M&G plc (OTCPK:MGPUF) Q4 2021 Earnings Conference Call March 8, 2022 5:30 AM ET
Company Participants
John Foley – Chief Executive
Luca Gagliardi – Director of Investor Relations
Paul Cooper – Chief Financial Officer
Jonathan Daniels – Chief Investment Officer
Clare Bousfield – Managing Director, Retail & Savings
Conference Call Participants
Nasib Ahmed – UBS
Andy Sinclair – BofA
Andrew Baker – Citi
Andrew Crean – Autonomous
Dom O’Mahony – BNP Paribas Exane
Charlie Beeching – KBW
Mandeep Jagpal – RBC Capital Markets
Alan Devlin – Goldman Sachs
Steven Haywood – HSBC
Larissa Van Deventer – Barclays
Rhea Shah – Deutsche Bank
John Foley
Good morning, everybody. Thanks for coming. It’s really good to have the office open again, so we can invite you into the auditorium. It’s really good to see so many of you have made it this morning. So, thanks for coming.
We’ve done a little bit different this year in keeping with the previous couple of years under COVID, we’ve recorded the presentations which is good from our perspective, which means we don’t have to do them up here live, but also gives you a bit more time to look at the information.
And hopefully, this answers to your questions in there. But it also gives you the opportunity to think about what other questions you might want to pose to the management team that I actually had in the front row here. So, if we get stuck, we’ve got them to ask the questions.
A couple of things to say before we get started is I’m delighted to say that we are joined today by our new Chair. He joins us March the something. So, Edward, can you stand up and take a quick bow. So, that’s a job ticked. Thank you for that. But also most importantly, thank you to Fiona for stepping up into that role for the last year. It’s a very long time and done a great job. So, thank you for doing that.
I’d also like to thank Paul, who many of you may or may not know, stepped up to the CFO role as we moved Claire into a new position. And we wish Paul the best with his new adventures sometime later in the year.
And I want to also thank the management team. You may know that we had a reorganization back in the autumn and everybody’s role changed in some way or another. So, people had expanded roles or they took on a new role. I’d like to thank them for the gusto with which they’ve got on with the job.
But most important, I want to take this opportunity to thank everybody in the company for the really hard work that they have put in to not only achieving these results, but since we became independent, it’s a testimony to everybody’s contribution that we are where we are today. So, I really want to thank everybody.
And with that, over to Luca. [Foreign Language]
Luca Gagliardi
Shall I go?
John Foley
Go.
Question-and-Answer Session
A – Luca Gagliardi
So, I guess we’ll open to questions for people in the room for analysts in the room. I’ll remind you of two things. First one, take out the microphone from the seats and ask the question in the microphone. Otherwise, the people online will not be able to hear anything. And secondly, please keep it to two question maximum. This way, we can give all of you a chance to speak. And then obviously, if we have time at the end of the session, we can go back to whoever has got any additional question that has not been answered in the meantime.
So, with that, no further instruction. I see a few hands raised. I did promise the first question to Nasib. So, do you want to go first? And maybe introduce yourself, the firm that you’re working for and then ask the questions. Thank you. You need to press the button I think.
Nasib Ahmed
Yes. Nasib Ahmed from UBS. Yes, thanks for the presentation and thanks for the results. Just three questions. First on your targeted acquisition.
Luca Gagliardi
Two questions.
Nasib Ahmed
Okay. Sorry. Okay. I’ll keep it to two. So, on the targeted acquisitions, so you’ve done some good acquisitions in both management and asset management. Are there any other areas where you think that you can enhance your capabilities? And just compared to peers, where do you stand with regards to those capabilities?
And then just secondly, on the solvency ratio, I saw that you’re focusing more on asset management, wealth and reducing focus on life. But as a ratio, if I project the solvency ratio forward, we know asset management and wealth management is less capital intensive than life. So, the ratio tends to kind of go up over time. So, it seems like there’s more sort of potential capital returns coming if you’re at the 190% now and the ratio can stop. Thanks.
John Foley
No third one. Delivered instructions. So on the acquisitions, look, what we’ve done there is that we’ve talked to you since we became independent about how we think about the business, how we’re going to grow the business, what the strategy is. What you’ve seen us do is actually either acquire by inorganic means capabilities that we frankly didn’t have.
