that provision itself? Thanks.
Antonio Simoes
Thank you. Thank you, Nasib. So, Jeff, why don’t you start in reverse order, you answer those two, the investment provision. And actually, there was a question online, which I can see here on, can you split – it was a big – the bigger question about the £1.6 billion, so maybe you could try to mention the small one and the big one there, and then come back with the interest rates hedging. And I will talk about the government.
Jeff Davies
Sure. Yes, the cost provision, I mean it is just being prudent about the implementation of the operating model changes in LGIM. This – the outsourcing to State Street, as Antonio said, we have started to go live on that. We have got more to go.
Antonio Simoes
Yes. Phase 1 done.
Jeff Davies
And so we all like to think we are brilliant to change, but generally, they overrun. So, we are being really prudent on that and just trying to make sure that we have made some provision for that. We are hoping Michelle beats it with her team, and we release it in the future. And we will watch this.
Michelle Scrimgeour
That is not the target.
Jeff Davies
The rate sensitivity, yes, all I was saying was we were slightly longer than we expected to be at the end of December, which is why the rates – the Solvency II sensitivity was just marginally lower. And so I didn’t want to bake it in the 10%, 11% because we think it will just go up a couple of percent. The Solvency II and IFRS are now actually quite separate because we have been using the designation of assets under IFRS 9, as we have said, and so we have managed to get quite close now to where we wanted. It’s pretty neutral if you look at that disclosure. We are amazed, you got that impressive. Then there is a footnote that says in January, we did a bit more because Boots landed in December. We did a bit more in January. So, the IFRS is £25 million per 100 basis points down. It’s slightly convex, so up. We are still going to work on reducing that. But we are very happy with where that’s been. And similarly, for the same reason, we did some stuff on inflation because the Boots landed, and it all takes time. So, we thought it was more useful to give you updated IFRS sensitivities as well. But broadly, less happening on the Solvency II, just 1 basis point or 2 basis points up, we suspect, when we have changed everything around. And did you want to…
Antonio Simoes
No, I will do – yes. Do you want to just do that?
Jeff Davies
Yes. It was just sort of what’s the split, the one – I think most people have got there, what’s the split of the investment variance, the 1.5, 1.6.
Antonio Simoes
Just the overall investment variance.
Jeff Davies
And obviously, there is £500 million or so, which is one is quick, obviously longevity. We talked about the buyout of our own pension scheme where we put that through. They are very much sort of a one-off, no pension scheme ever again. The government is very happy that there is no more pension scheme accounting. And so – and then in the remainder, we have talked about the residual values. The only real – it says what’s real asset impairment real loss. It’s only the modular and the onto, the couple of hundred million. Others are either provisions, as we have talked about, or absolutely just mark-to-market unrealized. We are very long-term investors. We are hoping to get the upside as well as downside on those in the same way as we do on equity. So, that was really the breakdown.
Antonio Simoes
Yes. Thank you. And your first question on government proposals, and you have put a bunch of stuff together. But if you think of PPF and super funds, our view has been that PRT has served the market and society well. And it protects the benefits of the individuals, annuitants. And we have, over many years, funneled some of those assets into the productive economy. From a super funds perspective and a PPF perspective, we see the solution for schemes that are – that cannot be bought in. Yes, we can see that as a solution, but we don’t see it necessarily, and we have been quite clear for the schemes that are well funded and where we and other insurers could do a buy-in, buy-out, we see that as a gold standard and so does the government more generally. So, I think I would make a broader point, which is we do support all the initiatives around DB and DC assets being put to work from a productive assets perspective. And as you know, we are a signatory to the Mansion House compact. And so we are very supportive of that, and we are very engaged both on the DB and on the DC side. Thank you.
Thomas Bateman
Thomas Bateman from Berenberg, I just want to go back to the capital return because capital returns are a really important part of the sector’s performance at the moment. And it just feels, despite the growth angle in the UK life sector, they are at risk of lagging behind the UK – the European peers a little bit. So, I was just wondering how you think about that capital return if you do benchmark it versus the peer group. Secondly, I think you said for the £10 billion of UK PRT, you will drive 6% to 7% growth in operating profit or capital generation. Is this still relevant given the increased use of reinsurance? And also how does that change with higher volumes? So, if you do £12 billion, £13 billion, does that move the operating profit growth up? And finally, there has been a lot of talk about U.S. CRE exposure at the moment. I know that you are investing into the specialist CRE market, but if you could just give a quick update on any potential risks for U.S. CRE.
