M&G PLC (OTCPK:MGPUF) Q2 2022 Earnings Conference Call August 11, 2022 5:00 AM ET
Company Participants
Luca Gagliardi – Head, IR
John Foley – Group CEO & Executive Director
Jonathan Daniels – CIO
Clare Bousfield – MD, Retail & Savings
Kathryn McLeland – CFO & Executive Director
Conference Call Participants
Rhea Shah – Deutsche Bank
Farooq Hanif – JPMorgan Chase & Co.
Dominic O’Mahony – BNP Paribas Exane
Andrew Crean – Autonomous Research
Ashik Musaddi – Morgan Stanley
Nasib Ahmed – UBS
Alan Devlin – Goldman Sachs Group
Mandeep Jagpal – RBC Capital Markets
Larissa Deventer – Barclays Bank
Andrew Sinclair – Bank of America Merrill Lynch
Operator
Welcome to the M&G plc 2022 Half Year Results Q&A session. [Operator Instructions]. I will now hand you over to your host, Luca Gagliardi, to begin. Luca, please go ahead.
Luca Gagliardi
Good morning, everyone. To those on the line and those in the room. I’m here today with John and Kathryn. John will give a very, very brief introduction, and then we’ll be happy to take your questions. So John, over to you.
John Foley
Thank you. A very warm welcome to our half year results. First thing I want to do is introduce Kathryn McLeland, who joined us in May as our CFO. And so she will field most of your questions today. Look, these are a really good set of results. I’m very proud of what the team have achieved here. It shows that — 2 things. One is about the momentum in the company. We talked a lot about this and I think today’s results demonstrate the momentum that we have. And the second is delivery. We’ve often talked about delivery and how we are very focused on delivering what we say we will do. And we’ve hit all the milestones that we said we would at the merger, some we’ve achieved a little earlier than plan. And these results today, I think there’s a continuum of that momentum and some of you will notice the slight joke in “continuum”. Never mind.
So without any further ado, we’ll go straight to questions if that’s okay.
Question-and-Answer Session
A – Luca Gagliardi
I did promise the first question to Rhea. So Rhea, over to you. [Operator Instructions].
Rhea Shah
Perfect. Thanks, Luca, and great results today. So 2 questions for me. The first is on the dividend. You’ve committed to the cash spend for the dividend for this year, but how should we think about either the DPS going forwards or the cash spend going forwards if depending on whether you are committing to further capital return? And then — excess capital return, that is. And then the second 1 is about M&A. So I mean you’ve been building up M&G Wealth, and I think there was a comment in the statement saying that you’ve got all the building blocks now for M&G Wealth. So are there any other gaps in the other parts of the business that you think you could acquire or invest in to grow further?
John Foley
Do you want to take the first one, and I’ll take the second one?
Kathryn McLeland
Yes. So in terms of the dividend, as you said, management at the full year results said they’d like to keep the pounds amount of dividends the same, and so what that means is we’ve got a GBP 500 million buyback program that we announced in the full year. So obviously, when we reduce the share count, you’ll get an increase in the dividends per share. And obviously, that’s part of a broader capital management framework, 1 element of which John will talk about in a minute. So encouragingly, we’ve seen a 40% increase in operating capital generation in the first half, which means at GBP 486 million we’re well on our way to our GBP 2.5 billion operating capital target, and it’s also really strong underpin of that cash dividend. And in terms of other uses of excess capital, I’ll hand over to John to talk about potential inorganic.
John Foley
So we did say that we are very pleased with the progress we’ve made on M&G Wealth and that we have the building blocks now to start delivering product, not just the PruFund proposition, but also M&G’s mutual fund propositions to clients directly or through intermediary channels. We can still build that out further. So you’ve seen the deal we did recently a small transaction with Continuum, follows the Sandringham acquisition. All of these are very positive building blocks to increasing our delivery mechanisms to our clients.
In terms of gaps, we think that the acquisition of the platform is really important for us. And PruFund Planet is already on platform, on that platform. So that’s a great result. And we hope that the core PruFund proposition goes onto platform in the second half of this year, and that will be a very important driver for sales of that proposition and will improve the momentum significant, as you would expect, right?
Otherwise, I suspect that we’ll probably do more of the same. We’ve got Clare in the audience. I don’t know if you want to talk about the IFA channels, Clare, and what our thoughts are around that.
Clare Bousfield
Yes. So in terms of the Continuum acquisition, that was just really adding to the scale that we’re basically looking to build from an overall kind of advice perspective. So we’ve now got both a restricted and an independent. That allows us to be able to encourage advisers as well in terms of broadening that out. We’ve talked about a target of 1,000 advisers as being a sort of level from a scale perspective. But I think it’s important to recognize that, that is nothing more than an ambition of which we need to kind of play that together with productivity and the use of digital.
So we announced the launch of Hybrid advice at the end of last year. That has been extremely successful in terms of actually improving the productivity. So don’t treat that 1,000 advisers as anything more than kind of a sort of a point that we are looking to basically achieve. And we’ll do that both inorganically and organically in terms of what we’re looking to do. And obviously, the partnership with Moneyfarm is also a key part of that in terms of being able to provide the full remit in terms of the access to different markets.
Luca Gagliardi
We’ll go over to, who was the first one raising his hand. And maybe I forgot to mention earlier. I mean, I know all of you very well, but if you can introduce yourself by name and company that you work for, please.
Farooq Hanif
Farooq Hanif from JPMorgan. I’m glad I’m fast on the draw even though I’ve had lots of results this week. So can you talk about your thinking behind the flat nominal dividend? And presumably, your indication here is that — obviously, you’re doing the 500 million buyback, but you’d like to do more. So can you talk about the parameters around that? And then secondly, there’s a slide where you talk about your leverage and the GBP 300 million of own funds you set aside. So presumably, this is something you’re going to come up against potentially more as your cash runs out. Also, what’s your plan around debt and addressing that earlier than core dates. And just if you could talk around that as well, that would really help.
