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Edited Transcript of LGEN.L earnings conference call or presentation 9-Aug-17 8:30am GMT

Half Year 2017 Legal & General Group PLC Earnings Call

London Jun 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Legal & General Group PLC earnings conference call or presentation Wednesday, August 9, 2017 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bernard Leigh Hickman

Legal & General Group Plc - CEO of Legal & General Insurance Division

* Cheryl Agius

Legal & General Group Plc - CEO of General Insurance Business

* Kerrigan William Procter

Legal & General Group Plc - CEO of Legal & General Capital and Director

* Mark Zinkula

Legal & General Group Plc - CEO of Legal & General Investment Management and Director

* Nigel David Wilson

Legal & General Group Plc - Group CEO & Director

* Stuart Jeffrey Davies

Legal & General Group Plc - Group CFO & Director

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Conference Call Participants

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* Alan George Devlin

Barclays Bank PLC, Research Division - Director

* Andrew Hughes

Macquarie Research - Insurance Analyst

* Andrew John Crean

Autonomous Research LLP - Managing Partner, Insurance

* Andrew Sinclair

BofA Merrill Lynch, Research Division - VP

* David Bracewell

Redburn (Europe) Limited, Research Division - Research Analyst

* Gordon Aitken

RBC Capital Markets, LLC, Research Division - Analyst

* Greig N. Paterson

Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst

* Jonathan Michael Hocking

Morgan Stanley, Research Division - MD

* Marcus William Barnard

Numis Securities Limited, Research Division - Analyst

* Oliver George Nigel Steel

Deutsche Bank AG, Research Division - MD

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Presentation

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

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Good morning, everyone, and welcome to our 2017 half year results. As the title says our excellent execution has delivered a consistently improving financial performance. As you move through the building, you will have seen many great images of what we are achieving, accelerated evolution in practice, images showing both our investment in physical assets to deliver growth, but also our technological innovation in digital assets, which is also delivering growth.

A couple of bits of housekeeping. Here are the usual forward-looking statements. Please switch off mobiles. And if there is a fire alarm, the home team will shepherd you downstairs.

This has been another terrific period of delivering performance. And indeed, once again, I would like to thank all of my colleagues. The key reason delivering accelerated evolution, which drives our EPS and ROE growth is the increasing capability of my colleagues. That is right across our organization by division, by function and by country. We have a positive supportive culture, morale is high, engagement is high and our Net Promoter Scores from our customers keep increasing. So thank you, once again.

In terms of our key numbers. Operating profit is up 27% to almost GBP 1 billion, profit before tax is up 41% to GBP 1.2 billion, EPS is up 41% to 15.94p, net release is up 6% to GBP 724 million, ROE up to 26.7%, and our formulaic dividend is 4.3p. Jeff, Kerrigan and Mark will discuss the financials in more detail later.

Whilst these results are good, in fact, they're very good, there is so much more we can achieve. We have the capability, we have the capital and we have the opportunities to continue to grow.

So much is being written about the accelerated decline of many U.K. industries. What's happened, for instance, on a global scale to the U.K.'s brewing industry? What's happening to our retail industry?.

Legal & General has prospered for 180 years because we manufacture and deliver economically and socially useful products. It is clear that we've been accelerating on our evolution for several years. Our successful strategy is based around 6 long-term and increasingly important growth drivers: aging societies, globalization of asset markets, creating new real assets, welfare reform, technological innovation and providing today's capital. The creation and management of long-duration assets and liabilities sits at the heart of our business and sits alongside a positive supportive culture. We believe in teamwork and we are indeed a team. This explains how we've created sustainable competitive advantages, resulting in market-leading positions, an increasing relevance to all of our stakeholders.

Our key achievements in H1 are shown here. We are making progress in all areas. In aging demographics, Chris Knight and the team have delivered around 100% growth in lifetime mortgages and Individual Annuities, an extraordinary achievement by Steve Ellis and our colleagues in Solihull. And John Towner and Pretty Sagoo are driving thought leadership in action for Pension Risk Transfer. In globalization of asset markets, Aaron Meder and team have seen our U.S. business grow to $164 billion of AUM, that's up 23% in H1. In Real Assets, Bill Hughes, Laura Mason and others have grown our Direct Investment to around GBP 12 billion with new build-to-rent sites, successful urban investment in Cardiff, in Stratford and in Newcastle. And with last week's announcement, investment into later living. On welfare reform, Paula Llewellyn and John Hyde are helping change attitudes to Retail protection, with innovative new campaigns driving people to think about the need to protect themselves and their families. Emma Douglas and colleagues are helping the vital growth of retirement savings through our market-leading Workplace, Pension and DC products. And Jackie Noakes is working very closely with me on accelerating our technological innovations, some of which I will share with you later.

This slide highlights the share of profits made by each line of business and our market share. Our markets are attractive and they are growing, and we typically have a 25% to 40% market share. And as shown on this slide, we are #1 in 9 U.K. markets. Where we are not, like Individual Annuities, our market share has climbed, but it's still only 13%. We are confident as the industry sees more consolidation and the demand for security of income in retirement increases, we'll have the opportunity to continue to grow that share.

We produced a version of this slide at our last set of results. Our ambition for 2015 to 2020 continues to be ahead of market consensus. We delivered 17% earnings per share growth in 2016. We've made a great start in H1, and we are confident about H2, and we will be increasingly ambitious going forward.

With that, I'll hand over to Jeff for more detail on the financials.

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

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Thank you, Nigel, and good morning, everyone. As a mini agenda, I'm going to cover the financials for the first half at a group level: our dividend, the group's capital position, and then the performances of our insurance -- General Insurance and Savings divisions. Kerrigan will then cover Retirement, Mark, LGIM, before Nigel returns to cover L&G Capital, Group strategy and finally, the Q&A session at the end.

As Nigel noted, it has been a strong half year as a result of our excellent execution and clear focus strategy, with all our key businesses growing well. 13% growth in LGIM assets, now GBP 951 billion, with GBP 21.7 billion of net inflows. GBP 3.2 billion of new business sales in LGR. 27% increase in LGC's DI, with growth from new investments offset by profitable disposals. Total group-wide DI is now at GBP 11.8 billion, up 18% since the year-end. And LGI's premiums up 7% to GBP 1.3 billion with the U.S. performance particularly strong.

The 27% increase in operating profit to GBP 988 million benefited from a release of GBP 126 million as a result of changes we've made in our base mortality assumptions, following recent greater-than-expected mortality experience. Even without this, the growth in operating profit was a strong 11% at the Group level, but there will be more on the outlook for further releases from Kerrigan later.

Our key divisions performed strongly in the first half, contributing to the 6% increase in net release from operations for our retained businesses. An additional GBP 100 million of dividend from the LGAS legal entity to group in respect of the base mortality release is not included in the net release from operations. When added together, the group generated GBP 824 million total release, up 13% on first half 2016.

PBT was up 41% on the back of the strong operating profit result, combined with a positive investment variance, and our posttax return on equity grew to 26.7%.

As a high-level summary of our capital position, the group's Solvency II surplus at the end of June was GBP 6.7 billion, up GBP 1 billion since year-end. This was underpinned by good operating surplus generation. This equates to a coverage ratio of 186%.

And finally our dividend, which shouldn't have been a surprise to anyone, given that a year-ago we moved to a formulaic basis for the interim dividend, calculated at 30% of the prior full year dividend, which gives 4.3p.

