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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning. Welcome to Legal & General's Full Year Results for 2022; indeed, our record results. This was another strong year for us across all our key financial metrics. We again delivered higher profits, better returns to shareholders, backed by even greater balance sheet strength. Another chapter in over a decade of consistent growth, irrespective of changing externalities, geopolitics, economics, and markets. I would like to thank all my colleagues for their work in delivering another strong set of results in 2022.
The usual disclaimers apply, please silence mobile phones. We will follow the usual format today; I will provide some opening remarks, Jeff will take you through the numbers in more detail, and I will round up at the end leaving plenty of time for questions.
To recap the headline numbers for 2022: we delivered record operating profit from divisions of £2.9 billion, that's up 10%; EPS of £0.3833, that's up 12%; ROE of 20.7%; full year dividend of £0.1937, that's up 5%; as to surplus generation of £1.8 billion also up 10%; and the solvency ratio of 236% compared with last year's 187%.
The benefits of our diversified model were very clear in 2022. LGRI, our capital-light PRT business grew operating profit to £1.25 billion, that's up by 9%, with notable successes in both the U.K. and internationally. The surplus generated above the dividend and the strength of the balance sheet position LGRI strongly for the expected growth in the PRT market.
LGC's operating profit at £509 million was up by 10%. LGC is a scalable and profitable alternatives business and on track to achieve our 2025 ambitions of £600 million to £700 million of operating profit, whilst also attracting £25 billion to £30 billion of third-party AUM.
LGIM's operating profit dipped in 2022 due to rising interest rates and reduced AUM, but as the only U.K. investment management in the global top dozen with £1.2 trillion of AUM, 90% of it external, it plays a major role in our synergistic business model and continues to internationalize and diversify.
Retail grew operating profit by 33% to £825 million. Combining our retail businesses in one division has been successful. Retail is diversifying its product range for retirement and investing successfully in adjacent fintech businesses.
As we start 2023, we are looking at much higher global PRT volumes, as more schemes are fully funded and can transact. As expected, we are seeing demand for individual annuities and demand for alternative assets also increasing. U.K. markets have calmed. Positive regulatory change to Solvency II will facilitate significant new investment opportunities for Legal & General.
2022 was another consistent year in over a decade of strong performance. Since 2011, we have delivered growth in operating profit from divisions of 9%, growth in EPS and DPS of 11%, and 8% growth in book value per share. All signifies of a consistent strategy, the ability to deliver and our tremendous resilience to external changes.
Over the period, these have included Solvency II, pension freedoms, Brexit, COVID, a war in Ukraine, LDI, and so forth. We've navigated each piece of turbulence and come out stronger, not just in operating profit and EPS and DPS, but also significantly in book value per share and in our balance sheet. Jeff will cover Solvency II results, which were also a record. 2022 was again consistent with this pattern.
Our model is conceptually simple, it brings together insurance, pension and climate liabilities, investment management, and asset creation. It is one that others in the U.S. pick out and [Apollo] (ph), for example, recognize and mirror, albeit, we started with the liabilities and credit the assets, their start point was the assets. Wherever you start, this model generates strong compounding returns for Legal & General Shareholders.
At the heart of our sustainable growth is the ability to generate a growing surplus, both OSG and NSG. These were substantially in excess of the dividend, which itself is growing at 5%. The capital-light PRT business is exceptionally well positioned for growth in the markets and the widening jaws between the capital generation and dividend provide us with strategic optionality.
Our PRT business is a capital-light model, self-sustaining for the last three years. During those three years, we have written £24 billion of new U.K. PRT and retail annuity business, and another £4 billion of international PRT at very low new business strain levels. At the group level, we have paid cumulative progressive dividends of £3.2 billion and also produced a net surplus of £0.7 billion over those dividends. This surplus alone is equivalent to approximately two years of new business strain.
L&G's balance sheet has massive strength. Our Solvency II capital ratio is lower than in 2016, our surplus is significantly larger and our Solvency II ratio, the strongest it has ever been at 236%, and as of Friday 240%. Solvency II reforms will allow us to diversify and self-manufacture the asset base. The asset portfolio has again performed well with no defaults.
After a decade of ultra-low interest rates, normalization is accelerating the PRT market opportunity as more schemes are now able to transact. LCP forecast potential transaction volume rising to £90 billion in 2025. The addressable market is immense, the U.K. and U.S. have pension liabilities of £1.4 trillion and $3 trillion, respectively, of which only 14% and 9%, respectively, have been transferred to insurers.
Only a limited number of skilled players are able to play in these markets and L&G is unique in operating on a genuinely global basis with our ability to derisk client pension funds on the path to buyout, create new assets for these markets, manage the portfolio and administer the large customer base. This anticipated scaling up of the PRT market will very likely be reflected in the volumes of new business we can write.
We now regard the current ambition, writing £8 billion to £10 billion, as a baseline, business as usual, and we have demonstrated it is self-sustaining. However, there are additional opportunities for large individual transactions. The biggest we have written to date is £4.6 billion, but we have the appetite for more, subject to them delivering on our business metrics. Opportunities like this, which could double business volumes from our £8 billion to £10 billion in a given year, would be funded from surplus solvency capital.
PRT business provides highly-predictable, high-quality capital generation over many years. Here you see, based on £10 billion of PRT written, the payback from capital invested after just four years, and the consistent cumulative surplus generation for 30 years after that. The cumulative OSG is an excess of £1.5 billion.
As volumes grow in the PRT market over the coming years, L&G is very strongly positioned to win this business. We have a superb track record and an unique global capabilities in PRT. Our synergies within the group provide a natural pipeline from LGIM through to LGRI as part of our client de-risking journey. 77% of PRT transactions in the last three years were with LGIM clients. And LGC's asset origination capability for real assets and alternatives gives us an edge in portfolio construction as does the lifetime mortgage origination capability in retail. We have a unique business model for PRT.
LGC has a strong record and is on track to achieve its ambitions. Since 2016, alternative AUM at LGC has grown at 24% per annum, and operating profits by 22% per annum. We have successfully built and scaled three initial alternative asset platforms: SME finance, housing, and SciTech, with many more in the hopper.
We have successfully expanded into alternative asset adjacencies including CleanTech and Data Centres, with again, more to follow. And we're now replicating our successful U.K. model in the U.S. and across Europe and Asia. We're on track to achieve our ambition of £5 billion of alternative AUM and total operating profit of £600 million to £700 million by 2025.
To give a little bit more detail on how LGC is a successful growth engine for investee businesses, CALA Homes has achieved scale under our ownership, with revenues growing more than 5 times and profits more than 15 times since 2013. CALA is on track to deliver its ambition of £1.5 billion of revenues and £240 billion of operating profit in 2025.
Pemberton has grown committed AUM by more than 13 times and revenues 9 times since 2016. Again, on track to deliver £27 billion of AUM and £190 million of revenue, in line with its 2025 ambitions. Pemberton alone could deliver our £25 billion to £30 billion ambition.
And we have more than doubled the value of the Bruntwood SciTech property portfolio since 2018. Again, we are confident about the 2025 ambition to achieve £1.5 billion of property value by 2025.
These three businesses are all key building blocks for our 2025 ambitions, and all three are on track to deliver. They're not the only investments in LGC, we are seeing growth also, for example, in our climate investments and in urban regeneration, which is transforming many cities for the better. And in VC, where we now have investments in over 600 startups and scaleups.
LGIM today is a scaled asset manager with £1.2 trillion of AUM. The mission to internationalize is progressing well. International now accounts for 37% of AUM. Products are diversified across LDI solutions, index, active, multi-asset, and real assets, and as we modernize as well as internationalize, this range has been supplemented with higher-margin products including thematic ETF, active fixed income and multi-asset.