John Foley
Okay. So the debt question is probably the quick and easy one of those. And it’s really down to economics, right? So we’ve seen interest rates move. They haven’t quite come into focus. The way I think about it is, when they come into focus, that’s when we might do something on the debt front. That means that there’s economic advantage to M&G and to shareholders to enter into conversations with bondholders about doing something on a preemptive basis. And when we talked about our capital framework at the year-end, we discussed that as a potential use of capital that we generate.
So that’s still something. And in fact, it’s a more likely proposition today than it was then, given the move in interest rates. And so we’ve also got the GBP 300 million that we set aside for the bond maturing in 2024. So that’s all pretty clear. In terms of otherwise in CapEx, look, as I say, we have a number of options around the capital we generate. We are a highly capital-generative, cash-generative organization. We have strong solvency. We, I think, need to demonstrate resilience in these markets. We don’t know what the winter is going to bring. It’s likely to be pretty choppy. And I’m very pleased with the fact that we have a 214% Solvency II ratio, that’s a very good number and gives us confidence going into whatever lies ahead.
But there will be opportunities, right? So markets will throw up opportunities, I believe, for us to make acquisitions. Again, if they fit, if they’re nailed on strategically, and I hope you can see that everything we’ve done thus far is nailed on strategically as a — these acquisitions have had real merit to our strategy. And so whether it’s that, maintaining dividend, we’ll likely talk more about it at the full year. I think we did say at the full year back in March that we wouldn’t be making any announcements around capital at the half year, nor do we intend to. Did that cover your question?
Andrew Sinclair
It’s Andy Sinclair from BankAmerica. First 1 for me was just on remittances, seeing slightly lower remittances in H1, about GBP 0.3 billion. Just any reason for that after a pretty good capital generation last year? And should we expect more for H2? And second and final 1 for me is just on with profits. PruFunds have held up pretty well in terms of performance in H1. Just really wondered given the market volatility, how that’s changed dynamics of discussions with advisers? Is it really picking up with interest as a result?
John Foley
Go for it. But push the PruFund because that’s been a phenomenal result.
Kathryn McLeland
So Andy, you’re right. Remittances are down, at about GBP 253 million. But I think first of all, remember that we’ve actually funded some acquisitions worth GBP 260 million. So it’s double that when you net off for the acquisitions that we’ve done in the first half. And I think when we look at how we manage capital liquidity across the group, our approach really hasn’t changed. And so when we think about what we can distribute in terms of excess surplus from subsidiaries to the parent we never like keeping a whole lot of excess in subsidiaries. So our framework has always been about distributing up to the parent, bearing in mind the decision, obviously, of the 2 subsidiaries, the most meaningful 1 obviously, the insurance one.
And also, you’ll remember last year, the 1.1 did have an unusually large contribution from PAC. So those are the main factors behind that. And I think when you look at the liquidity, we’ve got GBP 1.4 billion, and we obviously are a very capital generative business. So we feel very comfortable about the position of the group.
Luca Gagliardi
And now we answer the PruFund…
Kathryn McLeland
Yes. So yes, so PruFund, I think, delivered with profits, your question was more broadly that with profits. And so certainly, in terms of the performance, which you can see is a 20 percentage point outperformance of peers, which is really extraordinary. And that’s led to this 30% pickup in sales in PruFund, which is also encouraging. And obviously, Clare is looking for more distribution channels for that product, but it obviously is very well positioned. And so we’ve obviously had meaningful benefit coming through in terms of underlying capital from our with-profits businesses. And that’s about GBP 100 million of the increase we’ve seen year-on-year. And so obviously, underpinning that is just the growth in the PBST, which has increased year-on-year. Now there are a couple of provision moves that you’ll have seen and obviously, on the underlying capital moved we also moved a few hedges around. But we have had really strong performance, which has led to that growing PBST driving the really strong underlying capital generation that you’ve seen. So I think we feel quite well positioned. I don’t know, Clare, if you want to add anything else about the prospects of PruFund.
Clare Bousfield
Yes. So in terms of the advisers, obviously, what the PruFund investment performance, as Kathryn talked about has been extremely positive. And that is not just about — actually, you can see the smooth return, but also the underlying returns in terms of what we’ve actually been able to deliver. But from an adviser perspective, the advisers are in a pretty good place. We’ve made some fairly significant improvements in service that has generated a lot of the improvement in terms of flow. But the market volatility that we’ve seen, what you can see from this is exactly — it’s doing exactly what you’d expect it to do.
The other aspect, I think, that is important around this is a lot of the underlying assets real assets. So in terms of being able to actually deliver the inflation component in terms of the cost of living crisis. This product is absolutely well positioned in terms of that . So as interest rates start to climb, you’ll start to see increases in the expected growth rate. And again, that basically provides customers with a great outcome in terms of how they go through that retirement. And we’re certainly seeing that in terms of how the advisers are reacting. But the most important thing, Andy, is that the product is doing what it’s expecting because advisers have seen this now for 10-plus years, and they’re pretty comfortable in terms of how it operates.
Luca Gagliardi
This time around, it was a different Andrew being the fastest one, so.
Andrew Crean
It’s Andrew Crean here. A couple of questions. Am I right in thinking what is the underlying performance with the profit fund? I mean that’s presuming the smooth returns. If we could just have the underlying performance behind that. And then the second question on the balance sheet. The IFRS equity is GBP 3.9 billion, taking off tax intangibles of GBP 1.6 billion. And then there’s about 6 — GBP 550 million of buyback and dividend still to pay. The tangible IFRS equity now is about GBP 1.75 billion, and that plays against debt of whether it’s GBP 3.3 billion or GBP 3.7 billion principal and the leverage there is well into the 60s, 68%. Is that really okay? I mean are you happy with that level of leverage?
