Legal & General Group PLC

LSE:LGEN

Earnings Call Analysis

Legal & General Reports Resilient H1 2023 Results

In the first half of 2023, Legal & General persisted with a strategy termed 'Inclusive Capitalism,' focusing on investment-led growth in the UK and internationally. Operating profits from divisions amounted to £1.14 billion, with a solid Solvency II coverage ratio of 230%. The interim dividend rose to 5.71p per share, and the company aims to achieve £8 to £9 billion of cumulative capital generation by 2024, with £6.7 billion expected by year-end. The Group's adjusted property portfolio displayed robust performance without debt and full occupancy by high-quality tenants like Amazon and Comcast, and significant exposure to UK government offices. Although insurance operating profit increased by 4% due to sustained performance in the UK and US, fintech contributions dipped, and overall operating profit decreased. The Insurance division saw a 5% rise in gross written premiums. Investment management experienced a decline in operating profit to £142 million due to the impact of rising interest rates, although the company sustained cost management effectively. Legal & General's capital position remains fortified, enabling ongoing investments and dividend growth.

Overview of Legal & General's Half-Year Performance

Legal & General's half-year performance showcases a company in a solid financial position, driving value and seeking growth. Key highlights include growth in the value of new business sales, a strong solvency ratio supporting future investment opportunities, and an operating profit increase in their various divisions despite challenges in external markets.

Insurance Dynamics and Profit Release

The company has been effective in leveraging IFRS 17, which allows recognition of value from new business in the Contractual Service Margin (CSM), leading to a steady profit release in future periods. They have managed to grow the CSM by 5% over six months to a robust £12.8 billion and deliver an operational profit increase of 19% driven by profitable business written and diversified asset performance.

Investment in Real Assets and Digital Growth

Legal & General Capital (LGC), the investment arm, registered a 13% increase in operating profit, attributed to profitable alternative asset investments, including infrastructure and technology-focused real estate, demonstrating resilience against a tough market. They are on track with their strategic goal to grow the alternative asset portfolio significantly by 2025.

Growth Amidst Investment Management Challenges

The Investment Management division experienced a reduction in operating profit due to higher interest rates impacting Assets Under Management (AUM) and revenues. However, the company maintained cost control and achieved net inflows in higher-margin products, underlining a disciplined strategy in challenging market conditions.

Solvency and Capital Position Stability

The firm maintains a very strong solvency ratio providing substantial capacity for investment, with a focus on returns and surplus generation in the future. Despite the heightened interest rate environment, they have effectively managed their capital and liquidity positions, remaining flexible for strategic investment decisions.

Strategic Focus and Capital Allocation

Management discussions revealed a strategic focus on efficient PRT business writing and geographically expanding their market, particularly in the U.S. They also engaged in in-depth deliberations on capital return strategies, balancing growth investment needs against shareholder return initiatives such as buybacks.

Anticipating Future Profit and Growth

Legal & General anticipates stability in profit from the annuity sector, with more discussions about returning capital via buybacks than in previous years. The company is mindful of the mixed effects of their strategies but remains optimistic about future growth and the sustainability of profits.

Earnings Call Transcript 2023-Q2

[Nigel Wilson, CFO]

Good morning, everyone, and welcome to Legal & General's Half Year Results for 2023. It's terrific to be here with you and share a set of results we are proud of as a team. We remain on track to achieve our 5-year ambitions. H1 operating profit from divisions were £1.14 billion, with group operating profits and Solvency II operating surplus of £0.95 billion. Our Solvency II coverage ratio of 230% is near record levels.

Our interim dividend is 5.71p at 5%. I'd like to thank all of my colleagues for their immense contribution and commitment to Legal & General. The usual disclaimers apply, please silence mobile phones. We will follow our usual format. I will provide some opening remarks; Jeff , the numbers, and I will round up at the end, leaving time for questions.

You are familiar with our 5-year ambitions, £8 billion to £9 billion of cumulative capital generation by 2024. We expect £6.7 billion at the year-end. To grow earnings per share faster than dividend per share. IFRS 17 earnings will grow faster than dividends. To generate a net surplus exceeding dividends over the period, £0.6 billion positive so far, whilst growing the dividend between 3% and 6% per annum, 5% this year and next year.

We are benefiting from our strategy of driving investment-led growth in the U.K. and increasingly internationally. This approach, which we call Inclusive Capitalism has become core to Legal & General. Following support from our regulators and the government, the broader policy environment in the U.K. is making deployment of capital easier.

We are positive about our future. The broader economic environment in the U.K. is an important context for our business. U.K. has been challenged since the GFC, where historically, we went toe-to-toe with the U.S.

on productivity, we have fallen behind. Real wages have also stagnated. The NASDAQ and S&P have shown [indiscernible]. We also have a [indiscernible], we work with local government, with agencies and universities and crowd in specialist third-party capital. Key partners include the University of Oxford and the University of Manchester.

Local authorities from Sheffield and Newcastle to Bristol and strategic co-investors, pension funds like NatWest and PGGM and specialists like Bruntwood, Octopus, NTR and Experian. Our U.S. JV with Ancora, who are specialists in science and tech assets is another example. H1 demonstrates the power of our diversified and synergistic business. The changing macroeconomic context has generated some headwinds, but there are also tailwinds too.

For example, LGRI, our PRT business. With an acceleration of schemes coming to market and at greater scale, we got £5 billion in the first half of the year, plus £2 billion in the U.K. and nearly $1 billion in the U.S. since H1, all at good margins and we've lost strain. LGC deploy shareholder capital to underserved and growth areas of the economy.

Together with its traded portfolio, the goal is to achieve operating profit of £600 million to £700 million by 2025. We delivered almost £300 million in H1. LGIM and other asset managers had a difficult 2022. Profits for LGIM stabilized with £142 million in H1 compared to £140 million in H2 of 2022. Finally, we see significant opportunities in the retail retirement and insurance markets and the opportunity to harness technology, including AI to improve customer experience.

In H1, insurance profits are up, and noninsurance profits are down. IFRS 17 improves the diversity of our profits. And at the same time, we can see the CSM, our store of deferred profits growing strongly. We expect to release around 7% of the CSM inter operating profit. That's at least £900 million this year.

The CSM can be added to equity to show the value of the insurance business. This £14.5 billion excludes additional sources of value, including new business franchise value, investment income from annuities and earnings for our noninsurance businesses, notably LGIM and LGC. We've also [indiscernible]. We continue to be self-sustaining in annuities. We estimate that we can write £12 billion annuities and remain self-sustaining.

Risk margin reforms would reduce the strain of doing so by circa £130 million [indiscernible] across each of our divisions, we are very optimistic about future prospects. LGRI is in prime position on PRT, LGC is showing strong performance in key investments. We're making good progress internationally with our Ancora partnership in the U.S. Our European businesses are performing well, and we have exciting opportunities, they're opening up for us in Asia. In LGIM, we continue to expand our high-value product offering across geographies.

40% of our assets are now international. Retail is now a single business unit and across insurance and retirement, enabling us to harness complementary expertise across the business. Lifetime mortgages are down, however, U.K. annuity sales are up 27%, and annual premiums in the U.S. protection are up 40%.