L&G's history since 1836 is deeply rooted in the U.K. protection market, where we are still the largest player with 23% market share. Alongside this, we have built leading market positions in group protection, workplace savings, retirement income and individual annuities, lifetime mortgages, and other mortgage and surveying services. We have complemented the strengths of our products and distribution with investments in fintech businesses, including Salary Finance, Onto, Moneyhub and Smartr365.
In the U.S., we have grown our life insurance business, which now has a 5% market share, introducing a modern digital distribution channel and again, investing in adjacent fintech. We have now started to replicate in the U.S. the synergistic model that has served us so well here in the U.K. The key elements all now exist. Our retail life business with a 5% market share, providing captive assets and surplus capital; LGIMA, our U.S. investment management business with over $230 billion of AUM; LGRI, which last year wrote $2.1 billion of PRT business; and now LGC in the U.S., which with our partner Ancora, is now starting to generate high-yielding DI assets for the U.S. PRT business and eventually also for third parties. We will see growth in this space, first, science infrastructure as we doing with Bruntwood in the U.K., next, other forms of real assets and housing. We know this model works; in the U.S., can also work overtime and at scale.
To sum up, we have delivered another strong set of results in 2022 consistent with a decade of growth across all our financial metrics. The balance sheet is stronger than it has ever been, solvency is at a record level, the annuity book has experienced zero defaults and we once again received all cash flows due from our direct investments. We are very strongly positioned for the PRT market expansion with a capital-light model that has been self-sustaining for the last three years. LGC is on track to achieve its 2025 ambitions and expanding internationally. LGIM has achieved scale and continues to diversify across geographies, products, and channels. Retail has been augmented by fintech to provide enhanced distribution and service to our millions of protection and pension customers.
After more than a decade as the CEO and having been CFO before that, I would simply add that my colleagues have done an outstanding job to deliver these results, not just this year, but in every year. L&G is in great shape.
I'll now hand over to Jeff to take you through the numbers in more depth. Thank you.
Thank you, Nigel. Good morning, everyone. Great to see you here. Hope you're all keeping well.
Legal & General delivered another strong set of financial results in 2022. Operating profit was up 12% to £2.5 billion. Earnings per share was £0.3833, up 12%. And ROE was 20.7%. Operational surplus generation grew by 10% to £1.8 billion, and we reported a record Solvency II coverage ratio of 236%. These results demonstrate the resilience and strength of our diversified business. We continue to generate surplus capital, well in excess of our dividend, providing significant optionality for both U.K. opportunities and to expand internationally, replicating our successful model. The Board is recommending a growth rate in full year dividend of 5%, a rate which we aim to maintain to full year '24.
Turning to our divisions. In 2022, LGRI delivered operating profit of nearly £1.3 billion. This strong performance was driven by: new business surplus generated from increasing sales of 33% in the year; the growing scale of our back book, which delivers predictable prudential margin releases; and a profitable asset strategy, which increases the total yield on our A minus rated asset portfolio and is geographically diverse with 54% invested internationally. LGRI's investment variance was broadly neutral, reflecting a well-executed investment strategy, limiting the impact of higher interest rates and are well matched, defensively positioned, and diversified asset portfolio.
In '22, LGRI wrote nearly £10 billion of global PRT across 61 transactions. These volumes were written at attractive margins with capital strain levels below 4%, reflecting good asset and reinsurance origination. In the U.K., we were pleased to announce two follow-on transactions executed for over £4 billion with British Steel Pension Scheme under an umbrella agreement. In the U.S., we wrote $2.1 billion of PRT, almost double the 2021 volume. And in Canada, we wrote $700 million of business across two deals, building on our strategic partnerships in the region.
Business was written at good margins in line with the long-term average. As Nigel noted, we increasingly regard our ambition of writing £8 billion to £10 billion of U.K. PRT per annum as business as usual. As we have demonstrated, at these levels, our business is self-financing, with back book releases more than offset dividend contributions and new business capital strain. However, our expectation is that there will be opportunities to bid on additional large or very large PRT transactions over the coming years. We are well-positioned and have appetite to write this additional business, subject to delivering on our key new business metrics. We will consider any larger incremental transaction as M&A type activity, funding it from our strong stock of solvency capital as required.
Moving on to LGC. Operating profit was up 10% at £509 million, driven by growing profits from our alternative asset portfolio. In '22, we showed continued growth across the portfolio with notable contributions from CALA, Pemberton, and from investments in our specialist commercial real-estate projects such as Sky Studios. We are also pleased to announce our first LGC investment in the U.S. with Ancora L&G, further developing our international expansion. As Nigel mentioned, this is a significant first step towards replicating our synergistic business model overseas.
Closer to home, we were also pleased to announce a £4 billion partnership with the West Midlands Combined Authority to invest in regeneration, net zero neighborhoods, and housing. This adds to our profitable urban regeneration portfolio and complements similar arrangements in Oxford, Manchester, and Cardiff, amongst others.
Profit before tax of £101 million predominantly reflects the impact of market volatility on our equity portfolio and more minor revaluations on some land assets and development projects due to higher interest rates.
Moving on to our Investment Management division. Operating profit was down to £340 million, reflecting impacts from external market conditions. With equities and fixed-income assets down, total AUM reduced 16% to £1.2 trillion. As a result, our cost:income ratio of 65% reflects lower revenue, balanced against ongoing investment in the business. As always, we carefully monitor and control costs as we look to maintain a competitive cost:income ratio and we continue to make progress in modernizing, diversifying, and internationalizing the business.
We are transforming our strategic operating model to build a globally scalable platform to deliver best-in-class client service. We are expanding our investment offering with a focus on higher-margin product areas, such as real assets, ETFs, multi-assets, and fixed-income. We remain a market leader in the U.K. DC space, where we now have 4.9 million workplace members and £135 billion of AUM. And internationally, we are continuing to expand our distribution footprint in Europe and Asia. International assets account for approximately 37% of our £441 billion with ambitions to continue to increase this.
Despite market volatility, we delivered significant external net flows of almost £50 billion. The flows were diversified across the business and international net flows represented 43% of LGIM's total, reflecting our deepening global client relationships and broadening geographic reach.
We also continue to see strong flows in DC, with 43 scheme wins in 2022. The default strategy for the majority of these schemes is higher-margin, multi-asset or target date funds. As previously disclosed, there was a reduction in DB flow related revenue. This was offset by the positive net new revenue of £22 million, driven by inflows across these higher-margin areas.
Now, moving on to our Retail division. Operating profit increased 33% to £825 million. This was driven: firstly, by the return to profit of the U.S. insurance business due to strong new business volumes and the release of excess prudence following the reinsurance of our universal life block; secondly, by longevity assumptions in the retirement business, which were updated, as usual, based on experience and market data; and finally, by the markup of two of our fintech businesses following successful funding rounds in '22, illustrating the value we are creating for shareholders through investments in fintech businesses to meet changing consumer demands.
In line with the wider market, after significant adverse claims experienced over Q1, we continue to see elevated U.S. mortality over the remainder of '22. This led to claims exceeding the provisions set up in 2021. To be prudent, we have established a $40 million provision to allow for the uncertainty of COVID and flu over the remainder of this winter.
Solvency II new business values were lower, mainly due to the impact of higher interest rates, although protection grew in 2022 with gross written premium of £3.1 billion, up 8%. Whilst the individual annuity volumes were in line with last year at £954 million, we started to see increased demand at the end of the year given the higher rates on offer. This has continued into 2023.