Luca Gagliardi
So maybe I should take the first 1 on PruFund because we do not disclose the unsmoothed performance of the fund because obviously, this would be an arbitrage opportunity for any customer out there. So we have never disclosed that. And unfortunately, we cannot do it. But you — it’s always within a boundary from the smoothed performance. So it hovers around and clearly moves on a daily basis, but we don’t disclose it. On the balance sheet, I think the short answer would be that our main metrics would be on the capital side of things. So that’s what we focus most on, but I’m not sure if you…
John Foley
It’s what other people focus on: investors and rating agencies and regulators.
Kathryn McLeland
So I think since I’ve been in the role, I’ve understood people looking at obviously the IFRS position. Certainly, we do focus very much and obviously engage with our rating agencies. And clearly, the regulator is an incredibly important stakeholder. And when we’ve seen the leverage moves in the quarter on the solvency basis upon which we look at leverage, obviously, there’s been a huge impact in this period from the very material market moves that we’ve seen. So our debt position hasn’t changed that movement down to low 30s, wants to adjust for the GBP 300 million is something we’re comfortable with.
We said we’d be happy with sort of temporary variances above our target 30% but I think the management team, and we said that at full year, I think the management team is comfortable — very comfortable with this approach to looking at leverage on the solvency basis rather than the IFRS basis. And obviously, there have been, as I said, meaningful market moves in both over the period.
John Foley
Our ratings haven’t been adjusted. And if you go back to 2020, we’ve probably been super AAA on that basis. So that’s why we just look at it on the basis that Kathryn has described.
Luca Gagliardi
Ashik and then Dom, because you’ve consistently put up your hand quite fast, but you’re always second.
Ashik Musaddi
This is Ashik Musaddi from Morgan Stanley. Just a couple of questions. So first of all, on management actions. I mean this half, we saw about GBP 67 million when it had been a very volatile half. So how would you categorize the GBP 67 million for the half? I mean, would you say it was a good result or would have been more or is there any pipeline you can share for the year, because at least it is an important part of your capital generation metric?
Second thing is retail flows or wholesale flows have been pretty strong. I mean, GBP 0.8 billion, which we haven’t seen for quite some time. So what would you say, were there any lumpy business in that? Was pretty stable? Is there any outlook you can share, how it is looking for second half? Any thoughts on that would be helpful.
And the third 1 would be on cost. I mean, over the results season, we have seen quite a few asset managers struggling on the cost side as well as on the revenue side. But when I look at your results, I mean it kind of came pretty well in line with expectation. So how do you think about cost in second half? I mean, do you think there is any catch-up on the cost that needs to be done in second half? Or would you say your — the first half is more or less a good indicator?
John Foley
One and 3 and Jack will do 2.
Kathryn McLeland
Yes. Look, I think I mentioned and I think in the first question that the operating capital of 433, up 40% is pleasing for us, given it shows we’re on track for our external target. And we do like driving underlying performance. So again, we do focus very much on that metric. But when we look at the management actions we delivered in the 6 months, yes, they came in at around GBP 67 million and that is in line with our expectations. And so we feel very comfortable about what we can deliver over the course of the year. Obviously, we typically review all the longevity assumptions in the second half of every year. So we have the CMI 20 tables that we’ll need to assess against our assumptions. And you’ll remember that the a year ago in the first half of 2021 was very lumpy in terms of manufacturing. So really meaningful numbers coming through there. And so yes, the number of GBP 67 million and the opportunities that we see in the annuities business there, we’re comfortable around them, and it’s very much in line with our expectations.
John Foley
But it is lumpy, right? I mean we — and we’ll take opportunities when they arise. So if it doesn’t fall within a period, we’re not — we don’t get excited about it, if I can put it that way. Jack, do you want to take the question on flows?
Jonathan Daniels
We can have Slide 11, Luca? So the approach to wholesale asset management, we’ve talked about it in the last couple of years, is a consistent approach to improving the flow position, and you can see that, that’s starting to happen. 4-pronged approach: tackling performance, which was weak a couple of years ago, it’s now improved considerably. Value for money, looking at the pricing, which we’ve dealt with as well, is no longer an issue when we talk to our wholesale clients and intermediaries.
Launching new propositions and revitalization of that proposition base, also bringing in new talent in the equities business in order to reinvigorate that side of our activities. And we’ve seen some very good inflows into equities in the first half. And then investing in distribution and developing these core relationships with our wholesale intermediary clients, that we can then do a number of different strategies with them rather than just 1 or 2. And some of those are more bespoke. So all of these things are starting to work, and we’ve seen that in the first half with positive flows. The second half, we would expect also to continue with that momentum. But it’s something that we’ve been focused on for a couple of years in a very systematic way, and it’s starting to come through as we would expect.
John Foley
And if you take that in context of what’s happened in the wider market, I think that the achievements are even better.
Kathryn McLeland
Shall I take the third one on costs. And so I think it’s a natural follow-on from just hearing about the really strong turnaround in the wholesale business. So you’re absolutely right. Within asset management, costs were up about GBP 40 million year-on-year. Now it’s important to remember that about half of that was from the consolidation of our South African joint venture. And then the remainder is split broadly 50-50 between some inflation and then some investments, which Jack’s talked about, to grow the business.
And so I think it’s really encouraging that we’ve seen the fruits of this strategy and these investments come through, and that the business has got momentum. Revenues are up 7% year-on-year within Asset Management. And so I think what I said in my speech this morning is that over the longer term, you would expect the cost/income ratio to move down. But I think we’ve been very selective and focused on when we’re investing. And really importantly, it’s made the business much more diversified and much more resilient, which is why we’ve managed to, I think, deliver a relatively good performance in this period, particularly notable in the turnaround in the wholesale business.
John Foley
And I think to make the point in relation to delivery, so performance, we’ve spent this money, it’s not the performance is there and the revenue improvement is there. And that’s what we focus on when we spend shareholders’ money. Just to make the point.