So, whether it’s in the wealth space or in the asset management space, the acquisitions we’ve made, whether it be the investment in money farm or the Ascentric platform or Sandrine, this will provide us with the building blocks to take the M&G Wealth proposition forward at pace, okay? It’s our job to integrate these propositions and to scale them.
On the asset management side, we know that sustainability, despite all the questions that are going around in the market today about different aspects of sustainability, we know it’s here to stay. We know it’s going to grow, and buying responsibility as we have, will augment our capabilities, both in terms of sustainability as an investment proposition, because these guys have been doing it for over 20 years, don’t forget, but also opens up the opportunity for us to scale that business and with a different distribution network based in Zurich.
So with that acquisition, we get a scalable proposition in impact investing in the areas that we really want to grow as an organization. So that’s both in terms of private assets and sustainability, obviously, but also gives us a new hub in Zurich, both from a distribution perspective and also an asset management perspective. So all of that augments what we’re doing from a strategic perspective.
What you can expect us doing in the future, we’ve said before that we’re not really interested in scale deals because they generally speaking don’t work. And there’s lots of evidence of that. But what we will do is where we see the opportunity to accelerate our strategy by doing more of the sorts of things we’ve just done, we’ll do them. So that’s what you can expect to see us doing in terms of acquisitions.
On the solvency ratio, well, that 160 to 190 range that we’ve talked about, that’s the first time I think we’ve talked to the market about that range. And that’s why when we demerged from Prudential, we were at 170, and that’s why we’ve consistently said that we’re comfortable with 170 because that’s within the range of 160 to 190. So this isn’t new to us. This is how we think about capital management. That’s why we’ve shown more details about our capital management framework, which is really important that the market understands as we do the first share buyback, which is a very interesting opportunity, I think, for us and for shareholders.
We thought it was appropriate to share with the market how we think about capital management, the capital framework, what goes into it, what might be the issues around it. As you can see, it’s not clear cut. There are very many aspects to how we think about the capital framework and capital management generally. But the result of all those machinations is that we’re doing GBP 0.5 billion buyback over the course of this year. From what I’ve read so far, people seem to be quite happy about.
Andy Sinclair
It’s Andy from BofA. Two for me. Firstly, just on the debt redemption. I thought it was generally tracking update today. But perhaps the one area, I just wanted to push a lot it was just on the debt redemption. Why not commit to reducing debt sooner? You don’t seem to have expressly stated a timeframe from that. I think people wondering if that’s just waiting for calls. Is there any ability, desire, willingness to push to redeem debt earlier than waiting for maturities? That’s question one.
And secondly, again, just looking at the capital generation and scope for more capital returns, 2.5 billion targets. It looks to me like after dividend costs, you’re going to have comfortably over 300 million extra a year that’s going to be generated over the next 3 years. How do you think about that? And what could be the priorities for deploying that excess?
John Foley
Yes. Thanks. So on the debt question, so the way we think about that is that we won’t be doing any transactions that are uneconomic for shareholders. So when debt is trading at a premium to where we issued, there seems little point in buying back the debt at the said premium because that’s not an economic transaction as far as shareholders are concerned. But we have decided to earmark, as you might point out, the £300 million for the first call date on the bonds — on the £300 million bond. That’s still, what is it, July 2024. So we’re not going to do anything ahead of that unless markets change, the rates move sufficiently that we can exercise an earlier call on that, not that there is a formal call, but we could get into conversation with bondholders around redeeming. These are tortuous discussions if you’ve ever been involved in. We’ve done them as part of the previous line, and they end up costing you a lot of money. So for the optics, which is all it would be really, it seems just you’re trading off the optics for the economics, and we have no plans to make that trade.
In terms of the capital generation question and any excess, we live in a volatile world, Andy, so I — we’ve already planned out the £300 million excess that we hope happens. But look, what we’ve tried to do today is give you a lot of the inputs. So we’ve given you the framework. We’ve given you the growth strategy of the organization. We’ve talked a bit about the types of acquisitions that we want to make.