Moving on to capital. Our balance sheet remains well-capitalized with a Solvency II surplus at nearly £10 billion. At year end, the coverage ratio was 236% as a result of strong capital generation and positive market movements, mostly driven by higher interest rates. Strong operational surplus generation and efficient new business strain levels under 4% delivered net surplus generation of £1.4 billion against the dividend of £1.1 billion. We continue to generate surplus capital, well in excess of our dividend, providing optionality to invest and grow, and we remain confident in delivering a strong and progressive dividend to our shareholders.
In closing, we have delivered yet another strong set of financial results with operating profit up 12%, capital generation up 10%, and our ROE of 21%. Our diversified business model continues to deliver predictable levels of cash and capital to fund our progressive dividend. Our solvency capital position is stronger than ever, providing a substantial capital base and enabling us to pursue the many growth opportunities across our businesses. Demand for PRT is high and we will consider deploying capital above our £8 billion to £10 billion ambition. We have successfully replicated in growing our business model internationally and we are continuing to invest in the real economy, creating value for shareholders and making a positive and lasting impact on society.
Thank you.
Thank you, Jeff.
So, now to round up. To summarize, our investment case, L&G's strategy and execution is consistent and compelling. We have demonstrated over and over that aligning our business to strategic growth drivers helps immunize us from negative externalities. Our business is both diversified and synergistic. This has delivered strong results for over a decade and again in 2022 with double-digit growth, as Jeff said, in operating profit, cash, capital generation, ROE over 20%, and a 5% increase to our progressive dividend. This is underpinned by a strengthening balance sheet. Solvency is strong, no defaults again in 2022.
PRT is set for substantial growth. Our U.K. annuity business was self-financing for the third consecutive year in 2022. We see £8 billion to £10 billion as a BAU level of business with upside from there and we are uniquely a global player. LGC is performing strongly and on track to achieve operating profit of £6 million to £700 million and fee generating third-party capital of £25 billion to £30 billion by 2025.
I'd like to thank you my colleagues for all that they have achieved in 2022. And Jeff and I are both happy to take your questions.
There's a lot of hands up. What we're going to do this year slightly different is, the mic is going to be given to one person and they just pass it around, because I think that's the most effective way. So, Andy, if you want to go first? If each of you state your name and the organization you're from, it will help everybody else.
Thank you. Andy Sinclair from Bank of America. A couple on LGC and one on LGIM, please. Firstly, on LGC, just wondering if you can give us cash generation amount within LGC and ideally components as well, possible for 2022? And how you're thinking about 2023 cash generation, which I guess, maybe a slightly tougher year for disposals? Correct me if I'm wrong?
Secondly, was on CALA, £170 million for the year I think, but I think it was about £98 million in H1. You said you're beating your targets for 2023. But haven't told us what those targets are? So, just wondering if you can give us an idea of what sort of level of profitability is feasible for '23 for CALA and for that assumes for the U.K. housing markets?
And then, finally, on LGIM, just really wondered how do you balance investing in growth versus cost:income ratio challenge, I guess, from softer market levels? How should we be thinking about that cost:income ratio challenge over the next few years if markets don't bounce back?
Yeah. Thank you, Andy. Jeff, do you want to take the first one, CALA question for you Laura, and LGIM, Michelle?
Sure. Yeah. Cash generation, I mean, we constantly say it moves around dependent on what we're doing. Clearly, CALA is a strong generator of cash. You get cash when you sell a house. So, against the profit of around £500 million, we're looking at cash generation £400 million to £450 million this year again in LGC, but that comes from CALA, a lot of the operating businesses with both cash yield and disposals in some of those businesses like some of the VC businesses and obviously dividends on the equity portfolio as well. We reinvest a lot of that, it's not there today to be substantially contributing towards the dividend at group level. We see lots of opportunities to continue to invest in that business.
'23, it's not that reliant on disposals, but actually and we'll come back to this, I'm sure. We've seen strong demand for some of the specialist commercial real estate that we're doing. We haven't seen the write-downs of other people in those assets. So, where we think there are good disposals, there will be good quality businesses. But equally, there'll be opportunity to invest in the coming year.
Okay. Thank you. And on CALA, probably the best way to think about that, the housing market has had two bumper years as we well recognize. We have been very thoughtful about how the budget setting for CALA this year. As we said in our trading statement, we are performing very close to that budget which is a little bit less than the budget we set for 2022.
Just a bit of context around that, we have assumed and this is playing out that sales rates will go back to the sort of pre-pandemic norm and we've had sort of very -- we were able to predict quite well the types of pricing that we would achieve for CALA housing, and as we've said in the trading statement that is what's panning out so far.
Michelle?
Okay. So, it's a great question. It's a balance, right? So, definitely thinking about the long-term future for this business and the present, and the reality is, given what's happened to markets, it's tougher. However, we're confident in the strategy. So, we are continuing to invest selectively in the strategy. You'll see us continue to do that. We are confident in the areas we are selectively investing in and we've touched on some of those. So, really, really keen to see our business become more international diversified. Really confident in what we're doing across the businesses, be it partnering with Laura, with Bernie, with Andrew. And actually, thinking about this as the client business, so it's a long-term client business. And retention is also very important. So that investment in the platform that we have to support our business part of that modernize is also really important.
Of course, we have to take a balanced view of cost, and that means that we are thinking very, very carefully about where we need to pause and slowdown, and also, where we continue to invest. I would just say, the cost:income ratio is one metric. It is -- it's a reasonable tool, but the other things that I look at to determine the health of the business, I definitely look at what's going on flows, so that opening flows number, 4% of opening AUM is a good number. I look at client retention. I look at what's happening across the business in terms of delivery around product. And I'm also really keen to make sure that from a client standpoint, that we're there for our clients. And I think what you can see here is also that we have to be there for our clients, particularly in volatile conditions.
But happy to take further questions on that as we go through. Thanks.
Thank you very much.
Keep passing around. And then, we'll switch over to the other side, okay?
Thanks. It's Gordon Aitken from RBC. And three questions, please. First one on managing assets that back annuity liabilities. You're a little bit different to peers in this respect. I mean, you and your own asset manager, your front deals, they use external fund managers. They say, you don't have any advantage. So, maybe you can highlight what advantage this does actually bring you? And maybe you can say sort of basis points of yield pickup? I mean, even this morning, I mean, we're speaking to clients and I guess that's where Andy's questions come from as well, because he's probably speaking to the same people, but you get concerns over LGC. So, how do you reassure people that your way is the right way?
And second question on...
There was two questions on that.
Yeah.
Second questions is on...
I'm going to actually [indiscernible] and Andrew will answer one, and Laura the next one. I'll do some [woof along] (ph).
Jeff mentioned very large bulks and I mean, there's a couple of £20 billion bulks out there in the market. I mean, you could do that with your solvency ratio as it is. Would you want to do the entire £20 billion, or is it more likely that would be broken up and shared between different insurers?
And the final question is on longevity. You're using 2020 CMI. We know that 2021 model, because it's been published already. The 2022, they're consulting, but it's going to have 25% weight on the COVID deaths. It's not going to be until CMI '25 until they move to 100% of COVID deaths. So, to me, that looks like five years of longevity releases. Would you agree with that, five more years?
Yeah. I think the last one is the easiest to answer, so I'll answer that one. That's true. January as we know from our own data was the highest deaths we've ever experienced in January, including the COVID period. So that was particularly unhappy in many ways a reflection of what's going on as the consequence of various changes to health systems, people's lifestyles, and the aftermath of COVID.
Andrew, do you want to talk about some of the issues that were -- there were several questions in there. You can take your pick which all you want to answer them in. And Laura can you talk about LGC?