Turning to operating profit from the divisions, which was up 19%. As already mentioned, LGI grew 40% and, excluding the change in our base mortality assumption, is up 9% as a result of the excellent 2016 and strong new business sales so far this year in both our Retail and institutional subdivisions.

LGIM grew 13% whilst maintaining discipline in its market-leading cost income ratio and against the backdrop of industry-wide fee pressure. Management fees and costs grew in line with each other by 15% as we continue to invest in the business.

LGC was up 5%, benefiting from a growth in the overall equity portfolio within the division's GBP 3.9 billion traded assets and continued strong performance in the GBP 1.3 billion of direct investments.

Our Mature Savings business contributed a robust GBP 52 million. And in LGI, 2 of its 3 subdivisions performed well: LGI U.S. and U.K. Retail Protection. However, these results were offset by decreases in Group Protection, which was affected by adverse experience.

In total, our division was flat year-on-year. Additionally, GIs result was down to GBP 15 million from GBP 31 million due to the impact of increased costs from nonweather-related claims in Q1, predominantly escape of water in line with industry experience. I'll explain more about how we address in these last 2 items later.

Moving on to PBT, I thought I would briefly take you through some of the key investment variances we had in the half year. Firstly, LGC saw a GBP 52 million positive variance from the traded assets portfolio, outperforming the long-term economic assumptions as well as profit on disposals realized in the Direct Investments portfolio.

At Group, the GBP 77 million gain was primarily driven by the Group's defined-benefit pension scheme, reflecting accounting valuation differences arising on annuity assets held by the scheme. The figure was also inflated by some catch-up from last year.

As highlighted last year, the comparative for LGI saw a negative experience of GBP 100 million, driven by a large reduction in U.K. government bond deals.

Moving onto our balance sheet, and in particular, our capital position. The group's Solvency II surplus increased by GBP 1 billion since the year-end to GBP 6.7 billion. Our Solvency II coverage ratio, calculated on a shareholder basis, increased to 186%, up from 171% at the year-end. As usual, we have recalculated the transitional, which actually reduces the surplus by a few hundred million on this occasion.

Our economic capital showed similar growth as expected. To explain the Solvency II surplus increase of GBP 1 billion, we've provided a bridge. Our operating surplus generation was GBP 0.6 billion, contributing 10% to the coverage ratio and covered the larger of the 2 dividends paid each year, in this case, the final 2016 dividend. Similar surplus generation in the second half will more than cover the dividend just declared of GBP 256 million.

Within surplus generation, we have included the impact of the amortization of the opening transitional, offset by the corresponding release in risk margin, which canceled out.

The impact of writing new business in the first half was a strain of GBP 0.1 billion. However, the majority of this figure is in respect of our U.S. term sales. As per last year, we were reinsure and finance this business in the second half, significantly reducing the strain. It is important to note for the remaining businesses, the strain was less than GBP 50 million.

As you know, we disposed of Cofunds of Netherlands, which together improved the coverage ratio by 2.5%. The GBP 0.4 billion improvement from other operating variances included the impact of experience variances as well as changes to assumptions, in particular the change in our base mortality. And it also includes matching adjustment management actions. As previously disclosed, the net sub debt issue of GBP 0.5 billion resulted in a 6% increase in the ratio.

And finally, on Solvency II. This slide gives you our estimate of the present value of Solvency II surplus emergence from the key elements of the new business we wrote. Our margins continue to be resilient, with much of the change from the year-end attributable to changes in business mix.

We have continued to maintain good margins and pricing discipline. For a small strain, we have created almost GBP 300 million of value.

In terms of divisional performance, I will start with Legal & General Insurance, which combines our U.K. and U.S. Protection businesses. The numbers presented here all exclude L&G Netherlands, which was disposed of in April 2017 as we want to show you the contribution from the ongoing business division, with the main impact of this exclusion being on net release from operations.

In total, gross premiums were up 7% to GBP 1.3 billion with operating profit flat. However, within that, the U.S. Protection growth of 33% was offset by a 13% decrease in U.K. Protection. Let me cover this in a little bit more detail, starting with LGI U.K., operating profit from the U.K. businesses was down 13%. As discussed at full year, we've continued to see poor experience in our Group Protection business. A range of actions have been taken, including pricing action at scheme renewals, however, the impact of these will take time to be fully reflected in our experience. So we expect some adverse experience to continue emerging, but at a reduced level in the second half of 2017.

Our highly automated Retail Protection business in U.K. continued to perform well, with gross premiums up 5% and generating good profits, reflecting the consistent performance of this business and its leading market position, with 25% market share in 2016. We are increasingly using predictive analytics and improved underwriting approaches to reduce the time it takes for advisers and our customers to apply for policies.

Our U.S. Protection business is the second largest provider of U.S. term life assurance through the brokerage channel and has 1.2 million policies in force. Our premiums increased 3% to $618 million. This was up 17% on a sterling basis. And operating profit grew 16% year-on-year to $72 million, up 33% on a sterling basis. This was due to business growth and favorable mortality experience.

The digital transformation of our U.S. Protection business is just beginning, but will catch up fast, fully using the wealth of experience and capabilities we have from digitizing our U.K. business.

Some of you will have seen earlier in our foyer a newly launched SelfieQuote, which provides a life insurance quote by estimating an individual's age and BMI using a selfie photo. Now it worked well for all of us, but suspiciously, Nigel was 45 and light as a feather. We are the first in the life insurance industry to roll out this approach, which is an example of how technology can improve the application process for consumers.

Moving to GI. Gross premiums increased 11% to GBP 173 million, despite the pressures of a competitive market. And our direct business delivered gross premiums of GBP 63 million in the first half, representing 17% growth year-on-year, now accounting for 36% of gross premiums.

Operating profit for our General Insurance division did decrease from GBP 31 million to GBP 15 million, however. This was primarily due to the impact of increased costs from nonweather-related claims in Q1, predominantly escape of water claims, which was in line with wider market experience. We've taken action to address this and saw improved claims experience in Q2. We continue to monitor this closely and will take further action if required.

We are continuing our digital innovation hereto. Our new SmartQuote product will enable customers to achieve a quote for household insurance in about 90 seconds by answering 5 simple questions. GI has now won 5 distribution agreements in the last 2 years with U.K. financial institutions, and we are on track to increase gross premiums by over 10% by the end of 2017.

Our Savings division now comprises just our Mature Savings business. Our focus is on customer service, while continuing to deliver good profits.

Operating profit remains robust at GBP 52 million on our GBP 30 billion of assets, through the introduction of robotics and automation to reduce unit costs.

And with that, I'd like to hand over to Kerrigan to take you through LGR's continued growth and more on our longevity assumptions.

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Kerrigan William Procter, Legal & General Group Plc - CEO of Legal & General Capital and Director [3]

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Thank you, Jeff, and good morning, everyone. LGR had a strong first half with net release up 8% to GBP 307 million, and operating profit up 40% to GBP 566 million. New business flows were particularly strong in the LGR retail business with total new business up 98%, comprised of retail annuity volumes of GBP 345 million and lifetime mortgage loans of GBP 424 million.

U.K. Bulk Annuity deal volume sourced directly from U.K.-defined benefit pension plans was GBP 1.5 billion, which compares to GBP 0.6 billion in the first half of 2016. We completed the Aegon transaction in the first half of 2016, so overall annuity volumes were down. However, new business surplus of GBP 51 million was a strong figure given volumes as we used the new business flow to fund lifetime mortgage lending and direct investment at attractive yields.