Luca Gagliardi
Thank you. So Dom, over to you.
Dominic O’Mahony
Dom O’Mahony BNP Paribas Exane. So 3 questions, if that’s all right. Just on wealth and I suppose, related to retail Asset Management. There are some indications that cost of living crisis is leading people to divert money away from saving, pensions. I know that workplace is not something you work in, but I’m wondering whether you’re seeing any signs that the propensity to save is changing. It sounds like your share of, certainly of retail asset management is doing brilliantly. I’m wondering whether I’m missing any signs that the total pond is shrinking as a result of that.
And then on to the financial side. Kathryn, 1 thing you said earlier was you tried to push cash up through the structure. I wonder if you could just help us understand a bit more about what the binding constraints are on cash remittance. Is it really as simple as the solvency position within the entities, and I guess PAC in particular? Are there other constraints? I mean, for instance, does it matter that PBST is a very big contributor to capital and presumably it’s not a cash item. But maybe it is. So anything you could say that would be helpful.
And then you may say you can pass this on to the full year. But in terms of uses of surplus capital, I hate to come back to leverage again. But on your own metric, it’s — I think it’s about 31% pro forma, the GBP 300 million, which is fairly above the target. But I wonder whether it would be fair to assume that shareholder returns would have to take a second priority to debt redemption while the ratio is above that target? Or actually, are you more relaxed than that?
Kathryn McLeland
So the first — I can take a few of those. The first question on have we seen any change in savings patterns, I think I’ll hand over to Clare and then I’ll take the others.
Clare Bousfield
So what’s interesting is the period — most customers basically go through a review of their finances typically around the tax year-end. So what we did see in that period was a slight pickup in terms of drawdown amounts in terms of people actually accessing their cash. But post that, we’ve seen no real change in terms of that trend. Now 1 of the things I think that’s really important as we go down the kind of post-compulsory annuitization is a lot more customers are now in drawdown than they would have done historically. So 1 of the things we’re very focused on is fund exhaustion, for example.
So we are looking at different mechanisms in terms of, for example, how much we highlight that to customers. But also, we’re also looking at guarantees as an example, because as interest rates start to improve, what we can start to do is make those much more commercially viable, particularly with the size of with-profit funds that we have. So there are a number of different options that we’re basically exploring at the moment, and we’re 1 of the few in the market who have got the expertise and the kind of structures to be able to do that in terms of offering it.
But what I would say at the moment is we’re predominantly a mass market and mass affluent player. So we don’t see some of the trends that I would say some of the kind of higher net worth or the sort of affluent, where we see a lot more impact from volatility in the market. But that cost of living point in terms of just being able to afford is critical in terms of our customer base.
Kathryn McLeland
So shall I take the next one. So back to the — how we think about remittances and how we manage capital liquidity across the group, this is something I did in my old role as well. So — and it’s actually just a really similar approach when you’ve got regulated subsidiaries. You want to make sure that you’ve obviously run those subsidiaries prudently in terms of all their metrics. So they’ll have a number certainly solvency capital, liquidity metrics are important. And — but the approach is really consistent from what the groups had historically. And as I said, last year did have a very, very unusually large distribution from the insurance subsidiary. So we are capital-generative, as you know, we’ve delivered really strong numbers in the first half. We feel very comfortable, obviously. You can see how well supported the dividend is.
And when we talk about an intention for full year broadly line cash dividend, again, we feel really confident around that, given what we’ve delivered in the first half. And given my earlier statements also around confidence in management actions in the second half. And now it’s an interesting question. Obviously, that’s appeared in — amongst our peers as well, given the meaningful market moves that we’ve seen. And it does mean that the composition of the capital base to move depending on what happens with markets, which obviously drove a meaningful move in own funds in this period. We’ve seen growth in the PBST, which is good news because it’s come from very strong with-profit performance. And so looking forward, we still feel very comfortable around the capital generation capacity of the group and the distributions to the market.
And now if you step back and look again around the question around leverage, which does get a lot of focus. It’s quite interesting. I think I look at that capital management framework that the group put out at the full year and think it’s very compelling for all our stakeholders. We really value financial strength. We like having, as John said, a 214% solvency ratio today. We also like having flexibility, and flexibility is also prudent from a regulatory perspective, from a business perspective to capture opportunities. So we’ve delivered very strong capital generation.
We have got the ability to potentially deploy that GBP 300 million. And as John said, we have seen what’s happened to credit spreads. Obviously, you’ve seen that also in our numbers today. And we understand certainly very well what we could potentially do. We will take into consideration all of the stakeholders and importantly, do what’s also driving shareholder value. We’ve delivered — the management team has delivered enormously for shareholders. John can quote the numbers in terms of how much we’ve returned since listing. But I think that certainly, the total shareholder return through buybacks, and more importantly, the underlying strong dividend, is meaningful. And we like being in a strong position today. We know we’re capital generative, and we’ve got optionality and flexibility around that GBP 300 million, and we will continue to monitor the balance sheet and the position and do what’s right when we take into account all of those considerations.
John Foley
You want the number to the penny? We’ve delivered that — I’m kidding. The — just to make the point on this, though, I don’t really see that — you mentioned that shareholders would take a back seat to debt repayment. That’s not the way we see it. We’ve got these 4 planks on — from a capital framework perspective, and they’re all to the advantage of shareholders, we believe. And therefore, there will be a moment when actually — well, I say there will be moment — I expect there will be a moment when the debt question will actually play well in terms of value for shareholders in terms of reducing debt, given where markets are and where they’re heading. So that’s the way we think about it.
Luca Gagliardi
We have a couple of questions from the people online. So I promise we’ll exhaust all questions, but I’m just stepping 1 second to the e-mails. So I’ll ask one — well, two, from Andrew Baker from Citi. The first 1 is, what has been the initial flow experience from the PruFund Life product, which Italy has called Future+ in Europe. And based on your initial analysis, what solvency impact are you expecting from the U.K. Solvency II review?