Hey, good morning, everyone. Thanks for the questions. I might do the bulks, the large bulks question first, that's the easiest, because I think, fair to say there are as you referenced some large schemes that are in the marketplace in terms of conversations. We are actively working with those organizations and their advisors to understand the best structure to transact those when they come to market. There's a variety of ways that that could happen. It could all be in one go. [indiscernible] scheme so far historically have been in a phased way and in a structured way, so we're working through that. As Jeff said, we look at this as an M&A transaction. We have a great solvency balance sheet to transact large volumes. But Michelle referenced something, this is a client-led business. And first and foremost, it's about supporting the clients and how they want to transact, and how they want to move forward.
In terms of -- I understand your question on the asset side, I do think we have a unique advantage. We have LGIM, we have LGC-originating assets working as part of the business model. Bernie is here as well, Retail provide a large amount of assets to my balance sheet to write PRT. We also, and if you look at our U.S. business, we use external managers where they can supplement that as well. So, we have the facility to go externally if we need to, if they can provide assets, but also we have the internal capabilities that provide the advantage and provide a joined-up business model. And as we've seen, if 77% of our PRT business comes from LGIM clients, I think that integrated model is definitely something I see as a competitive advantage.
And I guess linking that to the assets that we create for PRT from LGC, I think they have a few sort of qualities that we look for asset-backed, cash flow generating, Solvency II insist upon that, but I think we would be looking for that whatever the Solvency II reform say. I mean, as we've covered, we've got some really good sources of those assets now, our affordable housing business, BTL business, Oxford, and looking to expand that into climate transition assets.
Yes, I think on the last point there is, we definitely see the PRA working constructively with us at the moment on which asset classes we can get into. One of the positive things of Solvency II reform is not just as the capital relief we get, it's the diversification opportunities. And actually, so all the skills we have in transition to net zero should translate into us having the capability to develop assets, at a premium.
And as you know, we self-manufacture assets, which again is a huge point of differentiation that needs to -- you saw on the slide we have in terms of profitability. When people look at our PRT business, they only consider the PRT business on that slide, you'll see quite a lot of extra profits flowing into LGIM and LGC, which improves our IRR and our ROE well above our industry peers.
Thank you very much.
We're going to work on that side, and then come back down this side just to keep the logistics easy.
Hi, thanks very much. It's Farooq Hanif from J.P. Morgan. Just going back to your M&A style, PRT deals, are you agnostic between the U.S. and U.K.? I mean, what are the opportunities in the U.S. that you could highlight? And I'm kind of -- the impression I always got is the kind of economics and hurdles there are easier. I don't know if that's true. That's question number one.
Question number two is, I mean in LGC, the one that kind of isn't directly linked to manufacturing for other parts of the business I guess is CALA. And, given its strong performance and maybe stable performance to date, would you ever consider exiting that and realizing value from it, given that it doesn't have necessarily that synergy with the rest of the group?
And I guess my last question is on LDI. So, obviously, we had a big -- I don't know what to call it crisis or whatever you want to call it, last year, and a big shift into collateral and your solutions business. What happens now from that? I mean, does that kind of now naturally flow back into your index business or does it now flow into PRT business? Can you just talk about the AUM mix of LGIM and how that sort of go back to a more profitable mix going forward? Thank you.
Yeah, just the LDI thing, I highly recommend that the watch John Kingman with a nice presentation to the House of Lords to get some further background information on what was -- what we said there. But it's financial impact on us was relatively modest compared to the noise that was in the market. And I think it's not quite normal business. But we're looking very much -- LDIs always being a vehicle for transition to PRT. And you've heard this statistic about 77%, that's the strategic link that we want to guess. Clearly, we've modified our LDI model and there's somewhere between £10 billion and £20 billion of revenue loss for LGIM last year, but that was much more significant from the movement in markets.
Jeff, do you want to take -- the capital allocation decision around U.S., U.K., and large deals, do you want to take that question? And Laura can you answer the CALA question?
Sure. Yeah, I mean to some extent it answers itself because clearly, we're still growing the balance sheet in the U.S. So, we couldn't write £10 billion in the U.S. in one go, whereas we absolutely could and would write £20 billion in one go if that's what the client wants in the U.K., because the consultants over there look at the size of the local balance sheet, which is why we've moved upwards. We've got to $500 million, we're now quoting on biggest gains of $600 million, $700 million, $800 billion -- million, and we want to get to $1 billion scheme in the U.S. and equally we need that asset manufacturer, which has improved very rapidly over there which is allowing us to compete on the $500 million.
So, to some extent, we don't need to do that. At the margin and the BAU level, we absolutely do. But for that M&A style, then it's much more about those really large ones coming to market in the U.K., because that's where we can execute on those. But we would like to do $1 billion in the U.S. in one go and move on from there.
And on CALA, as you recognize, we've grown and created already a very attractive and successful asset there. Although we don't have any immediate plans to sell it, we're open minded in the future. I do think there is a couple of things worth noting on the synergies we do get from CALA, and they obviously do create a lot of affordable housing. We're starting to build suburban build-to-rent houses on those sites, which can be asset creation for long-term investors. So, there are definitely some synergies there for us as well as it being a very attractive asset.
Hi, thank you very much. I'm William Hawkins from KBW. Sticking with the PRT theme first of all, please. Just the graphic on Slide 11, if you could help me understand, you're talking a lot about the upside, but there's nothing shown in 2023. I don't know if that's just expectation management or something fundamental. And then, equally, the BAU, you're showing that kind of flat at £8 billion to £10 billion rather than what you might think is growing. Again, I don't know if that's just simplification or something fundamental. So, if you could help me with that, please?
Simplification.
And then, U.K. solvency, now that we know a lot more, can you give us a hint? I mean, what would the solvency ratio be on the new regime? And can you be a bit more precise about where you would see the opportunities to lever that into doing future transactions?
Okay. Jeff, do you want to answer that? On first one, we may or may not do these large transactions this year, and we didn't want to create an expectation for many of the sales team here today. I can see Chris and John, looking at their shoes right now, as I don't over-promise for them and the rest of the team who are around. But clearly there is a lot of volume there.
At the moment, we just put BAU into our forecast. Clearly, there is upside if those transactions move forward. We don't want to pressurize ourselves into saying people will commit in 2023. That may happen in 2024, and that's why we moved the slide out. In due course, we're going to get a lot more information from the market as to what is the size of the market in 2023. It's looking as though it will be a reasonably good year in 2023. Jeff?
Yeah. I mean, just to build on. I mean, you think this has moved really rapidly for some of these schemes and so talking to those customers, getting them over the line, getting the trustees, the consultants everyone comfortable takes time. So, it's not that we're holding back, we're just trying to be realistic about when they may or may not execute and not build the expectation too quickly on this. But it's definitely coming, is the message, it's just a case of when.
The U.K. solvency, we've talked before, it's not really about the ratio. The risk margin gives us where the trends, where rates are, 5%, 6%, 7% improvement in the overall ratio. It's all about the investment flexibility that gives us. So, it's more about long-term value creation. We've talked about 50 to 150 basis point yield uplift, then it just allows us to self-manufacture going back to Gordon's question. If we are creating those assets ourselves, rather than bidding with everyone else on assets in the market, we don't go into have an advantage, it's obvious. You don't have to go that last two basis points, 10 basis points that you lose in the bidding process.
And we also get to optimize the structure of those assets as we create them, and it just opens a lot more of those, especially some of the clean energy, some of the ones where the features have been such that they see to banking lending rather than insurance. It wasn't worth people restructuring those to make them matching adjustment friendly. But now we can work with those and open up a much bigger universe of assets that we're able to invest in. That's where the real benefit comes from. And that's a message that Nigel has clearly been giving into the government and vocally on that.
Thank you.
Thank you. Good afternoon. Thomas Bateman.
Alan, will you pick it up next, and then we can go around the side? Okay.