Our total new Annuity sales were GBP 2 billion with new business value add of 8.9% achieved with the regulatory capital strain of less than 4%. This continues to support our expectation of low to mid-single-digit regulatory capital strain in the medium term.

Total new business was GBP 3.2 billion, including a GBP 115 million of U.S. Bulk Annuity business and an GBP 800 million longevity insurance deal with a U.K. pension plan, which compares to total H1 2016 business of GBP 4 billion.

So let me now move on to longevity and our longevity release. LGR's gross longevity exposure is GBP 61.4 billion across Annuity and longevity insurance business. We have reinsured GBP 15.9 billion of longevity risk with 11 reinsurance counterparties, leaving a net exposure of GBP 45.5 billion.

In the first half of 2017, we reviewed mortality experience for our overall net longevity exposure. In the light of more-than-expected actually deaths, we have decided to release GBP 126 million of prudence in our reserves. At this point in the year, we have not adjusted our assumptions for future mortality improvement. They remain consistent with those used at the end of 2016, but there is increasing evidence that the high level of recent mortality is in part due to medium or long-term influences rather than short-term events. We will be reviewing our longevity improvement assumptions in the second half of 2017.

For the technicians, we moved to an adjusted version of the CMI 2014 model for the 2016 results. And we will be investigating the appropriateness of the CMI 2015 model for longevity improvement in the second half of this year. This review will also cover how our annuitants differ from the broader population and to what extent adjustments should we made for spikes in mortality in the underlying data such as the high death rate in January 2015.

We continue to scrutinize the likelihood of a sustained slowdown in mortality improvement and gain confidence as we see more years of evidence. Based on the current view of the data and level of certainty, if recent mortality experience continues, we would expect to reflect this in our best estimate assumptions in stages over several years.

Our asset portfolio has seen a continuation of the defensive and diversified theme with, for example, over half the portfolio in sovereigns, utilities and infrastructure, GBP 7.2 billion in gilts alone and low percentages of the portfolio in banks and energy, oil and gas.

On the direct investment side, we added a further GBP 1 billion of assets at infrastructure or assets delivering or secured on stable rental income. This is in addition to new lifetime mortgage loans.

LGR's institutional business supports a promise of a defined benefit pension to 518,000 people and holds GBP 34.1 billion of assets to back these promises. Pension risk transfer adds to this business both in the U.K. from buyouts, buy-ins and longevity insurance and in the U.S. through buyouts and buy-ins. Client interest from U.K. pension plans remains substantial. And LGR's connections with LGIM's institutional business are working well, with approximately GBP 1 billion of the GBP 1.5 billion Bulk Annuity business in the first half originating from LGIM clients.

The U.S. business is progressing steadily with $141 million across 3 deals in the first half, meaning that we have now executed over $1 billion of U.S. PRT deals since opening for business in the second half of 2015.

The U.S. market looks set to grow in 2017 from the $14 billion market size in 2016, and we will continue with our measured approach to growth in that market.

LGR's Retail business manages GBP 21.5 billion of assets to back pension promises to 541,000 customers with a further 16,000 lifetime mortgage customers. LGR Retail's new business has seen terrific growth this year, and we expect new retail annuity business in the second half to be in line with the first half. Lifetime mortgages has the potential to be a rapidly growing market, and our market share has been steady at around 30% in the past 3 quarters.

Finally, further industry consolidation seems likely, with the potential for annuity back books to add to either the institutional back book as with the Lucida deal we completed in 2013 or to the retail back book as with the Aegon deal last year.

LGR has seen strong growth in both its institutional and retail businesses, but the potential for the markets in which we operate is huge. There are GBP 2 trillion worth of liabilities in U.K. private sector-defined benefit pensions, currently transferring to the insurance industry at GBP 10 billion to GBP 14 billion per annum. There are GBP 3 trillion of liabilities in U.S. private sector-defined benefit pensions, of which we expect around $20 billion to transfer to the insurance industry this year, up from $14 billion in 2016. There is GBP 1.5 trillion worth of U.K. housing equity with over 55s, of which we expect GBP 3 billion to be released this year in the form of lifetime mortgage loans, up from GBP 2.2 billion last year.

L&G have a leading role to play in the unwind of this legacy of wealth accumulation, but we will also have a leading role to play its replacement through defined contribution and decumulation with guarantees as the burgeoning LGIM retail and LGR retail work ever closer together.

I'll now hand over to Mark.

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Mark Zinkula, Legal & General Group Plc - CEO of Legal & General Investment Management and Director [4]

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All right. Thank you, Kerrigan. LGIM continues to experience strong consistent growth with external net flows of GBP 21.7 billion during the first half of the year and a 13% increase in profit. We continue to grow our U.K. DB business and remain the largest manager of assets in this market and the largest provider of LDI solutions. We're seeing positive growth in our DC business, and we're now the largest manager of DC assets in the U.K. And the U.K. Retail business is also growing rapidly, ranking first in net flows during the second quarter. And we're experiencing accelerating in growth internationally with AUM up 31%. I'll focus on all 3 growth areas in more detail in later slides.

We've maintained a stable margin of around 50% due to the scalable nature of our business model and fund performance continues to be strong. And our investment technology and overseas distribution will help us maintain our current positive momentum. In an industry experiencing consolidation and multiple challenges, such as the upcoming Brexit negotiations, MIFID II and the FCA asset management market study, we're well placed to continue delivering for our customers.

Positive flows across virtually all of our channels, regions and investment areas demonstrates the breadth of LGIM's business model. The derisking of DB schemes and the growth of the DC market are allowing us to increase assets across our range of solutions, which includes LDI and multi-asset strategies and fiduciary management. A strong performance in active fixed income is leading to increasing inflows, especially from the U.S. and U.K. institutional clients while demand is growing in other regions.

Index net outflows are once again due to U.K. DB clients switching out of equities and into other products, primarily solutions as they continue to derisk. However, we had strong net inflows from international and retail clients as our index business expands in new markets. We're also successfully expanding our product range in factor based and ESG strategies and is growing demand for real assets as part of a broader solutions mandate or on a stand-alone basis. We made over GBP 1 billion of investments across real estate, Infrastructure and corporate debt, and we're experiencing success with our build-to-rent fund with approximately GBP 1 billion in capital raised.

Although we're still expanding our presence in the U.K. DB market, as it continues to mature, it's important that we grow our U.K. DC and retail businesses. The DC business had net flows of GBP 1.7 billion, driven by our bundled business, which offers investment and administration services to DC schemes. Our master trust is a fastest-growing in the U.K. and together with our other workplace pension schemes now has over 2.4 million customers. We have seen a 20% increase in customers over the past year and expect this growth to continue. The number of pension schemes supported by the DC businesses has increased by 29% during the first half, and our investments in Smart Pension, a fintech firm focusing on auto enrollment for small companies, has helped drive this recent growth.

Our retail business is also performing well with GBP 1.7 billion of net inflows and assets have increased by 25% to GBP 27 billion. We're confident we'll continue to benefit from trends in the retail market such as growing demand for index and multi-asset funds, and we're expanding our distribution focus to wealth management in key European markets.

In addition to expanding our presence in the U.K., we're also experiencing accelerating growth in international markets. Over the past 6 months, we had record net inflows in our international businesses of GBP 17.9 billion, and total international AUM stands at GBP 198 million.