Our dividend intention to the end of 2024 is to deliver 5% growth per annum. The full year 2024 dividend yield of 9.3%. The Board will continue to assess the merits of different deployments of our capital. That's organic, M&A and buybacks, the focus on shareholder returns. I'll now hand over to Jeff.

[Stuart Davies, CMO]

Thank you, Nigel, and good morning, everyone. Great to see you here. A day we thought would never come for some. Our first IFRS 17 results, but on a more serious note, thank you to all the teams for their really hard work in getting us to this point, and we know it hasn't been easy at all. Legal & General delivered a resilient set of financial results in the first half of 2023.

Operating profit was £0.95 billion, driven by the predictable and ongoing releases of the contractual service margin and risk adjustment from our growing insurance businesses. There was further growth in LGC, and LGIM delivered in line with the second half of last year, reflecting the higher rate environment. We continue to show good growth in our stock of deferred profits on the balance sheet, up 3% to £13.8 billion, driven by profitable new business written so far this year, creating just over £600 million of associated CSM and risk adjustment. Our balance sheet remains strong and the Solvency II coverage ratio of 230% with surplus generation of £0.95 billion. We continue to generate capital to fund up aggressive dividend and ongoing investment in the business.

Now focusing on the IFRS 17 dynamics of the insurance business, [indiscernible] is the key driver of our stock of deferred profits. IFRS 17 recognizes the value created by new business in the CSM, which will then be released as a steady stream of profit in the future. In the first half, we generated £0.6 billion of value from new business sales. Interest added a further £0.2 billion, this grew the CSM 5% over 6 months to £12.8 billion, after which we released £0.5 billion into profit. Routine assumption updates and further new business should also add to the stock of CSM over the rest of the year, translate into a growing profit stream.

Moving now to the divisions and LGRI. LGRI delivered operating profit of £471 million, up 19%. This strong performance was driven by 2 things: Firstly, growing releases from the CSM reflecting both prior year routine longevity updates and profitable business written in 2022. And secondly, by the performance of our geographically diversified asset portfolio, which included back book asset optimization. Our annuity asset portfolios continue to perform well.

We have received 100% of our scheduled DI cash flows year-to-date, reflecting the high quality of our counterparty exposure. There were no material property or credit write-downs, and the investment variance was largely due to interest rate impacts, reflecting the fact that we've not yet fully moved to a neutral position under the new accounting basis. However, you will see from our disclosures that the Solvency II interest rate sensitivity has reduced as we have started to reduce rates exposure. LGRI won £5 billion of global PRT across 20 transactions. These volumes were written at attractive margins with low capital strain levels, reflecting good assets and reinsurance origination.

We have made great progress towards our ambition of growth in 8 to 10 [indiscernible] maintaining our disciplined approach to generating value. Given investor interest in property investments, we provide here further information on our direct property exposure with the annuity portfolio. The £5.1 billion of property is comprised of £2 billion of residual value notes and £3 billion of rental income notes. The residual value notes are based on a conservative estimate of the vacant possession value at the end of the lease term and represent our actual direct property exposure. We are not concerned with short-term mark-to-market valuation as the majority of our property assets have a 20-year term to maturity.

Our property exposure is wholly owned, recently built and has no debt. Our priority is the cash flow associated with the £3 billion of rental income notes. Cash flows are secured against inflation-linked long-term leases with high-quality counterparties, such as Amazon and Comcast and a paid out at 100% over '22 and in the first half of '23. Our exposure is relatively diversified by sector, with office space representing 39% of the total. But almost 90% of this office space is leased to U.K. government departments with an average unexpired term of around 22 years on the lease. Moving on to retail. Whilst insurance operating profit is up 4%, driven by resilient ongoing releases in the U.K. and U.S., total operated profit is down, given the lower contribution from fintech as valuation uplifts from the first half of '22 did not repeat. CSM released in the first half was 4.6% of the closing CSM, which have grown to £4.7 billion.

In the U.S., we're beginning to see improved claims experience. However, like the broader industry, mortality experience remained elevated through the first half and so we utilized the $40 million provision set up at the year-end. The experience variance shown here primarily reflects adverse experience in the U.K. on the minority of business where we are not fully reinsured, and also £8 million of onerous contract unwind in respect to legacy policies. Insurance gross written premiums were up 5% to £1.7 billion, reflecting robust new business volumes across all products with U.S. volumes continuing to benefit from our use of technology to improve the end-to-end sales process. Solvency II new business value was slightly down on last year with growth in U.S. protection and individual annuities, offset by lower margins in U.K. protection, reflecting the impact of higher interest rates and lower volumes in what continues to be a competitive market. We continue to focus on leveraging technology and our scale efficiencies across all our retail businesses to deliver great customer outcomes and business growth.

Now moving onto LGC. Operating profit was up 13% to £296 million, driven by growing profits from our alternative asset portfolio. Our alternative finance business, led by Pemberton, continues to perform strongly and in our specialist commercial real estate portfolio, our targeted investments in infrastructure and science & technology-focussed assets proved more resilient than the general commercial property market. Our diversified, multi-tenure housing portfolio performed well against a more challenged market backdrop. Our largest housing business Cala has delivered flat housing revenues year-on-year and excellent relative performance.

Profit before tax of £104 million reflects investments and other variances of £192 million, driven by the unrealized mark-to-market impact of higher interest rates on our portfolio. We remain on track to grow our alternative asset portfolio to £5 billion and to increase third-party capital to over £25 billion by 2025. Moving on to Investment Management division. Operating profit was down to £142 million, primarily reflecting the impact of higher interest rates on our AUM and so revenues. Total AUM reduced by 10% to £1.2 trillion, leading to revenues reducing by 11% to £440 million.

We managed a disciplined approach to cost management, whilst continuing to invest selectively to drive efficiency and grow. Despite inflationary pressures, costs were flat on an FX-adjusted basis. External net outflows were £12.3 billion, primarily driven by overlay assets associated with U.K. DB Solutions, where we supported clients to achieve more efficient hedging strategies, given the improvement in funding positions as a result of the higher interest rate environment. Excluding these DB Solutions, LGIM reported net inflows of £7.4 billion across higher-margin areas such as multi-asset, ETFs and real assets, generating net new revenues of £8.4 million.

International AUM now stands at 39% of LGIM's total. Moving on to capital. Our Solvency ratio remains very strong. This provides us with a large buffer and capacity to invest. As you heard from Nigel, we have investment opportunities across our business, which we expect to generate attractive returns and grow own funds as the surplus emerges in the future.

You can see from the left-hand chart, the increase in our Solvency ratio since rates started to rise, has been driven by a reduction in capital requirements rather than an increase in owned funds, underlining the fact that rising interest rates do not create extra excess funds. Equally, they don't create extra liquidity. Any capital allocation, including buybacks needs to consider both liquidity and capital. Looking at the most material movements during the period. Strong operational surplus generation exceeded the largest dividend payment of the year.