Thomas Bateman from Berenberg. And just two questions on PRT, please. Clearly, those higher volumes would come more credit exposure. Is that something you are happy to take on, or would you consider using reinsurance or already other actions to help reduce that?
And secondly, just on the capital strain, I think you talked about it being under 4%. Has that come down at all or will it continue to go down if you do large volumes, or will it stay relatively flat at that level?
Yeah. The 4% is an average number across -- include the U.K., it's actually signaling lower than that. If you look at it, that includes individual annuities as well, which a much higher strain. And so going forward, that should be a lower number, not to put any pressure on Andrew, who is now going to answer this particular question.
Yeah. I mean, yes, it adds credit, but obviously, we're showing -- we're diversifying that credit. We've had no defaults for many years. We continue to grow the other businesses to offset that. Specifically, around the reinsurance, it is clearly part of the tools that we would use, both to be able to use those third parties to effectively be sourcing assets for you as well, and they have their own skills for doing that. It reduces some of the capital requirement on day one. And if you're executing a £20 billion, you will use that as part of it. And so, we will be open to that.
But we will optimize around things like staying long-term value whereas the pricing coming in from reinsurance versus our asset sourcing, how much we'll manufacture and how much we'll be able to create ourselves. So, some of that will depend how quickly the largest scale comes, and then you'll be deciding how quickly you want to do the asset reinsurance around that. We're really confident on being able to manufacture and source a lot of the assets that we need. It's then a case of how quickly can we source those if large deals come one after the other.
Andrew, if you want to add some of your own thoughts to that, please?
Yeah. Just to build on what Jeff said, we definitely see the reinsurance market as a tool to help us write these deals. Obviously, longevity insurance -- reinsurance means something we've done for a number of years. But we are seeing the asset reinsurance side of the PRT market now develop, a number of players we talked to reinsurers, our panel regularly. They are also obviously watching what's happening with the PRT market and expecting to ramp up their own sort of capacity and operations, and we'll use that selectively. As Jeff said, they're a great source of assets. We've seen some sort of very good pricing on the reinsurance side, particular deals we've done in 2022. So, it's definitely a part of our toolkit as we look to sort of put it together our propositions for the deals that we're talking about.
Yes. I think the big trend we've had is clearly diversification, both internationally by sector. And when you go back to what the portfolio looked like in 2010, 2011, so massively different. And the resilience of it, I mean I think the thing, Jeff and I are doing a show [indiscernible] another institution about their performance on our portfolio during COVID, and when we did our show, they refused to tell, because ours was so much better than theirs. They just didn't want to go through it. Yet again, we've had a 100% cash conversion, no defaults. So, it's a very well-diversified portfolio. The Solvency II gateway in effect is quite difficult one to get through to get much of matching adjustment anyway, and investment grade credit, as you know, very rarely defaults as well.
Thank you. It's Steven Haywood from HSBC. Three questions on the PRT, really. Can you just quantify what you consider to be a very large PRT? Is it above the £5 billion level? Or is there any -- what is the top of the range, potentially on that as well?
Secondly, you talk about using your surplus Solvency II position to do the M&A in PRT business. So, what is the surplus Solvency II position you have to deploy potentially? I know you've been down at a much lower Solvency II ratio in the past. Are you comfortable going down to the 180s or 170s in the current interest rate environment?
And then, finally, on the pipeline, -- sorry, on the pipeline for PRT, can you quantify what you see as your pipeline for U.K. and U.S. PRT for 2023? Thank you.
Okay. Andrew, do the third. Jeff, if you can do the second? I'll just talk -- why don't you do the first as well, won't you?
Yeah. I mean, very largest -- you can pick a number of people, jumbo used to be £1 billion, and I remember when the Board would really bring their hands about £1 billion, now we talk to [another about] (ph) £2 billion, £3 billion, £4 billion, £5 billion, they know how to execute, we know how to do it. So, I think it's -- we're looking now well beyond that, very large £10 billion or £20 billion, we've said if a customer wants to execute £20 billion, we will do it, that will definitely count as very large. But if they want to split it up into full lots of five, that will suit us very nicely as well. So, we just work with them to say what is the best way to get this done, give them a certainty versus the balance of our pricing, asset sourcing, reinsurance. et cetera.
In terms of surplus capital, it's sort of a mid-point. I mean, we can write £20 billion and still be well over 200% solvency. The logic is more about rates aren't going back to 0.5% in the next couple of years, we think. But you never know. Clearly, when we look into write these, thinking about them as M&A and using capital, we will look at downside stresses, what does it look like. But the important bit is the speed of payback. If you're getting paid back three, four years, the theory that we're following is, you create real economic surplus. So, those are when funds higher, when you solvency capital requirement is higher in the future. So, we won't be back at 170,180 when rates are 0.5%. We'll actually be at a higher number by investing now with good economically rational business that makes money for us. So that's the theory behind it, and so it drives that. So, we're comfortable to use some of that surplus.
And just to pick up your question on U.K. and U.S. pipeline, I do think we have to be careful when we're talking about quantification of pipelines. We have a very large U.K. pipeline as we've mentioned already, but they're all at various stages. So, there are those deals that we are talking actively pricing quoting on that, which are very near term and then there are deals at each stage of progression, particularly the very large ones we've talked about where discussions are at an early stage. So, tens of billions is the pipeline, but I think you have to be very careful how you interpolate that as to when it emerges through into transactions.
In the U.S., I do you think it's slightly different. The U.S. market is even larger than the U.K. But you heard Jeff say earlier, where we participate in that market, we typically focus on transactions that are around $500 million and we have a particular liking for planned terminations, less competition, and better pricing. And therefore, that whilst the overall pipeline is very large, our deal selectivity and our decision making is much more focused in the U.S. around really focusing on those transactions where we think we've got the best client proposition and also the highest chance of winning at commercial metrics that are attractive to us.
It's interesting. We redefine what is large, various CEOs. I'm just looking at Simon at the back. We use to think £200 million was a large deal and we did £900 million of PRT business per annum, about the same as individual annuities until 2010, and then it became £500 million than it was £1 billion, £2 billion, £4 billion, £5 billion. And what's happened with the clients so far is they've wanted to do the deal over a period of time in tranches, and I see, we've done nine tranches with them, British Steel, we're talking about, we did two last year and that was £4 billion.
So, the uniqueness of the size of the pipeline is very difficult to actually quantify, because it may be that somebody who says they want to do £20 billion, does it in £10 billion or £5 billion or £5 billion and some follow-on, but over time we're going to capture a lot of this volume and it's just a natural transition between LGIM's position in the DB and LDI markets and moving it into the PRT markets. And that transition is a good one for LGIM and LGC as well as LGRI, which we've tried to capture on the Slide 11.
Definitely have to swap sides now. It's a game of two halves.
Cool, thanks. Alan Devlin from Goldman Sachs. Three questions. Firstly, you mentioned the large deals over the BAU are M&A type transactions. Does that change the way you kind of look at them and price them? Could you price a £10 billion deal any different from a £1 billion deal given you are using your excess capital to make an attractive double-digit return on that capital? Does it matter what the other metrics are?
And then, secondly, on the investment side, given the liquid credit yield, particularly in the U.S., does that take the pressure off finding real assets to source these transactions, particularly if we do well above the £10 billion?
And then, thirdly, on your solvency ratio, how do you view that solvency ratio, particularly the interest rate driven a bit, as you say, return going back to 50 bps anytime soon? Can you hedge any of that interest rate risk to kind of lock some of that benefit in or is that just too expensive?
I think in big picture terms, we've always prided ourselves on financial discipline at all times and never chased volume at the end of the quarter or end of a given year, and therefore, we have quite strict criteria. I think your insight and it was the two insights. We have reinsurance and very highly-liquid U.S. credit markets that allows us to be competitive in winning deals, but actually with the knowledge that we can optimize the back book by using some better DI assets and improve the profitability of the business going forward. And that's an option that we have.