Our U.S. business continues its rapid growth with a 27% increase in total assets for the first half of the year. In Europe, we had GBP 6.6 billion of net inflows and now have GBP 35 billion in client assets. We had GBP 2.5 billion of net inflows from clients in the Gulf as we deepen our relationships in this region. We've also established a distribution office in Tokyo and trading and fund managing capabilities in Hong Kong, and we expect our Asian business to experience accelerating growth.

As I mentioned earlier, our U.S. business had a very good first half with net inflows of GBP 8.6 billion. We're now managing assets of GBP 126 billion in the U.S. across a range of strategies. This rapid growth have been driven by thought leadership we provided in the U.S. pension market as DB plans increasingly implement LDI strategies and consistent strong performance in a range of active fixed income funds. A more recently established index team is also helping drive growth in the U.S. business. Good progress has been made in raising assets outside of the corporate DB channel as we begin to target public plan and DC markets. And we're also developing multi-asset and real asset capabilities in the U.S. to support expansion of our distribution strategy and also support LGR's expansion in the U.S. market.

So to sum up, it's been more the same from LGIM as we continue to broaden our U.K. footprint and successfully expand internationally with a focused strategy that leverages all our core strengths. Now I'll hand it back over to Nigel.

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

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Thank you, Mark. LGC continues to grow assets and profits, creating new asset classes and attracting core investors to grow their business. Operating profit for the half year is GBP 142 million, that's up 5%, and PBT is GBP 194 million, with strong performances from both direct investment and traded portfolios.

In total, we have GBP 2.9 billion of shareholder cash. And today, after the LGAS dividend was paid, we now have GBP 3.3 billion, of which GBP 2 billion is held at Group. LGC's business model is performing well across all asset classes. Over GBP 200 million has been invested this year, including a new GBP 39 million investment into later living as well as scheduled following on investments in projects such as the successful built-to-rent fund and our energy business.

The operating businesses are developing strongly, with Pemberton and NTR expanding rapidly and CALA delivering revenue of over GBP 700 million, that is 3x the GBP 241 million it was when we acquired it in 2013.

Developments such as Cardiff and Bracknell are exciting and profitable. Importantly, profits are being delivered from asset sales from LGC to long-term investors, creating real cash flow for Legal & General shareholders and a flow of capital investment to the wider U.K. economy, investing in real assets, creating real growth and real jobs. As this example shows, LGC invested GBP 38 million into the early equity -- early stages of a GBP 400 million Cardiff regeneration project in 2015. The LGIM real assets team has delivered attractive matching adjustment assets for LGR and also for LGIM's clients. This investment model is typical of LGC's approach, which has successfully driven investment into much needed inclusive regeneration schemes right across the U.K.

LGC is also broadening the opportunities for future growth at Legal & General. By applying their skills and creating successful investment partnerships and capital management, LGC are establishing new attractive asset classes, and there are many more in the pipeline.

All 3 sectors of housing, Infrastructure and SME finance suffer from underinvestments in the U.K. Finding long-term investment opportunities to bridge these gaps is essential to align long-term savers with socially and economically useful investments. By investing early, LGC has created huge opportunities for LGR and LGIM clients to deliver long-term investment opportunities for the group.

The environment in which we compete is seeing rapid change in technology and digital customer engagement. We are making great progress as we continue to invest in technology to ensure our business remains simple, efficient and convenient for customers. We've reduced processing time using robotics and in doing so, provide our customers with an excellent service as can be seen through outstanding Net Promoter Scores of 70 or more.

Our investment in platforms has resulted in significant increase usage by customers, institutional clients, consultants and administrators. We've seen an 80% increase in customer visits to L&G.com so far this year. And our digital institutional client portal is being used by over 2,500 clients. We're using a combination of technology and data to innovate and drive our business forward. Jeff mentioned earlier, our SmartQuote launched in GI, SelfieQuote in the U.S., using predictive analytics and automation. And we have pilots underway using artificial intelligence, chatbots, virtual reality and many more. Our cloud-first strategy is firmly embedded, and our usage of the cloud has already become business as usual, as indeed with robotics.

We're excited by some of the opportunities possible through the use of blockchain, and we're exploring its potential in a number of areas across the business. We have clear goals for the future, to achieve global leadership in pension derisking, help people achieve financial security, continuing building our world-class international asset management business, become the U.K. leader in Direct Investments, become the market leader in the provision of digital insurance and Retail Investments, with the ultimate aim to be recognized as a leader in financial solutions with a globally trusted brand.

I'd now like to open up to questions. So thank you. Now Gordon and Andy. Gordon, Andy, Greg, how about that?

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Questions and Answers

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Gordon Aitken, RBC Capital Markets, LLC, Research Division - Analyst [1]

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Gordon Aitken from RBC. Three questions on longevity. Firstly, you can talk a bit about -- I mean, CMI's 2017 will be published in March next year and CMI '16 underestimated the number of death in '16 by 4%. I mean, does your statement about potential future releases reflect the expectation that CMI '17, when it is published, will reduce life expectancy again on top of the reductions we've already seen in CMI '16 and CMI '15? Can you just talk a bit also -- second question about the wider implications of this and of the increase in deaths for the acceleration of DB schemes looking to derisk, and also maybe other insurance companies who have back book, looking to offload them? And the final question on strain and strong demand for bulks, you've highlighted that plus you have annuity back books looking for homes. So lots and lots of demand and, but doesn't look like there is an awful lot of supply in this sector. What happens to strain from here?

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [2]

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Kerrigan, will you take the first 2? And Jeff, do you want to talk about the back book acquisitions?

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Kerrigan William Procter, Legal & General Group Plc - CEO of Legal & General Capital and Director [3]

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Okay. Certainly. Well, just on the CMI models. As you know, as many of you all know, we're on the CMI 2014 model at the moment for the 2016 results and at the CMI 2015 model we'll be exploring really in the second half of this year. And just to give you a bit of color on that and maybe link to some of your other points. The things that we'll be looking at in some detail are the differences in the slowdown of longevity improvement for different socioeconomic groups, by age group and by gender. Broadly, the slowdown is more marked for the lower socioeconomic groups, it's more marked for older age groups and it's more marked for females rather than males. And if you want to kind of visualize that it's poor old mom, really is the unfortunate picture there with that slowdown in (inaudible)

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [4]

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Diversity polls for Kerrigan.

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Kerrigan William Procter, Legal & General Group Plc - CEO of Legal & General Capital and Director [5]

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So that's the picture that we're really investigating. You can see there's themes that not only apply to our back book. We really need to analyze that in a great amount of detail and get comfortable with the appropriateness of the CMI 2015 model and see how things progress from there on. I mean, just to elaborate those points a little about where does it go in the longer term. Clearly, there are some themes that are coming together here. There is the -- in a lot of our long-term themes, There's aging populations meets welfare reform, if you like, the age of austerity meets the aging demographic. The rate of increase of over 80s is not matched by the rate of increase of financial resources there, so you can see that continuing. The other element is really the cause of death argument, which says that people die of something. So as we've seen the improvement in circulatory disease treatment or cancers, then you've seen the rise in prevalence of dementia. And you put all those things together and you can see a potential for a medium-term to long-term trend developing, and that's really what we are thinking about. And I think some of that is underlying that CMI 2016, CMI 2017 figures that are starting to come out. So that's how we think about the overall picture. And certainly, that's a positive situation also for defined benefit pension plans so that GBP 2 trillion worth of liabilities clearly impacted by that longevity improvement and that rate of transfer to the insurance [entry] is clearly impacted by the funded status of all those pension plans.