The operating variance largely reflects timing differences that are expected to reverse out by the year-end, such as the execution of external and intragroup reinsurance. In closing, we have delivered a resilient set of financial results, demonstrating the predictable and growing earnings releases from the growing stock and deferred profits in our insurance businesses, as well as continued strong contribution from LGC as it matures. Our capital position remains strong, and our diversified business model continues to deliver solid capital generation to fund our progressive dividend and ongoing investment in attractive business opportunities. We are continuing to invest in the real economy, creating value for shareholders and making a positive and lasting impact on society. Thank you.

[Nigel Wilson, CFO]

Thank you, Jeff. To summarize then, Legal & General strategy and execution is consistent and compelling. Our businesses are performing well under strong leadership, showing resilience in changing economy and with clear opportunities to grow. We have developed a unique strength in asset origination, which enables us to be capital-light and self-sustaining. As a result, we are well placed to seize the near-term opportunity in PRT.

We are at the forefront of efforts to drive investment-led growth in the U.K. and elsewhere. We are able to invest to develop the capabilities we need to make advances in new markets. And the dividend for our shareholders is secure and growing. In summary, LNG is in great shape for the future.

My colleagues and I are now happy to take questions. Could you each state your name and the organization that you work for.

We'll start with -- and we'll just -- we'll work up this side and then come back down this side. So just try and be efficient.

[Andrew Sinclair]

Thank you. Andy Sinclair from Bank of America. Three for me as usual, please. First, fairly standard question for me. Legal & General Capital, can you tell us how much was the cash generation in H1 compared to operating profit, ideally giving us an idea of how much from disposals, how much underlying, et cetera? The second was just on the solvency movements that you mentioned for the reinsurance timing to unwind in H2, how much of the variances was that? And then percentage points as well would be helpful. And third was just on the CSM, I think maybe a little bit surprised that the CSM was only flat year-to-date, excluding the internal transaction, just especially given a pretty good H1 for new business. Just what sort of level of growth do you think we should see from the CSM over the medium term?

[Nigel Wilson, CFO]

Jeff, I think all 3 of those are yours.

[Stuart Davies, CMO]

Fair collection for me there. Thanks, yes. I will stand up. LGC cash, yes, we always prepare this for you Andy ready. You've said it could be below our profit some years above our profit depending on disposals and activity.

It's about just over 70% of our profit this year with actually fairly limited disposals within that. So it's quite a good underlying run rate of cash since we have been well over 100% of our profit in previous years. The variances, most of the number that's there we would anticipate to unwind. There were mostly timing differences. As we explained when we put the previous number out, looking at depending between own funds SCR, it's about -- up to about £500 million of that.

So there's quite a lot within there. There's for example, we always sought -- we always said this every year, we sort out the term -- U.S. term reinsurance in the second half. So that's coming through. We take it out below the line so that we get stable OSG coming through, for example, and there's some other intragroup and there's also some of the PRT business that lands late in the period.

We haven't yet reinsured those. So we know that we're going to do that, and that will rewind as well -- unwind, I mean. CSM growth, yes, it's interesting. So yes, it was 1.3%, including the pension scheme over the first half. We said U.K. retail was a bit more challenged and see reasonably short duration runs off. I have to add a bit more in there, but annuities did well. I think in terms of a good underlying, I mean, last year, we showed the half year to half year. I think it's best of a whole year. That was 7% growth across the whole business with CSM.

Last year, I think we had U.K. PRT over '22 grew at about 9%. That was including some longevity assumption changes. And even without that, we had 5% growth over the period for the PRT business. So we're expecting that sort of range underlying.

We're going to be growing the business, plus assumption changes whether, how much you want to factor in longevity, assumption changes, et cetera. I said that we'd expect some benefit from that in the second half again this period.

[Andrew Crean, Autonomous]

Andrew Crean, Autonomous, A couple of questions. Could you actually enumerate what your excess capital is? I mean everyone else says that the target or threshold rate is say, 180, 190. Could you do the same for us? And secondly, I noticed you've increased your amount of BPA business that you can write to be self-sustainable to, I think, 8 to 12, from about 8 to 10.

Is this an indication as to your ambitions? And have you now cast aside the idea from perhaps investing the excess capital to write £20 billion a year?

[Nigel Wilson, CFO]

Jeff, why don't you take the first one? I'll do a little bit of introduction on the second one, then you can fully answer it, Andrew.

[Stuart Davies, CMO]

Okay. Yes, sure. So excess capital. I mean we don't like to set a number. We're clearly showing we've got buffers there.

There's a large amount. Part of that is because it depends what we got there. I put on the slide that interest rates in themselves don't create what you call excess capital as we go higher on rates, we expect them to go down quicker at a bigger amount. So we changed our stress test. How we talk about it with the Board and formulating our views on how much have we got for new business opportunities versus buybacks or anything else is, what is the downside stress.

So we started from where we are, we say, what do we want to look like over a planning period, assuming PRT volumes with some upside, assuming other investments in the business, and then taking a downside stress on that and still not being stressed as a business if you like. And so that's how we do it. That changes depending on where you've got to where you are, which is why we don't think it makes sense to set an absolute threshold. It's safe to say we don't need 230% all the time, but over a period, we're anticipating writing significant PRT even if it's 8 to 12, we'll cover now in the next part. And so there's other investments, and we'll continue to do that.

We'll continue to give more clarity as well on capital allocation policy, I think, over the next coming periods.

[Andrew Crean, Autonomous]

What is the excess cap, and you talk to the Board about?

[Stuart Davies, CMO]

Well, I'm not going to say that number, that was the conversation we had with the board.

[Nigel Wilson, CFO]

I think the challenge that we're trying to look through is actually we're trying to highlight here is the PRT model that we have is much more capital light than any of you have in your models. So we've tried to articulate that so you can model it a bit better than the past. And we've given you the quantification of the benefits we're getting from risk margin, which we'll get this year. Clearly, there will be further benefits next year from the asset allocation that we're allowed to deploy. So we can write the 8 to 10 or even 12 very comfortably and keep remaining within self-sustainability.

If we then take the credit for the reduction in the risk -- the risk margin, it gives us further headroom to write more PRT business. So the challenge for us is the excess capital that we have sits in -- from a discretionary point of view, pointing more towards LGC and LGIM. And actually, that we use a lot of the historic thinking because the strain has been higher historically has been about just the PRT business. PRT market looks as though it's going to be £50 million to £60 billion. We'll probably get around 20% of that.

So that's very comfortable from a sustaining point of view. So PRT isn't the strain or the drain that you think it is or many of you think it is on the business. It's actually what can we do in LGC and what can we do in LGIM to accelerate the growth of those businesses? Maybe, Andrew, you can give a bit more color on the way we're thinking through the opportunities that presented us, Stuart. One of the big points that I just want to make is that a lot of our business is about the 50 million schemes who have 5 billion of assets, not the odd one that has much more assets than that because every time we've had a very big deal, we've ended up breaking it down into smaller deals historically.

[Stuart Davies, CMO]

Thanks, Nigel. Good morning, everybody. I'm very happy with Half 1 performance that you've seen on PRT. I mean to your point, in particular about the future pipeline looks very healthy this year going into next year. That pipeline next year does have some singular very large schemes that we're evaluating.