Antonio Simoes
So, I will take the first one. And Jeff, can you take the other two? So, from a capital returns perspective, look, there is not much more I can say today. As I have said, 5% dividend growth, we intend to do the same for 2024. And I will be more clear about capital allocation and distribution in – on the 12th of June. To your point, do we benchmark, yes, of course we benchmark ourselves against everybody else. We also have to go back to the principles of we look at what are the returns of our growth opportunities versus the alternative of distributing that capital, and that’s different firm-by-firm. And if you look at large European insurers and others, they have fundamentally different business models than ours. So, the answer can be different because we are different, but that’s something I want to set out very clearly on the 12th of June with, here is a strategy, here is capital allocation and here is capital distribution. But yes, we look at competitors. Thank you.
Jeff Davies
The other two, sure. Yes. So, that’s right. That’s what I was quoting earlier that sort of £10 billion extra of annuities drives that up profit growth, 6% to 7%. We talked about that sort of IFRS 17 teach-in, if you like, when we were first doing that stance, we have been looking at that. Clearly, if we write more – so that’s £10 billion net, obviously. You have to be retaining the value to be able to get that. But obviously, individual annuities contributed to that as well significantly. So, to the extent we write more the maths of – it’s a bigger book, you get a bigger CSM, you get more expected margin unwind, it will grow faster, yes. And so to the extent you are writing more, you get more upside. Clearly, the profits are spread over the whole lifetime for annuities. But clearly, that’s part of the value proposition, right, and the stuff, it makes greater returns on capital. And it gives you a very large store of profits that unwinds into the future, and we will give you the runoff for that. U.S. CRE, and the simple answer is very, very little. But to give you a bit of color, middle of last year, in particular, I remember e-mailing back and forth with risk, with the investment CIO, if you like, of the U.S. balance sheet, which is where it sits. There was virtually nothing in the UK balance sheet for this. And I think there were three assets on a watch list, and they were all $10 million or less. And they were wanting some – waiting for someone to re-sign a lease, that sort of thing. So, it was basically immaterial for us as a group.
Antonio Simoes
Thank you, Jeff.
William Hawkins
Thank you. William Hawkins from KBW. Just one question, I am sorry.
Antonio Simoes
Yes. I sort of set the expectation that you had to have three. So, the previous [ph] effect that it made.
William Hawkins
It’s really simple. When you were giving your early look remarks, Antonio, I don’t think I heard you refer to technology explicitly. So, I am just wondering if you can give some early look, thoughts about what you think about the technology platform that you have inherited, where you think you may be inheriting areas where Legal & General already has a competitive advantage and where that may be an area that you want to be thinking about for investment for the future.
Antonio Simoes
Yes. Thank you, William. Actually, that’s a really good question. In my slide, the one where I have spent a bit – the one that had more content where we talked about the trends, if you look on the left, I was quite deliberate about the four trends that I chose. And clearly, a trend to more personal responsibility, the DB to DC is important. I highlighted climate change. I highlighted the changing macro environment. But the fourth one that I highlighted there, which I didn’t speak to, you are right, is what’s the impact in – of technology and AI specifically, but technology more broadly, not just as an enabler of business, but as a catalyst for business change. So, what have I seen, there are different parts of L&G are more or less strategically advantaged or disadvantaged from a technology perspective. What you can expect is on the 12th of June for us to also be more clear about the role that technology plays as a catalyst for the business. I have just come back from Maryland, Frederick, our U.S. protection business, and that’s a good example of a business that is compared to our competitors in the U.S., probably more advantaged from a technology perspective. You mentioned the results, both Jeff and Bernie did that. That business has really been able to – one product, one channel, beat most of our other competitors because we are better from a technology perspective. That’s a great example. I wouldn’t say that’s universal across L&G. In many cases, we are actually playing catch-up. Actually, what we are doing with State Street is an investment that we hadn’t done before. And so that investment, I wouldn’t argue, is cutting edge. It’s really a catch-up in terms of technology. And so more about that on the 12th of June, but well spotted, and it’s an important trend. Thank you, William. I went to Larissa already, so I don’t – so I will come to this section and there, actually. So, any other questions? We had – okay, we had one question online. I will do the final thing. What is the outlook for cost in LGIM, if you get the last – to answer the last question, I think we have sort of answered that. But since Fahad asked it online, Michelle, outlook for costs in LGIM.
Michelle Scrimgeour
Sure. And some of what I said earlier on, it is absolutely the case that we are disciplined in cost management, that we are driving out efficiency, but that we are also continuing to invest, and that is really important. So, we don’t just focus on the cost line. We talked about revenue, and that is really what we are focused on every single day.
Antonio Simoes
Great. So, I think – looking around, I think that’s it for today. Thank you. Thank you for coming. Thank you for all your questions, and I look forward to seeing you on the 12th of June at our Capital Markets event.