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [6]

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So net-net, it's great news on one side, and there's a lot more business out there that's coming our way, and you're probably going to get a bigger share of it. Is that the...?

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Kerrigan William Procter, Legal & General Group Plc - CEO of Legal & General Capital and Director [7]

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I think that's a good summary.

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [8]

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Okay. Kerrigan, because a number of our people have PhDs who certainly give the complete answer. Jeff, do you want to add?

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Stuart Jeffrey Davies, Legal & General Group Plc - Group CFO & Director [9]

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Yes. I mean, just in terms of strain and what's out there, obviously, especially if you believe the press, there is potentially large back books. We're obviously very pleased with the less than 4% strain that we talked about. That combined with our increasing solvency ratio, anything that increases that in the future from longevity releases, improved cash position, all gives us optionality around that. So we're very comfortable that we can quote on those large transactions as they come along. And as you say, if supply/demand exceed each other and pricing improves, the strain only goes down, so we'd be very happy with that. So, yes, I mean, whether they are GBP 10 billion numbers or any other number, we're very happy to be in the market for those and have lots of optionality around it.

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [10]

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Andy?

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Andrew Sinclair, BofA Merrill Lynch, Research Division - VP [11]

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It's Andy Sinclair from BofA Merrill Lynch. Three questions as well, not on longevity. Firstly, on LGIM's flows, strong again. You mentioned strong consistent growth. I don't really feel this business ever really gets a growth multiple, though. Would you consider some sort of long term flows target to try and reaffirm that? Secondly -- second with LGIM. Expense growth is maybe a little bit higher than I anticipated, growing at pretty much the same pace as revenues. Were there any one-offs here driving expenses higher? Just what you're looking at going forward there. And thirdly, kind of just following on from Gordon's question. Jeff, I saw you commented on the media call this morning saying you could easily fund the GBP 10 billion annuity transaction today. Could you give us an idea of where you would see capacity constraints and is it constraints on capital or is it asset sourcing? Just a bit of color there.

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Mark Zinkula, Legal & General Group Plc - CEO of Legal & General Investment Management and Director [12]

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Okay. Yes, certainly. I think the first time I've had 2 out of 3 for LGIM. So thank you very much for that.

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

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We did been pay him. We did pay him. I saw you give him 20 quid.

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Mark Zinkula, Legal & General Group Plc - CEO of Legal & General Investment Management and Director [14]

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But it's obviously too many people dying. No, the flows have been, I think consistently around mid-single digit percentage of open AUM for a while. Obviously, the flows will be lumpy. We've talked about this several times in the past, especially the U.K. DB book because we have a lot of large institutional clients, a lot of large mandates. And so there will be some volatility in the flows there. But as time is going on, as you -- at pains to point out, the growth in our DC business, our Retail business in all regions is just consistent growth where we're starting from a very low or nonexistent base historically. So over time, we do expect those net flows to be clearly positive, virtually quarter after quarter for a while here. There will be quarters when they are not, but I think we can still maintain above industry net flows for a sustainable period of time for sure. So if the industry is at around, say, 1% or 1.5% since the crisis and we are mid-single digits, I'd like to believe we'll be able to continue that kind of trajectory. In regards to expenses. Yes, we are investing in the business, and we'll continue to invest in the business. We're exceptionally well placed right now. It's an industry going through consolidation. We are in a great spot to continue to consolidate, or win in this consolidation phase and so we'll continue to invest predominantly in expanding distribution to support this manufacturing machine that we have as well as -- a lot of it's in technology, in a variety of different kinds of initiatives. So I do expect that we'll continue to invest in the business going forward.

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [15]

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I think the -- there were a couple of comments that Mark made in the presentation that you might have picked up. When we transferred the savings business, Retail business into Mark's division, we were #13 in net flows. We were #1 in the last quarter and I honor Solomon and the team in just an amazing job there. And in the DC space, we've also become the #1 player as well, which is a great achievement by Mark and his team. Jeff?

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Stuart Jeffrey Davies, Legal & General Group Plc - Group CFO & Director [16]

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Yes. Just on the GBP 10 billion back books. I'm not sure that's quite what I said, but it's sort of true. Yes, so we are very open to business. And we've done the work around a GBP 10 billion book and what that would look like, and we talked about the strain figures, the less than 4%. Back book clearly comes with some transitional, which helps but that is offset by the amount of direct investments that you can source at a point in time. But we've done that and with, as I said before, with the highest solvency ratio and some of the tailwinds behind that, management actions we can take, we feel very well placed to be able to write that sort of sized deal and actually not impact our underlying flow business, and then warehouse that and decide our options for financing and source direct investments over a period of years, which would then start to pick up again in solvency and in the earnings over time. So, yes, we're very comfortable with that, don't see it as a constraint. There was clearly a timing issue with the amount of direct investments we can source and that's where Paul, Mark and Kerrigan combined work together to produce those for us.

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [17]

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Greig? Greig, then Jon.

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst [18]

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Three questions. One is, I wondered if you can give us some -- your thoughts on what actions you would take to address your negative outlook on the -- on S&P's rating. That longevity swap that you did, I was wondering if you could just tell us how much in terms of sterling million that's the sale that you did, added to the distribution on operations metric? And the third question is -- and you mentioned that your XXX reserves are going to be reinsured in the second half. Those are, I assume, going to continue to be reinsured with the profit fund. And I was just pondering there, that fund has had burn-through, in other words it's got a negative surplus. I wonder how much capacity do you have.

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [19]

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[Jeff's got] the right answer, but I think we'll answer first part of the question, which is the right part, second answer I -- do you want to take 1 and 3 and if Kerrigan, just 2?

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Stuart Jeffrey Davies, Legal & General Group Plc - Group CFO & Director [20]

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Yes, sure. I mean, be a little bit careful, but on the S&P stuff, it -- to be honest it's a bit of more of the same. So there was an element of changing the way they looked at the capital. But if you looked at what they said, they are very comfortable with our strong market positions, the profitability of our business and the outlook for it. So this is actually the first step in what we're going to do, and I'll be on the phone to them today or tomorrow to say, "We told you so." And so it's retaining more capital, building our strong position, continue with the earnings as we are and obviously, working with them to make sure they fully understand some of the capital loadings that they are adding, but we're confident around that for -- in terms of the S&P capital rating.

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [21]

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XXX.

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Stuart Jeffrey Davies, Legal & General Group Plc - Group CFO & Director [22]

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Yes, and the XXX, I mean, this is something we did last year. That strain figure was in there but it was smaller, the growth wasn't so big. It isn't reinsured with the (inaudible) reinsured into the LGAS entity at the moment. We will look to optimize that structure and we'll discuss some of the PRA, the best way to optimize it. We always have the fallbacks of what we've done in previous years, but it's just the same as we've always done is we reinsure it. We work on it during the year to get the optimal structure, that will flow through in reducing that strain but we just happen to show it at the half year.

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst [23]

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What is your comparison to (inaudible) constraint?

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Stuart Jeffrey Davies, Legal & General Group Plc - Group CFO & Director [24]

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No.

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst [25]

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And then your longevity?

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

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Yes, Kerrigan is going to answer.