As Nigel says, we don't yet know how those are going to transact if they'll transact to indeed, if we're going to be successful. So we're looking at evaluating those. But as has been already said from the stage, what's really important to us is preserving margin and doing it in a capital efficient way. And that's not just is it efficient with LGRI, it's about evaluating that capital efficiency right across the group. Is it the right place to deploy our capital in writing those schemes.

And if it is, we look to transact. We're working very closely with clients. We have a great PRT business. We're one of the really trusted brands in the space that the large companies want to transact with us. As Nigel says, there are 60 schemes out there with assets over 5 billion, and we're working that pipeline incredibly hard to understand if and when they want to transact in the schemes that we can offer.

But of course, it has to be on commercial terms. They're attractive to us as a group.

[Nigel Wilson, CFO]

Okay. Can you just keep passing it back and we'll come around.

[William Hawkins, KBW]

I'm William Hawkins from KBW. Nigel, I'm picking up on the answer you just gave, Andrew. So if you're thinking more about capital allocation and the other businesses like LGC and LGIM. On LGIM, how is your thinking on the outlook for that business evolving? Because you're clearly already relative to peers have an awful lot of scale, but in line with peers, there's still great challenges on the fee margin, the cost-income ratio, regulation and everything else.

So how are you thinking about the outlook for that business? And maybe more numerically, how are we thinking about flows because, again, a big drag from LDI, maybe that was to be expected. But I don't know how much further those outflows have to run, and your kind of either side of 0 on the active and index funds. So what's the outlook there? And then secondly, [indiscernible] sorry, but the reinsurance contribution to the CSMs, please, can you help me understand that?

There's a big reinsurance part of LGRI, which I get conceptually, that's rising, which I think I get conceptually. But how much further is that going to rise as you may be making more use of it for the jumbo deals? And then on the retail side, there seems to be -- if I've understood there's a positive impact of reinsurance on your CSM, which I don't quite understand, and it does seem to be fading. So it's a small number, but I'd just like to understand why reinsurance is positive to the CSM rather than negative, please?

[Nigel Wilson, CFO]

Yes. I'll have got the first one, Jeff, you can take the second to Bernie, if you want to make a contribution towards that. You're welcome to probably not was the answer from Bernie on that one. On LGIM, we're at a point of inflection really. The DB business is transferring and slash the DB and LDI business is transferring to PRT.

We get a high proportion of that transfer. And that in floor terms is often negative because we're unwinding some of the layers. So it's naturally a negative outflow. But actually, it's a positive profit benefit and revenue benefit for the overall group position. So that's part of the answer.

The other part of the answer is that we -- for a number of years now, we've been building up our credibility and presence in thematic ETFs in the real assets, including clean energy. And we have a couple of very exciting new funds that we're working on that we're in the midst of fund raising, fund raising is going pretty well on those funds for LGIM on a global basis. And we have our multi-asset business as well, which, again, for the first time, we've been selling it outside at scale outside of the U.K. at scale. That two-edge thing.

One is that we're sorting through the LDI, DB transfer to PRT, that's going to happen for the next 10 years. And so that's just a common theme. The other one is the same and to get into the ETF business, we made a very small acquisition. We're absolutely thrilled with that acquisition. Acquisition is performing in line with our plans.

And for most acquisitions, they tend not to perform in line plans. So we're pretty happy with that. So we look at even within LGIM at both organic opportunities, but also what I describe as bolt-on M&A opportunities. I've rattled on for long enough, Jeff, to give you some time to things through those particularly the third question.

[Stuart Davies, CMO]

Yes. So LGRI easy if I think about the reinsurance. If it's higher than our best estimate longevity assumptions, it's a cost, it's not going to give any benefit. So as that reduces the bell and therefore, reduces CSM, et cetera. So whereas if it's the other way around, that comes through as an asset.

What you're talking about, I think, on the LGRI is the funded reinsurance, which is where you see the increase. We said we did £800 million or so in the first half, we gave the numbers on that. And we continue to look at that as we need it. I mean it was 800 out of -- £5 billion of premium. We'll see what we need, depends how much scale business comes with.

We continue to work closely with a number of partners to have it available. If suddenly there's a £5 billion deal. We might want to do a bit more in one go. If it was -- we've talked, are there going to be tens, et cetera, who knows, but we'll use it on an ongoing basis where the pricing makes sense. On the retail protection, which is really what you're seeing there, this is mostly U.K. retail protection. It's the same thing as happens on the annuity business. It just so happens that reinsurers in the U.K. because everyone historically has reinsured 90% to 100% of their business, reinsurers in the U.K. are pretty aggressive assumptions compared to what we would have as a best estimate.

They've got way better data. They've done all the work on it because they add volumes and volumes of this for years. And so we haven't gone that far in our mortality improvement and base tables for mortality. So actually reinsuring appears as an asset. So that's what you see coming through overall on a net basis.

[Steven Haywood, HSBC]

Steven Haywood from HSBC. You mentioned earlier about the risk margin reforms and asset allocation changes. Does this mean that potentially going forward, the PRT business can be sort of sustainable about £20 billion per annum of new PRT every year. What would be the impediments to achieving that £20 billion per annum? Secondly, on your CSM roll forward, you talk about assumption changes and other companies, U.K. life companies talk about then being regular recurring assumption changes, longevity releases. Can you give us a normalized level of these assumption changes that we can put into our CSM roll forward going forward? That would be very helpful. And then finally, on the level of EPS growth normalized going forward. Considering that you say it will grow faster than the DPS of 5%.

What sort of normalize level of EPS should we assume going forward, similar to the CSM growth or higher?

[Nigel Wilson, CFO]

I'll take the first one, Jeff, you can take the second and third. Where to start -- just repeat the first part of the question again?

[Steven Haywood, HSBC]

£20 billion.

[Nigel Wilson, CFO]

£20 billion. Sorry, the -- if you do the math, it comes out at about £14 billion to £16 billion without any changes to the asset allocation. So [indiscernible] just save you a bit of homework doing the math for that. Clearly, it depends on what the strain looks like in 2024 and beyond. But if we do further asset synergies, then maybe we could do a bit higher than that.

So that gives us a very solid platform. Not saying we'll get to 14 to 16 of strain and international strain tends to be higher than domestic strains. So it also depends on the mix effect going forward. We were trying to keep you in the circa £12 billion range because that's a nudge up from 8 to 10 that we've talked about in the past. Jeff?

[Stuart Davies, CMO]

Yes. On longevity, I mean, it doesn't quite come out in this because it is quite lumpy. We've got a very large book. And when you start making changes as you saw last year, it was reasonably sizable. We'd held some back for a period of time.

But I think on average, we've done sort of 100 million, 200 million, if you average it out because there's some here has been very little other where it's been 500 million. So we still think there's a reasonable amount of prudence in there. We're experiencing for mortality. It was a very bad experience. January, February in the U.K. as a whole struggles with the NHS. That clearly impacts the older lives. We're looking to project all the different conflicting evidence on this to work out, what can we take from the data that's got lots of COVID noise in it. But we do think there's still more to come on longevity, what we said certainly for this year. Yes, EPS, DPS, we did say, if we wrote 10 billion on the annuity business, that would lead to growth of 6% to sort of 8% overall.