John Foley
So it’s still early days with Future+. It’s actually called Future+ in Europe. You know we are piloting this in Italy. We are working with Sao Paolo. So a very strong partner. We are going through the process of educating the sales force and so on and so forth. And results — investment returns like we had on the screen earlier will only promote the proposition. It will take time. We saw that in the U.K. Everybody knows that, that proposition was available in the U.K. market for some years before it took off. And circumstances change, and that I’m confident will happen. We’re also rolling it out in Ireland, and I think I’ve mentioned that previously. And we’ll just stick with those 2 markets until we have proof of concept because I think that will be more helpful, more advantageous for our commercial discussions with future partners in other markets going forward. So it’s going well, but I don’t expect to see huge scores on the doors any time soon. What was the other question?
So Solvency II reform. Look, there’s a lot said — I don’t see much in terms of output, but there’s a lot said. We are engaged with industry forums and so on. We talk to the regulators, people know our views. It’s not hugely impactful to our business. We don’t write the sort of business that is going to be impacted by that. That said, if things were to play into the hands of private asset managers, then that would be great from our perspective because it would mean that, that business would get yet another shot in the arm. But I think from our perspective, it’s something we watch. It’s something we’re interested in, but it’s not hugely impactful for our business.
Luca Gagliardi
Three questions from Steven Haywood from HSBC. The first one, any update on management changes, particularly with the CEO and CIO? Second question, CMI 20 calibration in the second half. Do you foresee any particular impact or trends and then probably positive, but what about COVID volatility in it? So second question is on CMI 20. And third question is about management action, which I think we partly addressed earlier. But any change to the expected run rate, and Steven quotes a number between EUR 150 million to EUR 200 million a year as a sustainable level of management actions.
John Foley
Okay. I’ll take the first 1 and take the others. So on the question of CEO succession, as you would imagine, the process is ongoing. It’s being led by the chair and we’ll make an announcement about that in due course when the time is right. So in the meantime, though, you’ll be pleased to know that my — or maybe not, that my hand is very firmly on the tiller of this company, and will remain there until a new CEO is appointed.
In terms of Jonathan leaving, well, he’ll be around for quite some time yet, I’m pleased to say. And I think it will be up to the new CEO to worry about how he’s replaced — being irreplaceable, as you can see from the results. Kathryn.
Kathryn McLeland
On the longevity question, and I appreciate this has come up before, and I’m not going to give too much more specific guidance apart from I think it’s too early to say at the moment or identify sort of any clear trend. So I think we’ll wait to see what comes out, and we’re not guiding to anything particularly meaningful or special here. So we’re not expecting anything particularly unusual than you would have seen previously.
And obviously, we know we’ve had meaningful longevity releases in the past. And obviously, also, over the last few years, we’ve been continuing to work on our underlying model as well. So that’s another aspect of that. And I guess just back to management actions. And in terms of the guidance that has been given before, I think that was — that guidance was given across both asset trading and longevity assumptions. So if you look at the asset trading, I think, as we’ve said in the comments, that we’re absolutely on track. We feel very comfortable about what we can deliver also in the second half. And you’ve seen that we have a really strong track record in management actions. So I think we feel very confident that we can continue to deliver there across the various levers — hedging, trading — that you know we have at our disposal.
Luca Gagliardi
Perfect. And last point on CMI 20, obviously, we book short-term experience variances in each result. So obviously, experience variance in mortality in H1 would have already been booked in these numbers. So when COVID was at its high, clearly, that had more of an impact in terms of long-term trends. It’s fair to say that it’s probably still too early to judge on that. Last person that submitted questions online, and then we’ll move back to the room. Charlie Beeching from KBW. First question is probably for you, Kathryn. Are you likely to change your balance sheet hedging approach at all with interest rates seemingly set to continue rising? So that would be the first one.
The second one, have you had any further thought of disposing of part or all of the Heritage book? Does this remain core to the strategy? It says the Heritage book, but I think it possibly implies the annuity book.
John Foley
Not that Heritage portfolio. very new ones.
Luca Gagliardi
And then third and final, which I think Jack already partly addressed earlier, do you expect net positive flows in the second half of the year, given a more positive outlook for institutional and the mandate wins? So obviously, we typically — we never guide on flows, but if you can add a little bit more color on that.
Kathryn McLeland
Should I start with the thoughts around how we feel about the position of the balance sheet in terms of hedging. So as you know very well, we’ve got 2 broad hedging programs. We have an equity hedge that hedges the shareholder transfers that the shareholder gets. And that’s been obviously pretty beneficial, given what we’ve seen in terms of the market. And I think that’s working very well. You’ll be aware we did adjust it a couple of years ago, but I wouldn’t expect us to change the approach to equity hedging. And on the interest rate side, you’ve seen that we have obviously got interest rate hedges on. We’re very much focused across all of our hedging programs on protecting the Solvency capital position. So that is the primary objective is looking at the solvency capital and protecting that.
And so there has been some negative move, obviously, given the meaningful backup we’ve seen in 10-year swaps this first half on that interest rate hedging, but we’re prudently protecting for downside risks. You’ve obviously seen net-net overall, the benefit we have received from a rising rate environment. So we’ll continue to — we do continue to look at the structure of the hedging programs, the composition and we’ll be as efficient as possible, but very much focused on protecting the solvency position of the group.
John Foley
I was worried that I wasn’t going to get that question. So thanks, for it. The answer is simply no. We haven’t changed our mind, we still think that it’s the right thing for us to hold onto that book, for all the reasons that I’ve mentioned multiple times before. And I think in the current environment, even more so in some respects. So if we’re talking about the annuity book, I mean the Heritage book we certainly have no interest in selling. So we stand at we’ve always stood on that subject.