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Kerrigan William Procter, Legal & General Group Plc - CEO of Legal & General Capital and Director [27]

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Just on the longevity swap, it was -- actually it was an interesting deal. It was a new and innovative type of structure in the market, where we don't keep any of the counterparty risk. It came in from one U.K. pension plan. We reinsured it, and the counterparty risk is taken by the [scheme] or the reinsurer, which we think was a great innovation for the market. Because it was just 1 client, I don't feel comfortable releasing the competitive information around the release from operations on that particular deal.

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Greig N. Paterson, Keefe, Bruyette & Woods Limited, Research Division - MD, SVP and U.K. Analyst [28]

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(inaudible)

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Kerrigan William Procter, Legal & General Group Plc - CEO of Legal & General Capital and Director [29]

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It was -- we took very little risk because we reinsured all the longevity risk [around] the counterparty risk.

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [30]

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Not particularly. Not really is the answer to that one. And Jon, and then if we head back over and start with Alan and move.

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Jonathan Michael Hocking, Morgan Stanley, Research Division - MD [31]

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Okay. Jon Hocking from Morgan Stanley. I've got 3 questions, please. Firstly, on the Solvency II ratio. It's crept up quite quickly since the sort of 150-or-so you reported, sort of out-of-the-box on Solvency II. And I guess, at this sort of run rate you're going to be sort of pushing north of 200 in the fairly near future. Can you just comment a little bit about how you think the capital policy will emerge? Because I guess the counterargument to that is actually the annuity concentration has increased. So how should we think about what's the sort of hygiene level for that solvency ratio going forward? It's the first question. Secondly, could you give a little bit of color about what happened with the matching adjustment optimization in the first half and what we should expect in the second half? And then finally, Individual Annuities, some of your competitors have talked about DB transfers picking up and actually from some of it overspilling into Individual Annuities. I wonder whether you could talk about how durable that Individual Annuity performance might be.

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [32]

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Yes. Jeff, do you want to take the first one? And Kerrigan, do you want to take the second and third one about why we haven't made enough progress on all of the management actions and compared to the action list for the year?

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Stuart Jeffrey Davies, Legal & General Group Plc - Group CFO & Director [33]

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Sure. I mean, obviously, we're not setting a limit. I'm pleased that you see that it's continuing to increase and certainly we think that is the sort of trajectory it's on, and some of those are the management actions that Kerrigan will talk about as well as the surplus generation. But as we said earlier on calls, et cetera, we have an ROE north of 20% and we see growth opportunities across the whole business. So whilst we have that, we believe our cash position, our strong solvency position, gives us that optionality, allows us to invest in bolt-on acquisitions, invest in more LGI business, grow lifetime mortgages, et cetera. So while there is plenty to invest in, we'll continue to monitor it and look at that and decide at a point in time if we feel it's excessive but at ROEs north of 20% we're going to keep going.

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [34]

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Kerrigan, do you want to talk about...?

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Kerrigan William Procter, Legal & General Group Plc - CEO of Legal & General Capital and Director [35]

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Yes. Just a little bit on the matching adjustment optimization. As you know, most of our liabilities are matching adjustment eligible, and we did a lot with matching adjustment eligibility of assets and efficiency through various structures into lifetime mortgage structuring. So we issued a new tranche of lifetime mortgage loans in the first half, and we tightened up on some of the structuring around our U.S. dollar assets, so made that a little more efficient. So lots of incremental small things, nothing major there. We've got most of our matching adjustment liabilities. These are eligible, but there's a few more there that with the restructure of the insurance contracts underlying that we could improve the efficiency there. So it's an ongoing, at-the-edges improvement on both sides really on that matching adjustment optimization. Individual Annuities. So, yes, there certainly have been flows from DB schemes with deferred members looking to switch to DC, so that's been noticeable. I mean, in the context of the GBP 2 trillion worth of liabilities, it's small, and I think actually beneficial because members get something that they would like, which is a DC pension significant cash amount. And the pension plans head towards a more affordable pension funding ratio. So hence, more likely to buy out everything. So we think it's all part of the management and derisking of this huge GBP 2 trillion industry. So notable feature for small schemes, but for a small number of schemes, we see that probably continuing. We see that overall trend in terms of the unwind of DB as positive for us.

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Alan George Devlin, Barclays Bank PLC, Research Division - Director [36]

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Alan Devlin from Barclays. Three questions. First of all, how do you -- when you look at the sourcing of direct investments for new business, you had GBP 10 billion deal does use a lot of direct investments versus an increase in your direct investments in the back books, and the economics of the 2? And secondly, in general insurance, you are growing premiums in what was a soft market with elevated claims inflation. And what gives you the comfort that actually it is profitable growth you're driving there? And then just finally at the start, Nigel, you said that your ambitions were ahead of consensus, and you were getting increasingly ambitious. What do you mean by increasingly ambitious?

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

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I think, Jeff is getting increasingly ambitious as well and -- which is great to see. On the direct investments, I'll do a little bit and -- certainly, what I'm seeing when wandering around the country is a lot of politicians at a city level and business people at a city level realizing that there's some negative headwinds from Brexit. And therefore, their electorate voted for Brexit. What are we doing to resolve that? And Jeff, Paul, Laura have all been on various visits to towns, and the reception that we get when we go there is just amazing. And there is a huge pipeline. We've got 20, 30, 40, 50 years of underinvestment in all of these areas. And we're getting more competent at creating matching adjustment assets, and Cardiff itself is a 10-phase, Phase 1 project, but actually, the team are already working on Phase 2 for some of the cities and towns. We're very excited that people like Andy Street have become now, in Birmingham -- which is -- which we've made some progress in but nowhere near the progress that we've made in Manchester or Leeds. But there's -- we're doing a lot, but there's a lot more we can do. And the trade opportunity -- what we put in the front book and what do we do for the back book is always an interesting discussion at our Group capital committees.

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Kerrigan William Procter, Legal & General Group Plc - CEO of Legal & General Capital and Director [38]

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Yes. Just a bit more on that. As you know, from various Capital Market Days, we're obsessed with cash flow matching, which is I like to have a bit more assets coming in than pension payments going out every single month. And so when we think about new business, we'll look at what assets we have available, lifetime mortgage maybe at the long end, some inflation-linked student accommodation, let's say, in the middle and some, short of that, real estate lending possibly at the end with traded credit. You look very closely at that. And if there is a front book deal and you're talking to consultants and clients about bringing those things together, then that can be a great place to put assets that meet the clients' needs and really fit with our book. To the extent that, that doesn't really fit for new business but fits within our back book then that's where we'll head that, towards the back book. So cash-flow matching is always the angle that we come at really.

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

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Yes. I think the other 2 things GI, I think is-- we didn't win any external business for 9 years actually, and then the new team have just done an amazing job and have won 5 out of 6 bids that we've made and we're very convinced they're all profitable, good bids. None of them are huge accounts, but they are all very good accounts, and we've got a number of other things, either we actually won and not announced or we think we have a high probability of winning. In terms of our ambition, I think that reflects the capability of our organization. And Elaine is with us today. Elaine is stepping down as Group HR Director, and has done an amazing job in working with myself, the Chairman and others and bringing great people into our organization, but also developing some of the has-beens and never-beens in our organization to make them incredibly capable. On things like the pipeline for the bulk business, I think Chris DeMarco and Pretty are both here, or were here earlier. And if you want to talk about what's actually going on at a microlevel and -- please feel free to ask them questions afterwards. But the -- Jeff gave an answer to the GBP 10 billion one. The answer last year was we'd probably need partners to do it. And that's one of the reasons we did GBP 3 billion rather than the GBP 9 billion on the Aegon deal. Our capital position has strengthened, our capabilities strengthened, our confidence in doing the deals having done 2 successful deals, has strengthened and our ability to source direct investments has certainly improved. But you heard Mark talk about LGIM's ambition, and we went on a trip together both in the Middle East and Far East. And the reception we get there is absolutely, truly outstanding. And America, partially because Mark is American, has been incredibly welcoming to us as a firm. And the success rate we're having on bids is huge. So I would -- I actually encourage Mark to add more people to his organization because, actually, the rate of success that we're having across our businesses is truly amazing at the moment. We've just got to keep it up at that high level. Andy is going to cheer us up now.