You say we'd certainly anticipate growing the business that the growth of what's coming out of the CSM should be reasonably stable. Actually, the releases do increase over time depending on how much you write. But if it was a stable portfolio, a bit like I assume all runs off towards the end. But obviously, as you write in new business, that's slows it, so it stays about the same sort of level in the short-term. So we'd expect to have -- has grown CSM releases more.

Clearly, we want to drive the similar growth in LGIM and LGC. And so we'd be looking to be side above that DPS, as we've said.

[Nigel Wilson, CFO]

I'm going to start working our way through this side.

[Thomas Bateman, Berenberg]

Thomas Bateman from Berenberg. Just going back to the view of excess capital. I assume the scenario is kind of lower rates now, credit spreads a little bit negative for solvency. So any other color on what that view of excess capital is? And you mentioned liquidity, how should we interpret the group's liquidity position?

Second question, you gave really positive commentary on the annuity portfolio, now no downgrades, 100% in cash flows, et cetera. Where are you seeing any pressure, if any, across that portfolio? I assume there's a little bit of pressure here and there? And finally, just on the risk adjustment, I think for LGRI, it was down year-on-year quite strongly. I don't quite understand why that is.

So if you could give a bit of color, that would be helpful.

[Nigel Wilson, CFO]

Yes. I'll do the second one. If you do the first and the third one, Jeff. Just on the -- Jeff, do you want to go first for the first.

[Stuart Davies, CMO]

Annuity. So the excess capital liquidity -- I mean, we discussed the excess capital. You're right, it's a big stress down rates along the curve. We would layer on as our risk people like to do. Equities down, property down all happening at the same time, whilst all things go wrong in credit at the same time never happens and it books diversified, but we obviously have to allow for that.

That gives you a significant down stress. As I say, it's not just doing it today. It's doing over a 5-year business plan and all the investment choices we're making across that and the optionality that we want, and that's what we present to the Board and ensure that we are sustainable within that. So we -- that's the way we look at it. We look at LGIM, LGC investment, M&A optionality and writing extra PRT across that and what we intend to do.

Liquidity, it was more a comment that similar to capital rates movements don't create liquidity and they don't create capital. There's nothing more to it than that. The group is a very strong liquidity position. You can see that we're sitting on as much cash as ever. So I mean, there's nothing more to it than that.

[Nigel Wilson, CFO]

Yes. I mean, a few years ago, we should talk about the dividends, and we have a sustainable dividend position. And therefore, we developed this sort of theory around sustainability of the annuity business to -- and that has sort of dropped off the agenda now. We've now become even more efficient at writing PRT business, particularly in the U.K. and we've got more work to do on that in the U.S. because we don't quite have the equivalent asset origination capabilities.

[Stuart Davies, CMO]

And we don't reinsure.

[Nigel Wilson, CFO]

We don't reinsure in the U.S. as well. So there is a mix effect that we're working our way through with Andrew and the team. In terms of -- we've had more discussions with our Board on returning capital via buybacks this year than in any previous years. And it's a good and very healthy debate.

Part of it is really understanding the ambition that LGC and LGIM have for their businesses. In a sense, we've done all the work on the PRT business. There's some international stuff, which Andrew is coming forward with and trying to figure out how much will we need for America, Canada and the Netherlands, all of which are the markets that are opening up to us. Right now and what sort of the level of returns are acceptable for us in those areas. But it is how much do we want to spend on growing LGIM and LGC, which is the in effect, the swing factor around should we or shouldn't we start to buy back program.

[Stuart Davies, CMO]

There was just some annuity portfolio. We don't no pressure. I thought we had more upgrades than downgrades the whole portfolio performs really well, but that's not us being complacent. We scour every different asset class, we do rolling, reviews of all the different asset classes, whether it's we have student accommodation, et cetera.

[Nigel Wilson, CFO]

Yes. We have nothing went to sub-investment grade in the first 6 months of this year, which is quite extraordinary given everything that was going on and as Jeff said, we had more upgrades than downgrades. But we're not being complacent with the watch list that we have, which we monitor at every carbon committee. And so now we have 2 capital committees in a week is relatively modest compared to what we've seen in previous times. And it's as Jeff highlighted, we don't really have any sectors that we're overly concerned about.

Sometimes you get individual sectors that are part of the portfolio, which you're worried about. We don't have that right now.

[Stuart Davies, CMO]

The last question was easy. It's just rates. It's just discounting. So same amount of money will come out over time. It is just worth less today.

[Larissa van Deventer]

Larissa van Deventer from Barclays. Two questions on sustainability and then one on ex U.K. bulk annuity growth, please. On sustainability of earnings, you surprised positively relative to expectations on LGRI and on LGC. How should we think about the sustainability of the number going forward?

And on new business, what do you see is the biggest risk to the new business strain and then also sustaining the margin? And then on bulk annuity growth outside of the U.K. How fast do you see these opportunities evolving? And can they compete with the U.K. margin?

Or is the illiquid asset generation prohibitive?

[Nigel Wilson, CFO]

Just pointing. I think if Andrew gives an overall flavor of the way we're thinking through the PRT business internationally, I think that would be very helpful. And Laura you might talk about the sustainability of LGC and what are our plans for not just the U.K. but internationally as well.

[Andrew Kail, CEO Institutional Retirement Division]

So on the international side, I think the great thing about the business, 4 large DB centers across the globe, U.K., U.S., Netherlands and Canada, we're in all those markets, which I think is a really positive thing for us as a business. Two of those markets we're in as reinsurers, which is the Netherlands and Canada. U.S. market expecting that marketplace to do about $40 billion of business this year. So very healthy pipeline of trades.

Nigel has already referenced is where we participate in that market is not where we participate in the U.K. balance sheet scale, our brand, et cetera, means we tend to operate in a different segment of the market. Notwithstanding that, we did our largest-ever transaction in the -- just after the end of the first half. So we've given you guidance, I think, about the size and scale of the ambition we've got for the international business over the next few years. And you've seen that -- we're well on track to deliver that.

But mindful the whole time about the margins and the strain that we see in that market. And as already been referenced, that's always as high as we see in the U.K. And therefore, we're very selective about how we guide our U.S. business to go after options in that market and then watching that market very closely, but we're on track to deliver against plan and very happy. In the Canadian and Netherlands markets that we go by reinsurance from our Bermuda operation.

Canada, we have a partnership, which is working for us, but is a highly competitive market. Canada is a highly competitive market and margins this year have been low, and therefore, the trades that we've seen, we haven't been successful on the operating margins that we're looking for. So whilst we're active in the market and we're quoting, we're being very disciplined about the returns that we're seeking on our capital there. The Netherlands is a really exciting opportunity, which is only just opening up. Legislation there has been enacted by the government, and we're now starting to see PR team -- schemes come to market, we are actively pricing on a number of schemes in those markets.

Initial observations are positive. But until we close those out and report them to you. They're not done. It's all still subject to DNB regulatory approval as well. So we're excited.

We're working hard market looks active, but nothing positive to report to you just yet.