Luca Gagliardi
And as a reminder, when we talk about the Heritage book, we’ve got the need to book the other because the traditional with-profit fund, which obviously is an integral part of the overall with-profit funds that also include PruFund so you cannot really partition the 2. That would be a nightmare of an exercise to do, and I don’t think anyone is interested in running that. Jack, on flows looking forward, maybe more on a sentiment.
Jonathan Daniels
So Slide 11, Luca. We talked a bit about the wholesale side of the business. Obviously, the other bit is institutional. That’s got a very long history of positive flows. The first half was quieter. Markets were turbulent, some of our institutional investors were sitting on their hands a bit. I’m pleased to say that in July, we had a couple of significant wins. We’ve got the capital queue and the private assets down on the bottom right there. And I was speaking to the head of the Institutional business earlier this week, and things seem to be returning to normal. But we don’t give any further guidance on what expectations on flows, but it feels better than it did in the first half.
Luca Gagliardi
Thank you very much, Jack. So Larissa, you’ve been very patient with well, all of those that haven’t asked questions have been patient with waiting, but Larissa, over to you.
Larissa Deventer
On capital generation, about 2/3 of capital at the moment does come from the Heritage book. How do you see that composition evolving over time as the Heritage book runs off? And at some point, would it actually make sense not to sell the Heritage book but to add to it by buying other closed back books?
John Foley
So we have never sort of avoided controversy on that topic. If we see an opportunity and it makes economic sense, and that might happen as a result of Solvency II reforms, not to the extent I’ve heard about but that might, then that is something we could consider because we have the team of people, we run the business, we understand it very well, and we have a terrific brand in that market. So it’s always an option. And if you’re asking will, at some point, it precipitate the change in our portfolio, it could well, but not for some years, in my opinion. If that makes sense. You’ve seen the runoff of that book. We’ve shown you that before, and it’s a very valuable asset for us. So could there come a time, sure. But there could also come a time when we would add to it.
Kathryn McLeland
If I could just add 1 comment to that, which is the capital generated from the annuities book first half was pretty meaningful and it was up. And when you think about how that calculation works, it’s also that we expect a return on the excess asset struck at the beginning of the year. So you’ll know what’s happened to rates this year. So the market has been very volatile, but setting that should be reasonably supportive in terms of the continuation of that strong expected return on those assets sitting in the annuity book, albeit with very, very much over the longer term, clearly, a declining runoff profile.
Larissa Deventer
Do you believe that the other operations could generate sufficient capital to compensate for the runoff?
Kathryn McLeland
So the business that Clare runs, certainly, we’re very encouraged by the prospects there. We’ve talked about the longer-term potential in Future+ in Europe, which we’re really excited about. And the results of asset management today show a business that’s got real momentum across wholesale and institutional, with great franchises. So obviously, we know that there are clearly inflation cost headwinds there, but we’re really encouraged by the potential to grow earnings in that business over time.
Luca Gagliardi
Got one — Dom, sorry, you take that — Nasib and then Alan.
Nasib Ahmed
I’ve got only 1 I’ve just received from UBS. On IFRS 17, given what you’ve done internally, what kind of impacts are you thinking on IFRS NAV and earnings going forward? And is it just a case of kind of adding your implicated surplus to your IFRS — and does that become the new base for IFRS 17? And does that kind of — is that the way you’re looking at IFRS leverage as well, because you’ve got a big good profits book relative to this.
Kathryn McLeland
So on IFRS 17, it’s obviously a project that is big for us and all our peers, we’ve got a lot to do, but we’re in a good spot at the moment. In terms of the impact on the business, obviously, we aren’t nearly as impacted as many of our peers, as you know. We’re — Luca is looking at what we might do in terms of guiding the market on the impact on M&G when it comes in at the beginning of January. So with the expectation that will be coming out in the final quarter, obviously, of this year.
In terms of more details and more technicalities around how the various parts work worth some initial guidance that Luca can take you through off-line. But obviously, we’ll be waiting until we more formally give something out to the market later .
Alan Devlin
Alan Devlin, Goldman Sachs. A couple of questions on PruFund. I know in the past, you said it’s — the sales been held back. It’s a complex year with COVID and the uncertain markets seem to be unknown in the last couple of years. You’ve given the improvement in sales this half. Is it starting to get easier to sell that product? And what’s kind of the outlook for sales not on the platform now you’ve launched in Italy and Ireland, et cetera, can we expect that momentum to continue? And presumably the strong performance in H1 actually is better for forward sales because obviously, just happened and the advisers can start to sell it?
And then secondly, also PruFund you mentioned in Italy and Ireland there proving the concept for you guys. What is the — how would you prove the concept? What’s going to be a success for you, you’re looking for in the in the Future+ are you in Italy and Ireland?
John Foley
That’s a good question. Clare.
Clare Bousfield
Yes. So we are just kind of standing back in terms of the last couple of years in terms of PruFund flows. So there are a couple of things that were basically driving some of the trends. Firstly, DB transfers were a big element in 2017 and 2018. They were about 25%, 30% of our flows during that period. And obviously, what’s happened with some of the regulatory pressure is we’ve now got a lot less IFAs who are actually able to make those DB transfers. So those volumes have come down. The actual demand for it just ends up over a longer period, and PruFund is an ideal proposition in the context of a DB transfer. So that’s 1 element.
The second piece is what we’ve seen is through the pandemic, a lot more customers and advisers have wanted to do things digitally for the obvious reasons. What that’s done is effectively generated quite a lot of adviser consolidation because a lot of the advisers, as we all know, are closer to retirement. And so fundamentally, what they’re saying is they’ve got to put investment into their business. And that, as a result, a lot of them have put themselves up for sale. And that’s why we’re seeing the consolidation that we’ve seen. What that’s also doing is shifting flows onto platforms. So there’s been a shift from our platform to 1 platform over the last 15 years that has accelerated as the advisers have accelerated.