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Andrew Hughes, Macquarie Research - Insurance Analyst [40]

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If you want me to, I can. Shall I start with a cheery -- really cheery thing? Okay. So the first question is on the kind of -- obviously the profit warning from Clarion (sic) [Carillon] earlier in the year and they highlighted a few projects, which are going a bit difficult for them. One of them was the Royal Liverpool Hospital, where you're one of the big funders with a GBP 150 million debt? And how do you view that? And what does that mean for that debt on your balance sheet? Have you written it down in the half year results? And the second question on the longevity basis change. So as I understand it you're using like a 5-year average for mortality on the base tables with some different weights now to the weights you were using before. And so what would be quite helpful to know would be what number does this come out with relative to experience last year? So -- and also how much of the GBP 126 would have -- you would have earned anyway and in the back earnings? So should we strip some of that off over time?

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

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Some of your more optimistic questions there, Andy. We obviously, contractors face different fees from time-to-time in the industry, and you take that as normal. We've done a pretty comprehensive review of the Carillon position across all of our projects. They're not huge contractors to us, overall, and we don't think we have any material exposure to them on any of our projects. On the longevity one, do you want to pick up the...

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Kerrigan William Procter, Legal & General Group Plc - CEO of Legal & General Capital and Director [42]

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Yes. Just a few of the details on that, you're right. It's a 5-year smoothing effect, really, on the base mortality, so the probabilities we apply to people dying today rather than the mortality improvement. So, yes, we've changed some of that, smoothed it more, in effect. Released GBP 126 million of prudence there on those probabilities. And that kind of compares to, I think last year just in terms of actual deaths we had about GBP 40 million worth of positive experience through this. So kind of put that GBP 126 million in the context of that GBP 40 million, you would have seen through just actual deaths happening relative to experience.

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

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Two more questions, Andrew and Oliver. Is there anybody else -- 3, yes.

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David Bracewell, Redburn (Europe) Limited, Research Division - Research Analyst [44]

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David Bracewell, Redburn. Two questions. I think it's a follow up -- the first one is a follow-up on an answer before. I mean, it's just on the kind of allocation of direct investments to the back book and the front book. And the reason I ask is just how much allocating of the lifetime mortgages to the front book are you currently doing? And the reason I ask just to see is if you can improve that 4% new business strain any further or if you're kind of maxing out the allocation of your lifetime mortgages to the front book business there? And the second question again is on longevity. For the future expectations, I think, and correct me if I'm wrong there, but I think you use a 2 percentage point per annum improvement rate to the -- to your base tables. And you did mention that you might be looking at the assumption you're making to future improvements to longevity at the year end. I just wonder if you could give me any sensitivities to the potential change to that?

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

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Can we just have a conference as to who wants to take the really tricky questions?

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Kerrigan William Procter, Legal & General Group Plc - CEO of Legal & General Capital and Director [46]

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So I'll talk something about the allocation of lifetime mortgages.

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

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That's the easy one.

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

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Yes, exactly. That's why I stood up first. So I mean, broadly -- and some of it gets into sort of quite sensitive commercial conversation, so there will be a limit to the amount I'll talk about. But it really comes back to the ALM points and making sure that we can match cash flows off. So lifetime mortgages, they're typically kind of 17 years' duration for the new book. So you need long dated flows to match them. So typically you might look at, maximum, we think we can put it 25%, may be a 1/3 of new business could be allocated to lifetime mortgages. So that's -- broadly, that cash flow matching consideration is what we think a lot about when looking at deals. That's not hard and fast, it depends on precisely the deal, but just to give you a feel for what we think about there on the lifetime mortgage flows. Do you want to talk about longevity or me?

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Stuart Jeffrey Davies, Legal & General Group Plc - Group CFO & Director [49]

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Yes. I mean, it's difficult to put a quantum on it. And obviously, we show sensitivities. There is deficiencies and as everyone knows, they're an indication, but not necessarily the change of tables. There are a number of you in this room that have done some pretty good work on what a shift to different tables, CMI '15, CMI '16 means and what some of those quantums are, but equally you come out with a quite a range. But it's fair to say if we move the whole way there's a good quantum there. But we're going to be prudent, we're going to look at it. We're going to follow the process that Kerrigan talked about. But we obviously don't have a number today, otherwise we'd be on the front foot with the numbers. So we have to do that work.

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [50]

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That's a very good answer for our auditors, you see. (inaudible) I saw Andrew (inaudible) smile at that particular answer. That wasn't the answer I gave in the rehearsal. That's why Jeff's giving the answer. Andrew?

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Andrew John Crean, Autonomous Research LLP - Managing Partner, Insurance [51]

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It's Andrew Crean from Autonomous. Could I ask 3 questions? First one, is could you give us a sense of what the yield enhancement was on the back book, driving the profit on that, relative to just the growth and the size of the book? Secondly, you said, I think there was GBP 2 billion of cash at center. What is the amount of cash at center which you would normally like? So how much is excess cash? And then you were talking about bolt-on deals. And you mentioned you could do deals like the Aegon deal you did, but you also then said you could repeat the Lucida deal. There aren't that many BPA writers left in the game. You're not really looking to take some of those out, are you?

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [52]

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I think the last one is the easiest one. In fact, I'll answer that one, Kerrigan and you can answer the tougher ones. There's lots of books. I mean, there is GBP 140 billion of back books and it's surprising how many people have written bits and pieces of business over the years. And so we have a long list of contacts. It isn't just the [Pru] and Standard Life. So we will see more smaller GBP 1 billion-type deals happening and hopefully, even 1 in the second half of this year. I think on the cash, I mean, in big-picture terms at least GBP 1 billion of that is surplus to anything that we would require from a liquidity point of view across the group. Do you want to...?

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Kerrigan William Procter, Legal & General Group Plc - CEO of Legal & General Capital and Director [53]

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Yes. I just -- trying to answer some of the questions on yield enhancement. So we picked the lifetime mortgages, obviously a very long-dated illiquid asset and so you're looking for a reasonable illiquidity premium there. The sort of market is looking at 100, 120 basis points-ish over a AA after taking out some no-neg, no-negative equity risk premiums. So broadly that kind of level. For other asset classes down at private credits, some of the private placements you'll be looking at a lower yield pickup, so below half that probably.

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [54]

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Yes. I think the question in a sense is that we've got a lot of assets, which are not optimizing the back book and the gilts we don't -- over time we need fewer gilts and we would look to -- if you look at the enhancement we can still do on the back book -- and actually the separation of the business into the 2 parts is making us look more seriously at the optimization of both the retail side and the institutional side. It turns out to be better for producing future surplus generation than we thought when we originally set it up. And as Paul's team, Mark's team and Kerrigan's team work closely together on the DI origination, the further opportunities to optimize the back book are much bigger than we'd actually thought and the pipeline that we have of deals coming into both the back book and the front book from direct investments is much harder. There's a lot more creativity going in. Again, we've hired some great people in -- with both Mark's -- I think all 3 teams have hired really good people who are working very collaboratively together to do this. So there is a fairly substantial upside in that as we go forward. Oliver?