[Laura Mason, Chairman and CEO]

And in terms of LGC, we're very much on track to meet the targets that we set out in the Capital Markets Day, and again, has been talked about today. So both in terms of the operating profit and the third-party capital. Nigel alluded to some of the work we're doing with LGIM in bringing third-party capital into some of our businesses. So that now generates both fee income from LGIM, but also supports the growth of some of our underlying operating profit. So hopefully, we'll have more to tell you on that in the year-end results and have already launched our Clean Power Energy Fund with LGIM that supports our underlying operating business NTR.

I think increasingly, we're seeing that our model can work overseas. We've very much built our business in the U.K. But equally, we are now seeing opportunities overseas, particularly in the renewable and climate transition space, many of -- much of the businesses that we're investing in today are now starting to operate outside the U.K., particularly in the climate transition space. So I think the model that we put together, I suppose, 6 or 7 years ago now and really looking at areas that are underserved by long-term capital, the model really is really starting to come together. So I think we feel very confident that we can continue to build on the profits that you've seen today.

[Nigel Wilson, CFO]

Yes. And there's other things like the [Kenzo] situation where we got in the ground, so our seating business a few years ago. Octopus have joined us in helping to scale it up, bringing there the example of specialist who has capability in the energy sector who we can partner with a bit like we've done with Brentwood in the [Cytec] space, which at the moment happening both in the U.K. and indeed internationally.

[Ashik Musaddi, Morgan Stanley]

This is Ashik Musaddi from Morgan Stanley. I've got 3 questions. So first of all, I mean, thanks for giving the additional color on the direct property assets. Is it possible to get some color about the rental yield you're getting? And what is the total return assumption you have in your models for the planned period?

That's the first one. The second one is with respect to like during extra capital return back to investors, I mean, clearly, you have a big solvency ratio 230%. So longer term, this trajectory looks very good. But how do we think about the near-term? How is Board thinking about it, given there is a leadership change happening in the company.

So I'm mainly thinking about, say, 6- to 12-month view on this, any color from the Board on that would be helpful? And the third one would be in IFRS, there was a big investment variance of about £600 million. And then similarly, in Solvency II, it was about 600. Clearly, you mentioned on Solvency II, it's largely the internal reinsurance, which will come back. But is IFRS investment variance similar?

Or is it anything different? Any color on that would be helpful.

[Nigel Wilson, CFO]

Yes. The direct -- probably really in 2 different parts. I'll talk a little bit about the LGRI part of it. And Laura, if you talk about the LGC type of it. I mean for LGR, we're trying to cash flow match and we're trying to create a spread in effect.

And so how do you think about what the return on capital is very different from what we're trying to do in Laura's business. We're trying to create, as Jeff highlighted, with the office sector. We've got the government as the counterparty looking to increase the rents over specifically period of time to match the cash flow with the spread on top of that. And that's been hugely successful for us on any measure. If you come back and do the LGC part of Laura, you just highlight?

[Laura Mason, Chairman and CEO]

So in terms of the real estate exposure we have in LGC, probably falls into 2 buckets. Firstly, the residential, which we talked a little bit about Cala and how well that's performed. The other big part of our residential portfolio is really concentrated around the affordable housing sector, which is performing particularly well at the moment. And then in terms of any sort of commercial real estate, we very much think about almost the future of real estate where we invest. So we've invested in digital infrastructure.

So data centers also our biggest other exposure is around Cytec. So creating real estate for science & technology usually in partnership with university and local authorities at the moment, focused in the North of England and in Oxford. And has also been alluded to, we are -- we started that model in the U.S. and I suppose very surprised on the upside in terms of how well that model is working, there aren't other players that are really wanting to partner for the long-term to create the real estate that will be needed in the future.

[Nigel Wilson, CFO]

And big picture terms, it's low teens or mid-teens return on capital, which is kind of where we are with Cala ruled the other parts of the business right now. On capital returns, yes, we're having a good discussion at the Board about that, but we've got nothing to report at the moment to the forum here. Jeff, do you want to take the question on.

[Stuart Davies, CMO]

Yes, there weren't quite -- there was mix in variances and IV. The investment variances on some [indiscernible] with 18 million or something. So a lot of the rates we'd already moved some of the hedging and see, we've reduced some of the sensitivity. Some of the rate benefit was then offset by smaller negatives and inflation moved significantly at the start of the year, for example, property very small negative spreads, et cetera. So there was just very small things offset in some of the rates benefit there, which is why I ended up a small number.

On the IFRS, we're moving to neutralize that much more, as I said. So we hadn't quite got there, which is why you still see -- saw some rate impact coming through on the annuity portfolio. We started taking the action during the first half where designating assets under IFRS 9, which I can bore you with later if you like. And we're leaving capacity to do more of that as we write new business, we'll put new assets, which will again neutralize more of what we're doing. So we extend the portfolio, which helps Solvency II, and at the same time, take more of those assets and put them on amortized costs, which then neutralizes us for rates.

So we'll be looking to do that.

[Nigel Wilson, CFO]

Yes, he's got the mic there. It was really tricky.

[Mandeep Jagpal, Capital Markets]

Mandeep Jagpal, RBC Capital Markets. Two questions from me, please. First one is on new business capital strain. I think I'm not sure I heard this correctly, but Nigel said it can go from 2.2% to 1.4.

[Nigel Wilson, CFO]

Just the math on the two. [indiscernible] take the 40 million of the...

[Mandeep Jagpal, Capital Markets]

What that 40 million, what -- between the various components of Solvency II reform? What was driving that 40 million reduction? And kind of what do you assume for longevity reinsurance within that? And the second question is just on the PRT outlook, in his mention house speech, the Charles spoke about DB consolidation on a number of fronts and launched a call for evidence as to whether the PPF should extend its role. Conclude acting as a public consolidator for U.K. DB schemes even for sponsors, which are not insolvent. What are your thoughts on this idea, and could it impact both huge demand in the future?

[Nigel Wilson, CFO]

I'm going to let Andrew answer those questions. I do want me to answer the first one.

[Andrew Kail, CEO Institutional Retirement Division]

So the first one is [indiscernible] markets?

[Nigel Wilson, CFO]

Yes.

[Andrew Kail, CEO Institutional Retirement Division]

So the impact on strain, the move is just not -- it's just the risk margin impact. So that's one piece. On the PPF, lots of consultation, you've seen all the debates. I mean in many ways that, that -- what's behind that scheme is the pooling model that allows you to bring schemes together and investment that's actually what the industry does. So that's what we do.

So in many ways, we, of course, we're supportive of the pooling model. But actually, we think the optionality available to the sponsors that we're talking to is better served through -- than working with the insurance industry and PPF. The PPF has its role by thinking in terms of a scheme. That's got a long way to go, and the Charles talked a lot about in his speech options, more probably DC than DB, we are continuing to work closely with regulators, talking to government about options for the future and getting the best deal for pensioners in pension schemes. But from our perspective, whilst we're supportive of examining options.

We still feel that the PRT route is a very secure room for pensioners particularly in companies like L&G and the brand we have in the 35 years in the industry gives us a huge track record to deliver a really great outcome. We've seen examples like British Steel this year, where that umbrella arrangement, the partnership allows us to take a scheme through its life cycle and deliver an outstanding outcome to thousands of pensioners. And of course, that's what we're looking to do for a number of schemes. So we are very proud of the role we play in the industry at PPF its role, but we're also very supportive of what we're doing to.