So that has been the big driver to why if you go back to 2017, 2018 and compare to where the flows are today, that’s the big drivers. So that was the reason why we acquired the Ascentric platform in 2020. That’s why we just launched PruFund Planet on the platform and in July we’ve had an amazingly positive response to that. Number of leads that advisers have come to us. We even had flow come straight in from a platform on day 1. That’s unheard of in terms of a platform.
But the one thing you’ve got to remember is the platform sale is a holistic sale, the way you basically plumb that platform into — through the adviser business and into us. And that typically takes somewhere between 3 to 6 months. And then it becomes less of a transactional process and more of something where you’re part of the business model in terms of the adviser. So we should start to see the impact of that, but it’s probably going to be ’23 rather than ’22 in terms of where we go. We’re also looking at putting PruFund Growth and PruFund onto the platform as well towards the end of the year in terms of that piece. So overall, we are very much optimistic.
You saw the performance. I mean the performance is stellar. And as the market is, the volatility of the market makes it very positive. As I talked about earlier on, we’re also thinking about guarantees in the context of where interest rates are in terms of those different markets. So from — in terms of the optimism in terms of the future, absolutely. If you then go to Future+, yes, the feedback that we’ve had in terms of the market and the agents on the ground in Italy has been very, very strong. Those banks, if you look at the amount of cash that’s on deposit in bank accounts, again. So all the dynamics and the opportunity are absolutely there. But as John said, it takes time, and we’re talking about thousands of agents and we’re talking about a very innovative new product that hasn’t been in the market.
And that will take time in order to kind of bed down and get the full momentum in terms of what we’re looking to do. The Irish market is a bit different because it’s more akin to the U.K. market. So there’s a lot of things that we can learn and leverage in terms of the Irish market. But yes, overall, I would say we’re feeling very, very optimistic in terms of the future.
Yes. So to Luca’s point around the with-profit fund. The with-profit fund is 1 block of assets. You have not got GBP 60 billion that basically backs 3 funds. It basically backs the full traditional with-profits. And then when you look at the different tranches, all they are is combinations of blocks of assets in terms of where you go. So absolutely, we can use the track record, although as you will get — the agents they really want to see what is the actual funds that the customers are going to go. So the longer we get a track record, the better.
But for example, when we saw a unit price downwards adjustment on that fund about a month, 6 weeks ago, that went down very, very well in the Italian market because it was actually significantly lower than the market had gone down. So what that was doing is proving to the agents, this actually does what you expect it to do in those situations. So yes, it’s very much doing exactly what you’d expect.
Luca Gagliardi
Thank you very much, Clare. Mandeep?
Mandeep Jagpal
Mandeep Jagpal, RBC Capital Markets. Just 1 question left for me as a follow-up on institutional net flows. I understand the pipeline here is good in terms of inflows, but in terms of potential redemptions, is there a threat here due to pension schemes to accelerating the derisking over the next few months and years due to the improvement in funding levels have been seen year-to-date? And this could either be in the form of moving from growth assets into LDI, or actually deciding that they’re now in a position to buy out business?
Jonathan Daniels
I’ll take that one. I mean there is — it is a challenge to our existing business. But what I would say is that if you look at some of the flows — positive flows that we’ve seen in the first half and actually in the second half of last year, — the — on the public fixed income side particularly, we’re getting very good traction with institutions outside of the U.K. in Europe. And if you looked at the last 6 months of last year, a significant portion of those inflows were large institutions in France and Germany.
So part of the approach to diversification and investing in our international business, particularly in Europe, is that those core fixed income capabilities that we have are the sort of strategies that institutions in Europe are looking to invest in as well. So that’s positive. And we haven’t really seen the of either in the interest in private assets. Again, we’ve traditionally been strong in the U.K., but again, we’re seeing significant flows there from institutions in Europe. So there is much more of a diversification to that side of our activity on the institutional side.
John Foley
In terms of the Asia operation, do we talk a bit about what we’ve done there?
Jonathan Daniels
Yes. I mean when we’ve talked about investing internationally, in the — we’re protecting the strength that we already have in the U.K. We think Europe is the area where we’re developing in the short to medium term. Longer term, some of the relationships that we’re developing with institutions in Asia are also showing some positive flows. This is particularly true in Japan, but also elsewhere. So we think the business is pretty well poised in terms of its diversification away from the U.K., which was a specific plan that we had at the start when we demerged.
John Foley
So you may recall we acquired an -based team some time ago, and we’ve recently acquired, we think, a team in Asia. So again, it’s not just about the public acquisitions but the resource at the team-based acquisitions, making sure we’ve got the investment capabilities to drive the business as we hope, and that principally is internationally, as Jack has described.
Luca Gagliardi
I’ve got — before going back to Andrew — well, Dom and Andrew, there’s 1 more question online from . He asked 2 questions. The first 1 being, should we start looking at pro forma leverage, e.g. if you earmark more money for debt reduction, we don’t have to wait for leverage to actually come down before capital return.
Second question is, you’ve only done GBP 150 million of the buyback so far. Would consolidation be the faster way to distribute.
John Foley
Take the first one? I’ll take the second one.
Kathryn McLeland
Look, I think in terms of the leverage position and — we just did think it might be helpful to adjust the GBP 300 million off both numbers, which is what gave the 31% so it gave us a higher number. Look, I think for the moment, what we’ve said is we’ve got GBP 300 million that gives us valuable optionality. We’ve got a 2024 bond that’s portable. We’ve got other securities and we’re watching market spreads. So I think I wouldn’t encourage people to think we’ll earmark more. As John said, we like having a strong solvency position. We have invested very selectively to accelerate strategies where we’ve got gaps. We’ve seen that most importantly in that Clare’s talked about it in well, but obviously, responsibility, we’re really excited about in asset management. And then we have got the share buyback, which, as you said, is just under GBP 150 million in terms of what we’ve done so far. So I wouldn’t, at the moment, think about any other aspect of earmark war. I think we’re comfortable with where we are at the moment. And on the debt — on the share buyback, I’m not 100% sure I understood what the question was?