And just to echo, one of the points that Laura made about affordable and build-to-rent, we have a lot of large sites. We have a huge land bank across the group. On those large sites, what differentiates us from other people is we're having to build the infrastructure and put it in build-to-rent, affordable, social housing as well as our other types of housing. And again, that's a unique asset skill that sits here with L&G.
Jeff, do you want...
Yeah. I mean it's just -- I mean we won't be sort of dramatically changing our targets on that. We will have to be able to point at those. They will be lumpy. There'll be disclosures required around them, and we'll have to say why they make good economic sense. So, we won't be particularly looking at them differently in any way before the team get to [indiscernible].
But in terms of rates hedging, we talked about it before, the dreaded IFRS 17 coming. So, we are looking to give ourselves more optionality around the hedging. We will look to neutralize as much as possible the accounting side for rates, which will allow us to look at the Solvency II, but equally, we always said that the length of that requirement is really non-economic, it's all about ratio. And so, we might do a little bit to try and reduce some of the sensitivity, but to fully hedge that just doesn't make economic sense to us. It could be very costly in other rates movements that you've seen that with some of our peers that just doesn't make sense for us we think. And so, we may try and reduce it a little, but we're continuing to work on that as we understand more of their possibilities around the IFRS side of things.
Hi, Andrew Baker, Citi. I'll stick with the three, if that's okay. So, first is on the outlook for Solvency II operational surplus generation, obviously grew in 10% or so in 2022. Should we expect similar levels in 2023?
Then, you mentioned on the PRT side about the Netherlands and the opportunity from the pension reforms over there. How can you just help us scale this potential opportunity in terms of the amount you could see coming to market there?
And then, finally just on LGIM and back to the costs, so £630 million in absolute terms full year '22, is this an appropriate base for 2023, or should we be thinking this should be higher or lower for any reason? Thank you.
Jeff, do one, Andrew, do two, and Michelle, you're happy to do three?
Sure. Yeah. I mean, obviously, some of the OSG growth is what's the LGIM at and what's the LGC at, and so, I don't have a crystal ball on markets, et cetera, yet around that. You will have seen clearly that the total SCR is down. So, some of the OSG is the unwind of that SCR, but it's not as simple as saying, well, divide that over periods in the future, but you'll get less contribution from that. We have a lot more excess assets with a better return on them, which offsets that. So, we lose some from the reduction in the solvency capital requirement, which is still some of the growth. But outside of that, the rest is still to be determined with the performance of the underlying businesses and what we achieve on it.
Andrew, do you want to talk about Netherlands?
Yeah, just a quick word on the Netherlands. Obviously, there are four very large PRT markets in the world, and the Netherlands is one of them. So, we're watching it very closely. Those of you who have been following the marketplace, they will see that through some DNB-related legislation that's working its way through the statute book. It's opening up an opportunity that the way of guaranteeing income in retirement for your employees is the PRT scheme. PRT has always been a marketplace in the Netherlands, but very small DNB legislation, looks like it's going to grow that very significantly. So, we're watching the market closely. Market commentators are over and above us, have quoted numbers of PRT volumes over the next few years of somewhere between around €100 billion, and obviously, that's what the interest to us, and so far, we're monitoring it very carefully.
And Michelle?
Thanks. And look, it is [indiscernible] balance. So, do I expect our cost:income ratio to be in this place for a period of time? Our cost:income ratio is better than the median asset managers. So, we expected it to rise because we're investing. What I would say is, that we are going to continue to invest, and we're going to do that selectively. And it really has to be selective, but it doesn't mean that we're going to stop investing. We are also thinking proactively about how we take sensible decisions around the cost base as you would expect, and that will need to continue as it would in all asset managers.
But as I said at the beginning, we're confident in strategy. Modernize, diversify, internationalize, isn't a one-year program. This is a multiyear program, and we're seeing through 2023 to beyond, because we are confident that is what -- is the right thing to do to the business. So that is continuing to invest in internationalization, it's continuing to invest in product. And that diversification is not just around products, it's around channel as well. So, how do we get to different kinds of clients, not just our -- well, today, we're predominantly in institutional manager. And we are really confident that we can get to wholesale, and that's something that we're actively planning. Thank you.
Good morning. It's Andrew Crean. Kind of couple of questions, please. Firstly, with the Solvency II reform, you can expand the horizon of the liquids. What proportion of your annuity book, would you like to have in liquids with 50 to 150 basis points more yields compared to where you are now? That's the first question.
Second question on, again, going back to Slide 11. I think it's about £49 billion of excess or M&A style [BPA] (ph) done there, 6% funding rate, that's about £2.9 billion. You're about £3.6 billion, north of 190% solvency at the moment. One might argue that you could even fund that now from excess. Or alternatively, if you are going to write all this excess new business, could you give us some indication as to when the dividend will grow faster than 5%? Because there's really no point in doing it unless some shareholders couldn't see a faster rate of growth.
Very good questions, those ones, Andrew. We're working on the answers is the truth for the those particular questions, because they're relatively new to be frank about it, is we do have the headroom to do it. What's nice about the group at the moment is we have four areas competing for capital. It isn't just the PRT business. We want to expand LGC. We want expand LGIM. Retail is doing very well. We are building adjacencies everywhere. And so, we will, I think, continue to make some bolt-on acquisitions as part of the use of some of that capital.
I think you and others can do the maths, pretty straightforward that we have a lot of headroom. There is a huge amount of capital in there. Jeff was very clear on the dividend. The dividend is set to 2024, which is the next phase of our financial plan. Undoubtedly, it will be reviewed by the Board to what -- and the strategic plan in 2024 as to whether we continue with 5% or some of the level. And part of that will depend on how successfully we execute in '23 and '24 to continue to generate a lot of surplus in excess of the dividend.
So, there aren't precise answers for you right now, but the math is reasonably clear. We have a lot of headroom, I got four Chief Executives sitting down there, all demanding more capital to help grow their business. And there is certainty of the dividend for this year and for next year. And then after that, it will be reviewed by the Board during the strategic planning process in 2024.
Thank you. Ashik Musaddi from Morgan Stanley. Just a couple of questions I have is, so first of all, I mean, thanks for giving that color about 50 to 150 basis point yield pickup if you go into private assets. Can we get some color as to how much you think you'll be able to retain and how much of that might need to be passed on to the pension funds? Because I guess if everyone is trying to do the same thing, then probably pension funds would demand a bit out of that return as well. So, how much is it possible to just keep it?
Second question is, I mean clearly want to get a bit more color about private market asset origination side. So, if I look at the current situation, we have about £30 billion of PRT, which is written in U.K., say 30%, 35% is private assets, so that's about £10 billion. Whereas if you look two years down the line, I mean, the expectation is £60 billion, and half of that would be private assets, so £30 billion. Now, we need £20 billion extra private assets. So, where do you think that this is coming from? Is it like taking market share from other originators? Or is it new assets you reckon that will come?
And just linked to that, you reckon it is mainly in U.K., because I guess the treasury's agenda is that this asset needs to be invested in U.K. This is the reason -- this is the whole point behind Solvency II reform. So, can we get some color about geographical diversification on this as well? Thank you.
Yeah. I'll take the second question, while Laura thinks sort of better answer than the answer that I'm going to give on that. Even if you just look at the existing portfolio that we have, we pretty much have the land to scale up massively, and we're busy writing letters to treasury, et cetera, about how much is stuck in planning and how much capacity we have. Oxford is a £4 billion program. We've got three projects at the moment. We've got six more in the hopper. West Midlands is a £4 billion program, which Andy Street personally walked us around all of the city saying I want this, I want that and I want the other. Manchester is an enormous project, £1.5 billion projects. So, there is a huge amount even within the existing business.