[Andrew Baker, Citi]

Andrew Baker, Citi. Three please. First, just on the operating profit for LGI and retail. You're able to give the asset optimization split that was in that? And how do you think about the sustainability of that in particular?

Second, Cala, so flat year-on-year, probably I get a sense better than maybe you were guiding to at the beginning of the year. How are you thinking about the rest of the year for Cala? And then third, just on the annuity AUM roll forward. It looked like it was about a 50% jump in payments to pensioners whether that was year-on-year or even over the second half last year. Anything in particular driving that?

And what's the outlook there going forward? And the way you're looking at me is questioning my numbers there.

[Nigel Wilson, CFO]

I was looking at 3 different people, here trying to figure out who is the best one to answer it, none of them are making any eye contact whatsoever.

[Stuart Davies, CMO]

We'll have to go through the numbers with you off-line, I'd say, on the third one.

[Nigel Wilson, CFO]

Yes, that -- that's the last line.

[Stuart Davies, CMO]

That's right.

[Nigel Wilson, CFO]

Operating profit, do you want to say.

[Stuart Davies, CMO]

Yes, sure. Yes, the asset optimization, it was a few tens of millions higher than the previous year, which was part of the sort of outperformance across the annuity portfolio. It's split pretty much in proportion to the assets, probably a little bit more goes to the PRT business because of the nature of what we're doing there, and we give the split of assets there. So it's pretty much in proportion to that.

Yes, we don't -- we think it's sustainable. We have a good few years to do that. We think it's a great way for adding extra value for shareholders. We put the assets against the back book, don't give away any of the margin in new business. But obviously, we're conscious of hitting up against any proportions of DI in the book and doing it over time and making sure it's sustainable.

But yes, that would be there as a feature for a good few years to come.

[Nigel Wilson, CFO]

Yes. I think that's one of the exciting things about the reform is getting access to a different pool of assets that we can do more asset optimization on a go-forward basis. We'll talk about Cala and.

[Laura Mason, Chairman and CEO]

So in terms of Cala, you're right, revenue is flat year-on-year, anything a little bit higher than it was at this time last year. And that's made up of average sales prices, which are slightly higher than they were last year, and the sales rate, which is just slightly lower. And I guess, we are very pleased with how Cala has performed, both compared with other competitors, but also given the macro changes that have been seen over that year. Given that, I think we feel fairly confident that we will meet our plan. And I think it probably is worth just noting some of the sustainability measures that Cala has put into place.

So this year, we bought a very small timber frame making factory, which will allow us to make all of the houses using timber frame, so reducing the embodied carbon of the housing. And from next year, we are aiming that no gas will be going to any sites. And given I think the trends that we've seen recently, I think this year, we've seen a record number of consumers fit solar and heat pumps. I think we're certainly catering to what consumers want.

[Nigel Wilson, CFO]

Yes. We did that across the group. If you go and visit one of our inspired -- newest Inspired Villages, it's all ground source heating and air source heating and very carbon-friendly outcomes.

[Farooq Hanif, JPMorgan]

Farooq from JPMorgan. I'm surprised you didn't see a bigger jump in your retail annuity sales given the value for money. You've got this wondering how you're going to play in that market going forward? That's question one. Question 2, back to Laura, I'm afraid.

I mean, you -- we were told 10% to 12% return on alternative assets by 2025. You seem to be sort of getting there almost every year already. Is that just because yields are higher? Should we just think about the risk for yield as a base upon which you're naturally earning a risk premium. So we should just assume that you get the level of return going forward.

And then my last question was just on LGIM on costs. So you talked a little bit about the revenue and the flow outlook, but what about costs? So I know you've been investing and is there a point at which we'll see the cost to income ratio drop? And when is that?

[Nigel Wilson, CFO]

You're going to go first and say why 29% is a disappointment.

[Unidentified Company Representative]

Yes. I'm really disappointed with 29%. Yes, no. Yes. Great to see you all.

Yes, I think the -- there's a couple of points there. We're very active in our pricing, which means as interest rates go up. We reprice more quickly as they come down, we reprice more quickly. And actually, during the first half, given the time lags involved, they were kind of in general, coming down post the mini budgets. So we hope to see that trend reverse a little bit.

The other thing that we're a little bit different to the market is we have got some really good partnerships with some external companies who've got guaranteed annuity rate business. And with the big jump in interest rates, the actual size of the of the pots that are needed to fulfill those guaranteed annuity rates has actually reduced. So we've got a bit of an offset. But yes, 29% we're really happy with, and we're looking to do more of that going forward. We're feeling really positive about the retail annuity market and the -- both the volumes and the margins that we can get in that market.

[Laura Mason, Chairman and CEO]

And in terms of to the 10 to 12% which we -- as you say, we have now started to achieve. We've achieved an over 10% return on operating profit on our assets over the last 2 years. And that we've really set out that number. Thinking through how our earlier stage investments are starting to perform and mature and therefore, get more sustainable returns around the -- between the 10% to 12%. So yes, I acknowledge interest rates have changed since we set out that target, but really, that the math is really around sort of putting in early-stage investments that are maturing and getting to that those sort of longer-term sustainable rates of return.

[Stuart Davies, CMO]

Yes. LGIM, costs. Yes, I mean, you saw we took action. We had to react to where the market was and what it was doing to revenue. So we took some action end of last year, start of this year, around workforce, et cetera, and controls around costs.

Richard has been diligent on project spend and prioritization within that. We have some very large things we want to execute data improvement is essential. You can't use AI, if you haven't got data as I keep telling everybody. And just generally been able to use that for automation, et cetera, as well as doing the large work that we're doing with State Street, which is ongoing. But at the same time, we've been investing on distribution in Korea, in Switzerland et cetera.

And we think those are the right things to do. But we are being the word we like measured in those, and we are being conscious that what has happened to AUM, and we have to continue to have a focus on expense. So we'll do that for the rest of the year, absolutely. We'll take a view in the plan towards the end of the year and where we think markets are going to go. But unless the yield curve drops dramatically, we're going to have to keep that focus on expenses.

We don't want the cost income ratio continuing to increase.

[Rhea Shah]

Rhea Shah. 2 questions, please. So in LGRI, within the investment margin, what was the release of the prudence and how sustainable is that? And then second question on Cala, can you provide some color on the NAV of Cala? And are there any scenarios where you would look at other options for Cala, are you reducing a stake or changing how that works?

[Nigel Wilson, CFO]

Jeff, do you want to take those?

[Stuart Davies, CMO]

Yes. So the investment margin, you mean on the CSM, the actual unwind. So that includes -- it's mostly the unwind of the assets back in that. So we've most -- we designated quite a bit to amortized cost. So those unwind at the same rate.

And the rest of it is just the yield less the 41 bps we talked about in the previous sessions in IFRS 17. So that is just the yield across the book. The yield looks very like the one that we talk about for Solvency II, so it tells you the yield, you can add the matching adjustment to the fundamental spread. That's the total yield, knockoff 41 instead of 50 something. Can you get your answer.

So you can see what the yields are at, that's just the assets, just unwinding so that's very sustainable. There was an element of back book optimization within that number as uplift. And we get a higher number because we have surplus assets and obviously, return expectations have gone up on those in a higher yield environment. So that's why you get some extra coming through on that. So there's 3 areas that you can just get to with the modeling around that.