Luca Gagliardi
I guess the question was whether share consolidation as opposed to buying shares in the open market as a means to return the capital passed through to shareholders?
John Foley
What we’re doing is a proven technique to reduce share count, it’s chugging along well. So we’ll see how it goes. And if that forms any future action, then that it forms future action. So — we’ll just leave it there, I think.
Luca Gagliardi
Dom, you were the first 1 of the second round, and then Andrew.
Dominic O’Mahony
I promise it won’t be a third round. Dom O’Mahony, BNP Paribas Exane. First question, this may sound cheeky, but it’s extraordinary how strong the performance of the PruFund is in the period. Was there an element of positioning that drove that? And I’m not asking for the natural number of the actual performance, but something that helps us understand why it’s done so spectacularly. And in particular, how have you marked-to-market the real assets within that? So do you change the discount rates in future cash flows based on interest rates? And then the second question is, I think in previous presentations, you gave us the future UCG coming out of the in-force book. I think there’s GBP 10 billion at the end of the year. I haven’t seen it in the slide deck. Forgive me if it’s in the pack somewhere. Has that number moved?
Luca Gagliardi
So it is not in the deck simply because, in a way, market — the number will always move because of assumption on return on excess assets , but we also feel — it’s such a long profile and such a big number that it’s not worth updating it every 6 months. Once a year is probably — it would have not changed massively between January and now. That’s basically the short answer to the second point.
John Foley
I mean I think Luca put the slide up before you asked the question. It is this that I think makes the difference and it always has. So the strategic asset allocation that the team, and it’s a pretty big team that devised the SAA on this strategy. You think long and hard about it. It is this that creates, I don’t know, somewhere between 80% and 90% of the value of the return. And then, of course, given the size of the fund and the breadth of what we’re able, both geographically and from an asset class perspective, what we’re able to invest in. That’s the result.
Dominic O’Mahony
And I’m guessing that means that actually because so much is non-sterling, the performance in sterling is very, very strong because of the weakness of the currency?
John Foley
Well, you’re right to point out that there’s a considerable international dimension here, and we manage our own assets, both in North America and in Asia as well as Europe. So it’s the blend, right?
Andrew Crean
It’s Andrew Crean again. I was a bit flummoxed by the Solvency II move, the market movement in the first half, trying to apply the sensitivities which we then had. You couldn’t help me a little bit as to how an outsider with models and how it changed — how the actual performance changed relative to that. And then I suppose going on from that, with yields falling since June, what’s happened to your solvency position? And can we apply the sensitivities, do the sensitivities allow for your current hedging?
Kathryn McLeland
Go to 28? Okay.
Luca Gagliardi
Because we put in there back part our biggest sensitivities…
Kathryn McLeland
Yes. So this gives you the shareholder solvency of sensitivity to with-profits and on the right. And look, I think in terms of the market movements, they — and obviously, we’ve had a meaningful reduction in the capital from as well when you look at which I look at as Slide 29. So I think there have been really meaningful moves, obviously, across equities, across rates, across credit. When you look at how the capital position has moved, sometimes you have sort of interactions between some of these sensitivities. But I think it would be broadly in line in terms of where we’ve seen benefits and when we’ve seen market-driven movements. Obviously, we’ve got the annuities surplus assets, credit spreads have widened by 50-odd basis points, rates are higher as anticipated.
We’ve got interest rate hedges on, which are prudent to protect against downside risks. But as I said, we do continually monitor those and so we also have benefit from the equity hedging that we put on, on shareholder transfers. So I think the sensitivities might have moved, but — and obviously, we need to look at — when you look at the overall solvency position, there’s sometimes second order effects and move impacts between the various external macro numbers that impact our solvency capital position, together with the hedging and then obviously the own funds.
So I think at the moment, what I’d say is that we are mindful about and no one’s asked about inflation. So I did say in my comments that we from a balance sheet perspective, we do feel that the inflation risks are hedged in terms of the amount of inflation-linked annuity assets matched by liabilities. So the balance sheet is in a well-protected position. We’re obviously mindful about cost headwinds. I covered that in some earlier comments on — with regard to just cost management and cost discipline across the group.
And then, look, we continually monitor the appropriateness of how we manage the risks that we face. And I think we feel pretty comfortable with where we are today, but we’re very alert that it is a very uncertain macroeconomic environment. We’ve seen the inflation numbers for the U.K. And we constantly monitor that we’ve got the appropriate level of protection on. And hence, you see the sensitivities that we updated today.
Andrew Crean
Perhaps you could give the sensitivities for the other way. Are they symmetric? Because everything there is sensitivity to markets crashing?
Luca Gagliardi
All the sensitivities that we show we have said in the past and that hasn’t changed. They’re roughly speaking, symmetrical. I think what has happened in H1 is that the magnitude of the movements were such that there were other second-order effects in play, right? So the broad direction was what you were expected. Maybe the magnitude is slightly different. But broadly speaking, they are there or thereabout. You’ll notice that we have updated the sensitivities. They’ve moved a little bit, again because market moved. So you’re looking for where you should use this, and we are not providing a mark-to-market update on the solvency simply because there hasn’t been that much time since the end of the period, right? While at full year, we’ve got 2 months before results. Now it’s only 5 or 6 weeks, so.
Kathryn McLeland
I did check where swaps had moved since the 30th of June and they rallied a bit, but not too much. And when I first looked at this, I obviously wanted to see what the rates sensitivity was, but this is where we’re exposed, which is why they kept sensitivities on the downside.
Luca Gagliardi
So we exhausted all the question, all the questions online, and I’ll check, but yes. And I think we also covered everyone’s questions in the room. So thank you very, very much. And I guess, see you in March. Thank you.
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