We then, get into all the asset classes we want to get in, and we've been developing transition to net zero capability for a very long period of time. We have an onshore wind and offshore wind solar business. We want to do retrofitting at scale. We have ground source heating business. Lots of different businesses we think will generate assets, which will become [MA] (ph) eligible under the new regime going forward, and that's one of the points that we've made to the government. Who thinks the government won't introduce something along the IRA lines that we've seen already in the United States, they have to compete to do that.
And so, we think science and technology, we've got 2.5 million square feet already in the U.K. We've got another 2.5 million square feet in the hopper. So, the U.K. has huge potential to invest in these assets. We have the land. We have the opportunity. We have the relationship with the respective industries or respective towns or cities across the U.K. We're hoping for some planning reform. If it doesn't come under the conservative leadership right now, it will definitely come under the liberal leadership, because they'll need some things really boost growth and there won't be much more pro-social housing, affordable housing, and build-to-rent housing then the current government has been over the last 10 years.
Jeff and Laura, do you want to add something to that?
I think you covered all the assets. But, no, really no. I mean, in terms of price, you can't say how much you give away. I mean, the key is, this gives us a competitive edge. How often can you win, how often can you get them over the line, the trustees, the consultants, they are smart people. They know where the clearing price is. It's a case of how easily can you get to that clearing in price, you have to be able to source the assets appropriately. Sometimes you can use more traded liquid assets, it's a case of how much you do into give you that uplift and then helps you keep delivering consistent profits.
Thank you. Very clear.
I mean, the only thing, I think, I would add is that, when we said L&G capital up, we very deliberately chose to invest in sectors where we saw a huge need for capital. So, I don't think we're worried about -- really, it's about Solvency II reforms. But in terms of the potential, in terms of housing, climate transition, these are trillions of pounds of asset classes. So...
The nice thing we have is the optionality. The other thing about clients as they often set a target price, so they will have a target price in mind. And then, we are in constant negotiation with them and that price may move up or down on a biweekly or monthly basis. We look at it what's our asset portfolio at the moment? What else do we think we can slot into that portfolio going forward, given we have this massive pipeline? We can't say that we will build six buildings in Oxford in the next two years, but we're not going to build them. Because actually -- and the variable is not our capability or capacity, it's a planning process. And if there's some reform of planning, we'll able to do things much quicker, and in a sense accelerate the PRT transition.
Thank you. Larissa Van Deventer from Barclays. Three questions, please. The first one on, you've termed a lot of the bigger DB deals as acquisitive of M&A, but would you consider bolt-on M&A? And if so, any particular area where you think there is a skill set you may want to add?
The second one is that a lot of LGC's talk has been around CALA. But how do you see the relationship between CALA and build-to-rent evolve over the next few years?
And then, the last one is on hurdle rates and IFRS 17, which is looming at the half year. And is there anything we can do now to change thinking around hurdle rates? Or how should we approach that transition?
Jeff, do you want to answer the third one? And Andrew, do you want to go first one, and Laura, the second?
Sorry, I'm surprised Andrew is coming to run inorganic outside the PRT, but I thought I misunderstood the question. Just on hurdle rates, I mean, it doesn't affect anything. It is just accounting. And so clearly, we will look at the amount of CSM added, and what are we doing from that. And that will be a difference constrain to what do we look at under IFRS 4, where you have a new business value. But we have at least six different metrics that we wrestle with when we're doing the PRT deal, for example, better than different deals when we're doing term pricing. And so, it's just something else in the mix. But it will be -- most of the focus will be, what's the value you're getting in CSM, because that will be what's most evident to you when we write new business.
So, on CALA and BTR, I mean, as you say, the relationship is getting closer. We're able to work -- the teams are able to work very closely to source sites that can effectively be used both to private for-sale housing, affordable housing. and build-to-rent, and we can use the expertise in both sets of teams to be able to do things that players that don't have BTR and private for-sale capability to effectively get sites that those who just have the individual components wouldn't be able to purchase and plan for.
Don't worry, Jeff, I'm not going to talk about our M&A strategy across the group. Just in terms of in the context of the PRT business and inorganic, we're not looking at active bolt-on acquisitions as LGRI division. What I would say though is we are thinking about partnerships, particularly as we try and move forward in the marketplace. We've done some in the U.S. We're also looking in the U.K. as to what skills and solutions we need.
So, some of the very large schemes we see, they are currently, because their funding levels having accelerated much faster than they expected, are holding large amounts of illiquids on their pension scheme balance sheets that will need transitioning into a PRT deal. That -- in the context of that maybe being private-equity, that's quite a -- that's a specialized skill.
And of course, as we've talked about, we have phenomenal business model here with huge amounts of capability. But if we need to augment that capability through a partnership to help us solve a particular problem for our client and provide the best solution, then of course we would be open to looking at that.
I think, I'll just echo -- I'll just give some color on the way we think about M&A. I mean, there are lots of opportunities for accelerating the growth of the business. We've got lots of examples of them. We've done lift-outs of people from organizations and that helped us grow our multi-asset business. ETF business we started with an acquisition to get that up and running. Pemberton, we've got a team, we took a 40% interest in the business and allow them to develop what is a hugely successful business. We made acquisitions and inspired villages to actually get the business up and running, and we can add scale to the business.
The chart we showed earlier showed just how quickly we can scale up businesses. The world is awash with startup businesses. We have 600 in our portfolio. What we try and figure out is, which are the ones will benefit from three things that we can bring to them. First of all, is our customer reach. We got over 10 million customers here in the U.K. and pretty much every institution deals with us. And a lot of businesses that require scale-up or scaling up need access to customers. We can provide that in a heartbeat. People might not take a call from company XYZ, but will certainly take a call from Legal & General for lots of things.
And Kensa, our ground source heating business, is a great example of that. We bought it in the middle of COVID and we know ground source heating is going to be a great business. We might bring in other partners to help accelerate the growth of some of these businesses with a view to potentially listing those businesses in five or 10 years' time, when we've sort of build very successful businesses and not sold out to foreigners or not actually will try to list them elsewhere and that's part of our long-term goal.
I think there is great opportunities for LGIM to add bolt-on acquisitions for its business and help growth. But it's all within this -- we're going to be very financially disciplined about it. It won't be this sort of unquantifiable strategic benefits from putting this together. It's -- the four CEOs competing for capital. And so far, it's been pretty successful for us doing that, and I think it's a model that works. And increasingly, we're finding the people who work for us very excited about translating the skills that they've had in building things for Legal & General since some of these smaller companies, which can increase their revenue 25%, 30%, 40%, 50% per annum for a few years, and that's been one of the hidden secrets if you like about what we've done over the last five to 10 years, because they just starting to emerge now. When they are very small businesses, you say they have grown 100% in the last two years, but they're still irrelevant. Some of them are now becoming very relevant. And in the next five to 10 years, it will become incredibly relevant to us.
I think we've got time for two more questions.
Rhea Shah of Deutsche Bank. Two questions from me. So, there's a lot of focus in the statement around your international businesses or percentages in international. Do you have any aims where you want this to grow over the medium-term or long-term either just strategically or whether there is any numbers you can give in terms of cash gen or profits?
And then, secondly, around PRT, are there any synergies between the U.S. and U.K., PRT businesses? Are there deals you could do that include a company on both sides of the ocean, or any other capital synergies that you could talk about?
Yes. Certainly, on the second one there is huge synergies. Jeff, do you want to say whether we have specific targets internationally?