[Nigel Wilson, CFO]

Laura.

[Laura Mason, Chairman and CEO]

On the net asset value of Cala, it is a significant part of our residential portfolio, which is about £2.2 billion of NAV. In terms of what we are doing with it, we've grown Cala significantly in terms of revenue and profit since we check it on in 2013, I think. And our aim very much is to continue to build it, increase the return on capital employed. Really embed the sustainability measures to make sure that we are really one of the top 10, has in terms of revenue and sustainability. And we are always open to sort of the strategy and what we do with that, whether we co-invest, take merger and another house builder, we continue thinking of what the best option is for that, and we'll do the right thing from a sort of investment perspective at any given time.

[Abid Hussain, Panmure Gordon]

It's Abid Hussain from Panmure Gordon. Two questions, if I can. Firstly on Solvency II margins. Just wondering why the Solvency II new business margins are lower if the new business strain and the IFRS 17 profitability has improved. I would have thought the Solvency II and IFRS 17 move in the same direction?

That's the first question. The second question is on PRT competitors. Who are you competing against in the international market? And are there any plans to enter any new markets beyond the Netherlands?

[Nigel Wilson, CFO]

If Andrew, if you can take the second, Jeff, do you want to take the first?

[Stuart Davies, CMO]

Yes. I mean there's not much any really, it's 8% against 8.7% or 8.9% I [indiscernible] what it was -- it's the same as ever. The answer always get it is just the business mix within that and just relative to this, there's nothing really that's gone on between them. They do broadly move in the same way the IFRS 17, as you say, but not exactly because there are different features within them, the cost of capital and one's got different expenses in, et cetera. But the -- but they're broadly the same.

And so yes, there's nothing has gone on within that. And so I think the 8% is roughly where we'd expect to be and in line with historic numbers as well.

[Andrew Kail, CEO Institutional Retirement Division]

And then just on competitors. I mean, there are 19 active writers in the U.S. So it is a very broad-based competition if you bring that down to planned terminations where the U.S. market on balance doesn't always like writing deferred lives, that can bring it down to 7, who are there? They're the usual companies you see in the market MET, Prudential, Apollo, et cetera.

So nothing unusual about that. In terms of new markets, no active plans to move into new markets. We have Japan on a sort of a watching brief carriers in the audience though, sort of Asia President, PRT is actually company legal. In Japan, which makes it a bit of a barrier to entry. But we actively look at that market in terms of potential.

But certainly, we've still got a long way to go to mature the Canadian and Dutch market. So those are taking your attention for now.

[Nasib Ahmed, UBS]

Nasib Ahmed from UBS. First question on the OSG, how much asset optimization or management actions do you have in the in 947? And I noticed in the second half, you're expecting around about £800 million in net of management actions were more weighted towards the second half. So what's driving that reduction versus the first half? And then secondly, on new business CSM that fell versus 1H '22?

Even though you've written more PRT -- slightly more PRT, is that just mix driven and higher rates? And finally, can you split the earnings split for LGC between Cala, Pemberton or your key businesses? What percentage wise, what percent is big contributor by these businesses?

[Nigel Wilson, CFO]

Yes. If you do the first two, I'll do the third one.

[Stuart Davies, CMO]

Sure. Yes, OSG management actions. I mean, we said -- as we've said, there are certain ones in there that are in the first half, certain in the second half, things like the internal reinsurance of the U.S. term business. And so we take that out and we probably have -- probably relatively equally weighted in terms of management actions.

Asset optimization doesn't really figure heavily in the OSG number. So we were forecasting surplus generation broadly in line with last year, possibly up a bit, down a bit, 1% or 2%, but we think it will be broadly in line. But there's nothing much going in there. It's partly when Tim can be bothered to execute some of them, of course, as well. But there's nothing major in there that's really shaping it, I would say.

And then the second was the new business CSM, yes. Yes, there was -- no, I think we -- it's probably best that we talk to you or which number you're looking at because there's a whole lot of complication between which premium you've got for the funded reinsurance or not, and whether you're allowing for that and also whether you've got a pension scheme contribution of CSM in there or not. But broadly, I think actually, it was higher for PRT business than it was in '22, depending on how you do the calculation at 9.5 or 10-point something, depending on how you look to the calculation. Retail annuities were good. U.S. was good. We did say that some U.K. protection was a tougher market. You could see that was done in the Solvency II new business value and the same happened for the CSM on that. But otherwise, there was big variation period-on-period, and we can talk you through the PRT one, if you like, because this just need to make sure we pick up the right numbers.

[Nigel Wilson, CFO]

Yes. On the breakdown of LGC, we're trying to do a lot of that when we did the Capital Markets event last year, and at some point, we'll just give an update on the capital markets and how we're tracking against the plan of it. So far, we've never on all constituent parts and trying to get them to -- otherwise, it would be a horrendously long report to go through all the different assets that Laura and the team have in their business. I think this is the last question. If anybody hasn't asked a question or want to ask another question, could they please put their hands up.

I'm assuming not. So the privilege last question.

[Dominic O'Mahony, BNP Paribas Exane]

Very privileged. Dominic O'Mahony, BNP Paribas Exane. Just two questions left, if it's right and the probably sort of follow-ups really. The first is just to clarify the comment you made, Jeff, about liquidity, I get that the cash position is great. Just trying to understand whether there are any circumstances on the liquidity would ever be a constraint really.

And in my understanding, because of the simple corporate structure, it's quite easy to move cash up and down. So I wouldn't have thought that liquidity would ever really be a material constraint, but I'd be interested in your comments on that? The second is just on new business strain. Jeff, when you said our models are too much strained in them. I wonder if you were thinking of my model because I've got a 3% strain in mine.

Is the 2 the 3 or is 1.5 that you? And I...

[Nigel Wilson, CFO]

Many of the models were at forward. So you were one of the [indiscernible] process. So just to try and get over it, there is a difference. And we were seeing that lots of people had different variations in the model and we wanted to kind of treat everyone the same, and therefore, give the disclosure by this route as opposed to any other route. So that was the second and the first one, Jeff.

[Stuart Davies, CMO]

You're right, liquidity is not a problem for us. There's a couple of different forms of liquidity is, the cash movement through the business, which we can easily move up from the insurance business. We tend to move up what we need, as we said, and what needs to sit in treasury. And so we have no issues with that, and it's grown up from the various businesses we move that up. So liquidity, not an issue there at all.

And the other form of liquidity is more around the annuity business and derivatives, which is the main thing we stress test for. We obviously saw after the mini budget; we listed that very well. We had plenty of headroom still on that even with the rates movement, so we can withstand big, big up red shocks, which is the big thing that we hold liquidity for within the annuity business separately. But that's very different to the cash passing through and cash that I was talking about, which is not an issue at all.

[Nigel Wilson, CFO]

Thank you. Thank you, everyone, for their questions and their support for Legal & General. And I probably won't see many of you again or some of you not again. This will be my last set of results. And I'd just like to thank you for all the support you've given me over the last 14 years. Thank you. Bye-bye.