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Oliver George Nigel Steel, Deutsche Bank AG, Research Division - MD [55]

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It's Oliver Steel, Deutsche Bank. So 3 questions. One just slightly technical. The new business surplus on Protection seemed to have dropped versus last year, yet I think business has increased. I'm just wondering what's going on there. Secondly, I mean, on these -- I mean, you talk about the escape of water losses and I know it's an industry problem. Equally as you say, you've signed a lot of new deals. You've now got this new policy which asks only 5 questions. Does 1 of them include how many bathrooms does it have, and things like that? So I'm just wondering here about how can you test the quality of new business you're taking on in that area? And obviously, that has implications for the quality of new business you're taking on elsewhere if there is an issue here? And thirdly, the management actions in solvency. So GBP 0.5 billion in total. I know GBP 100 million of that was the longevity issue, but roughly GBP 100 million was the Netherlands sale. But GBP 300 million from what you said, sort of tinkering around the edges, seems to be quite a bit figure. And I seem to remember in the past there was a sort of comment that maximum -- or no, that you could expect GBP 400 million of additional solvency from management actions, but it sort of -- it feels as if it's a bigger issue and I'm just wondering how much of that is actually sort of business as normal. That you can continue to sort of creep that solvency ratio upwards through management actions.

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [56]

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Okay. Kerrigan, why don't you take the third one? I mean, the delta is only GBP 4 million, but I'll ask Bernie to comment on the -- more generally about the Retail Protection business and how it's doing. And then Cheryl, if you want to talk about the GI and the escape of water.

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Bernard Leigh Hickman, Legal & General Group Plc - CEO of Legal & General Insurance Division [57]

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Yes. Thanks, Oliver. Yes, GBP 4 million. I mean, the new business surplus is a function of the underlying profitability of the business. It's still highly profitable business. We've got a really strong business model there which is working really well. The mix of business, actually, has quite a place if you write a slightly different mix of business, the margin -- average margin drops and new business surplus drops. And it is a competitive market out there. We're not the only ones to find the market attractive. We're competing well, but there are other competitors out there. So it's going to fluctuate over time. But there's still opportunities in that market. Certainly in our banks and building societies, distribution opportunities there as well. We continue to digitize the business, engage with customers. So we're hopeful to continue seeing growth in top line and bottom line in that business.

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Cheryl Agius, Legal & General Group Plc - CEO of General Insurance Business [58]

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Just on the escape of water. So in the first quarter of this year, we saw an increase in severity on some of our claims. And our frequency was as we expected. So we've taken a clear review of this and management actions to both increase rates, change some underwriting practices and some claims control. We've not seen this repeated in the second quarter, and we believe with these actions we won't see this into second half of the year. With our SmartQuote, we've partnered with Landmark, which has got access to all the surveying and data in the market. So we've -- on each individual's properties we've got over 400 data points. So we're very comfortable. We've got real-time access to data and pricing for each of those individual risks.

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

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Yes. There's some very innovative ideas coming on. At some point, we should give a longer discussion on all the technological improvements we've made across the businesses because they're beginning to make a material impact on both customer acceptance, obviously, and our Net Promoter Scores for some parts of the business have actually gone through the roof. They've been really amazing. Kerrigan?

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Kerrigan William Procter, Legal & General Group Plc - CEO of Legal & General Capital and Director [60]

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Yes just probably try and give you a little bit more color on some of the matching adjustment, Solvency II management actions. We've got probably about a couple of billion of liabilities -- couple billion pounds worth of liabilities that are very close to matching adjustment compliant but not quite. And in this business it's all or nothing. So we're working on whether we can restructure the contracts there slightly or just argue that they could be match-adjustment compliant. So that's kind of that GBP 2 billion room there, possibly that we need to work on. Then similarly on the asset side, we are exploring new asset classes, new potential with LGIM, real assets of course, LGC. And as each of those new asset classes come in, we try to get an efficient structure to make that match adjustment compliant. So properties in construction periods, those sorts of things, where we can really explore and see where we can get efficiency. So it's coming down towards business as usual, clearly, and there's plenty of things to do, and it's sort of diminishing return, but still plenty of business as usual, moving to business as usual, things we can do to continue to that improve position, I think.

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

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Last question.

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Marcus William Barnard, Numis Securities Limited, Research Division - Analyst [62]

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Marcus Barnard from Numis. One question in sort of 2 parts for Kerrigan. Firstly, on Bulk Annuity pricing. Are you seeing any pressure from [ABCs] or trustees to reflect the worsening mortality in your pricing and maybe capture some of the projected worsening going forward or the loss of improvement? So first question is there an effect on pricing? And secondly, are you seeing any -- do you feel there's any delays? You've seen bond yields rise a little bit, you've seen equity markets rise. Perhaps with this uncertainty over longevity are people delaying the decision on doing a Bulk Annuity? Or should we expect a strong Q3, Q4 as usual?

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Kerrigan William Procter, Legal & General Group Plc - CEO of Legal & General Capital and Director [63]

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On the pricing side, I mean, I think certainly as you've seen, we now reinsure most of that longevity anyway. We took about 80% to 90% certainly over the past 2 years on both. So I think a lot of that price improvement has probably factored into different parts of the reinsurance industry. It won't be all reinsurers have adopted though, because we have a panel of 14 people or so who we go to when we can tease out, we think, the appropriate prices for those longevity reinsurers. So I think it has been somewhat reflected in the price, so everyone is quite cautious about what it means. And I think, therefore, clients are seeing some of that benefit coming through, I think, I believe. In terms of delays, on the yields point, although we've talked a lot about the flow-in, LDI business people derisking, removing the real yield risk, the interest rate and inflation risk, and that continues at pace, I think it was GBP 17 billion-or-so in H1 just in LDI within LGIM. So that signifies that people are significantly moving down that route. And I don't think that's a constraint. I think it really comes back to first point of people delaying because of the longevity, which I think they're thinking about it but when you explore the reinsurance industry and you see the prices and the -- that the people are getting, I think that's in a favorable place and I believe that we'll continue to see some of the seasonality in Bulk Annuities that we've seen over the past several years and looking for a strong Q3, Q4.

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Nigel David Wilson, Legal & General Group Plc - Group CEO & Director [64]

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Okay. Thank you, everyone, for your interest. And I'd just like to thank all of my colleagues for an absolutely terrific first half. As you heard from Mark saying there's tremendous structural growth in LGC. Kerrigan has got many, many opportunities in both the retail side and in the institutional side. Paul has got his fingers in many more pies in the U.K. at the moment. He's not eating them, by the way. He's just got his fingers in them. Bernie's hyperexcited about all the innovation that we're making in insurance space. Cheryl has absolutely assured us all that actually the second half we're not going to see a repeat of the first half in GI. And Bernie's finally promised that he will turn around group protection brackets, could be in 2018 rather than the second half of 2017, but the numbers in the second half of 2017 should be demonstrably better than the first half. So thank you, all, for your interest and your support. Look forward to seeing you all at the year-end results. Thank you.