Yeah. I mean. We don't have specific that we put some out there, £10 billion for writing international PRT, for example, we absolutely want to drive LGC, but to have a target from one business could be aspirational if you like and the scale of what's possible. And for example, Laura's fed up on me saying that the Inflation Reduction Act in America, just huge opportunity there.
So, the world outside the U.K. is much bigger than the U.K., but we are dominant in the U.K., so it takes time to balance that out. But clearly, you could see enormous asset flows into LGIM from the rest of the world, and there's just a lot of money out there compared to what you've got in DB and DC. But at the same time, we want to grow DC pensions in the U.K. to be highly successful.
So, there isn't let's make international that big, it's let's make international as big as possible, whilst growing in the U.K., because if suddenly write-in billions of PRT, we want to balance that with growth elsewhere. So, I think today there isn't -- I think when we got more concrete businesses, they're at-scale in LGC, in U.S., PRT with a bigger balance sheet. The next round of ambitions will certainly probably put more concrete numbers on the scale of international growth.
Yeah. There is definitely some synergies. I'll let Andrew fill that in. Sometimes, we get quotes and uniquely quotes on a international PRT deal, and we've won a couple of them and we're actually probably the only person quoting on them, because they actually just trust that we will deal with them. So, we can do a U.K. PRT and U.S., while at the same time. But there is a bunch of other synergies as well, which Andrew can talk about.
Yeah. Just to do that quickly, I know we're pushed on time. I think there is two group synergies I'll talk about, one is operational. So, a very large operational team sits here in the U.K., the amount of leverage we provide each and every day to the U.S. team to support them, whether it's on pricing, assets sourcing, et cetera. But saying that, some of the assets we're now using for U.K. PRT are being sourced from our U.S. business, it's a much bigger, more developed capital market. So, we see that as a real advantage of the two businesses operating really synergistically together.
The second type of synergy I'll talk about is relationship. We are the only global provider, and through LGIM, in particular, we have fantastic international relationships. And think of two transactions this year we've done where the connectivity between the U.K. and the U.S. from a client-side was really helpful to us in negotiations, particularly around what we do around customer. We keep all of our customer servicing, client servicing in-house, that's a real strategic advantage for us, particularly trustees sponsors and other employees are being cared for in the right way and being able to show that we do that on international basis plays really well to our clients.
There's definitely two last questions there.
Thanks. Dom O'Mahony, BNP Paribas Exane. Two really specific questions and sort of a strategy question. Can you just give us a sense of what mark-to-market effect you took on real estate in the period? I think going to the LGIM flows, definitely it looks like it's sort of a mid-single digits, but maybe you could give us a breakdown of commercial real-estate versus residential?
Second is, could you give us a sense of how much management action there was in OSG in 2022?
And then, I guess, the bigger picture question, the U.S. is clearly a really exciting opportunity for you folks. In the past, you've talked about Asia as also having some quite interesting potential developments. I know Japan has been a source of flows, Chinese Pillar 3, I think it was something that you folks were talking about as well. Wondering if there's anything new there to update us on any particular developments you'd like to highlight? Thank you.
Yeah. Jeff, do you want to take first question? I'll do the second.
Sure. Yeah. I mean in terms of mark-to-market, I mean you saw the result, total investment variance is still positive, 160 or so. Everything is absorbed within there. The ones you mentioned, we don't have huge property exposure as such. So, where we've got undeveloped land and quite clearly, if you get a third-party view on that factoring in new interest rates, build costs, et cetera, so those have come down a little bit. We talked about that in the investment variance for LGC in the direct investments, but again that was thought by the equity side of things, some of the ongoing investments, but you're talking £100 million total across the whole of that book is not very much, you can see that in the analysis.
And in the LGR book. I mean, it really is just a residual property. I mean, we said before the main property exposures, vacant possession value on the long sale-and-leaseback, et cetera things with Amazon, with HMRC, et cetera, and because these are 20 years away, we have prudent dilapidation within that, then you only get a part of that coming through. We don't sell properties to defy gravity, but they absolutely are part of a prudent balance sheet. Some of those come through more mark to market in Solvency II. But we clearly set up the rates and everything else to try and immunize as much as possible around those. But so, we're not seeing huge write-downs around this because of both the quality of them and what we have, and we've seen that in some of that specialized commercial real estate, where actually it's going in the other direction and we haven't -- don't fully reflect all of that.
Yeah. I think we very much see ourselves as a global business. I think America is a priority, because we've got the full business on the ground, up and running and actually all performing well, which is unusual for any British company to be able to say that.
In Europe, Pemberton already has a European business. LGIM has got a European business, NTR has got a European business. And somewhat ironically, we've done better in Europe post-Brexit than we did pre-Brexit. So, we've been sort of forced to, in a sense, put offices there and put people on the ground. So, it's not been fly-in, fly-out so much, it's actually having people, local people and local people who want to join us. We've got a really high-quality team in Germany, for instance.
In respect of Asia, I think Chris is going at the weekend. You're going shortly and I'm going shortly. So, there's lots of interest in the model that we do in Asia. We've been very successful in Japan in getting AUM in through the doors reasonably quickly from zero to $70 billion in a very, very short-time period. We've got our presence in Hong Kong and China that we've been very measured in how we expand into those areas. But they all intrigued about our inclusive capitalism model, and the fact that all these businesses work together in a very synergistic way and we deliver great outcomes from a societal point-of-view.
So, we are being welcomed everywhere we go, and this goal that we have to be a globally trusted brand is very evident in the welcoming we get from the regulators and institutions across the world.
Thanks. Nasib Ahmed from UBS. So, first question I've got similar thoughts to Andrew on the dividend. So, if you do a large M&A like PRT, if you look at the future cash flow that you show on the slide, that's going to be significant. And if you did it this year, could you go to the Board for an ad-hoc increase in the dividend, or is that reserved for the full-year? Is that the same reserved for full year?
Second question, how high do interest rates need to go for you to retain more longevity risk, also keeping in mind the Solvency II reform?
Third question, a softer one. Tier 2 on funds fell by about £500 million. Is that just mark-to-market, or are there any ineligibility restrictions there? Thanks.
Thank you. I think they're all yours, Jeff.
Yeah. I mean the dividend, you, obviously, need all of the metrics. We saw the paybacks not three or four years. So, it will be back to Andrew's point about in the future and what does that look like. So, it's not like, you write a PRT and you get profit tomorrow, unfortunately. And it's pulled back for your payback period around the capital regime and OSG. But when you see that OSG increasing, clearly, that's when we will be having a discussion around it, which will be the sort of 24-plus year timeframe that we're looking at around that.
In terms of rates longevity, I mean, it's yeah, it's all driven by the risk margin and we've said that if there was enough done on the risk margin and rates is as an element of how big that is, we would clearly look to retain more longevity. We've also said that at the moment, the level that it doesn't materially move our view of that when there is very competitive pricing out there. But we constantly review that, what gives us the optimal return on capital versus price to the schemes as well as where is the reinsurance pricing within that. So, we're open to it. It's not -- as you said, we've got the capital, we're open to, do we retain a bit more deferred, do we retain a bit more in payment dependent the relative pricing is and the capital strain that it's giving. But it's not a big strategic decision to do more of that at this stage.
And what was number three, I couldn't remember it. Yeah, there's nothing particularly going on in there. Most of that is mark-to-market around that. So, nothing really going on there.
So, thank you everyone for your continued support. Thank you to all my colleagues for the great year in 2022. But that's over and done with, now it's about 2023. We've got huge opportunities. It's all about our execution capabilities. We've been very strong, even during the COVID period and very confident that the team has pumped up 2023 and beyond. There's a huge amount of transactions in the hopper. So, Andrew, Michelle, Laura, and Bernie get on it.
And look forward to seeing many of you during the course of 2023. So, thank you.