And as we’ve always said, we have absolutely no desire to keep excess capital that we’re not going to use in the business. So as we have today, we’ve given £500 million through our share buyback to shareholders, which will probably take us the best part of this year to execute that. And then what the share price today is probably about 10%, 11% of the market cap that we — it’s significant. And so don’t expect me to make any comment about that subject at the half year. So that’s the way we think about it. So you’ve got pretty much all of the inputs to the capital, the way we think about the capital framework.
Andy Sinclair
Sorry, just a follow up on the debt. I realize that that’s trading above par. But if I look at, say, some of your longer duration coupons or tranches are out there when you think about the coupons that are going to be paid, it’s certainly still trading below the nominal plus the coupons that will be paid over that time. So will there still not be any willingness to look for some of those longer duration tranches and perhaps tender to take some of that off the table thinking about the full tranche?
John Foley
Yes, we could. I mean the answer is the spend calculations around this are always tricky. And frankly, we’d rather not get into those protracted negotiations with bondholders when we really don’t feel the need to. We’ve got this first call date coming up, albeit 2024, and we’ve set aside some capital to call that. But in the probably unlikely event, but you never know, that rates move such that that becomes an economic thing to call it early, well, we’ll enter those conversations. But there’ll be conversations with bondholders, right? You just can’t automatically do the extent.
Luca Gagliardi
I think Andrew from Citi had their hand up for a while.
Andrew Baker
Okay. Thanks for taking my questions. So the first one is on the 2.5 capital generation. So that compares to — I think it was 2.6 for 2021 to 2023 that you mentioned at the half year. I know that had the loss A Part VI in, so really flat if you exclude that. Is that the way to be thinking about OCG going forward? Or are there growth angles and run-off? I guess, how do we think about growth on a medium-term basis there?
And then secondly, just on the restructuring expenses. There were £146 million for the year. I can see some of that was Ascentric, other transformation as well as the building and things like that. How should we think about those restructuring expenses going forward versus the run rate? Thank you.
John Foley
Yes. So firstly, on the capital generation side, you’re right. The difference between the 2.6 and the 2.5 is indeed the ROTE perspective. But I think what we’re able to demonstrate for the past two years is just the capital generative nature of the business. So I think if you look at the management actions, we’ve been very pleased with what we’ve been able to produce over the past two years. That’s about £1.4 billion. And I think there’s two drivers on a prospective basis of that target, there is one which is we’ll continue to look for management actions.
If you look at the realms of longevity, asset trading, hedging, those are all areas we’ve been pleased with, along with some of the non-recurring aspects of those management actions. And I think the other aspect is just around those management actions. We can’t always tell sort of the timing or quantum of them, so that does come into feature around that sort of the target of the £2.5 billion, some within our control. Other aspects are without our control, for example, sort of regulatory approval might be a component.
The other aspect, though, and what you’ll see right throughout, I think, the presentation is the underlying capital generation, and we’ve really been focused on that from both an organic means and an inorganic means. And I think the actions that we’ve taken have really sort of helped sort of underpin and that’s where our focus will be to drive out the underlying capital generation.
From the sort of the 145 cost savings that, yes, so on the 145 cost savings, I think that’s something that we’ve been really proud of. So we finished that one year early, similar to the capital generation that we’ve mentioned. And I think within that, we’ve been able to absorb inflation for four years as well. So I think it’s a good — it shows that we are very focused on cost control and cost management. One of the things around that will be — and one of the things that we’ll continue to do is focus on efficiencies on a prospective basis and really look at reinvesting the efficiencies we’ve gained into growing the business.
I mentioned it’s sort of complementary to driving the underlying capital generation nature of the business. So that’s something we’ll do. But just as a reminder, I know we’ve made this point in the past that 145 program wasn’t just about getting efficiencies out of the business. It was also about improving the control environment, modernizing the business but also really ensuring that the customer experience and the customer journey has been improved along with digital lines, and we covered a bit of that in the half year. So there’s sort of a broader aspect to that program. I think you should expect more of that going forward.
Andrew Baker
Sorry, just one quick. So I was actually referring to the restructuring expenses below the line of 146 from Ascentric and what you found in the building and just how to think about that going forward? Will that be elevated going forward? Or are those one-time?
Paul Cooper
Yes. So the aspects are very similar. So the themes are very much, how can we identify efficiencies. That’s one aspect. The other one is well known and John mentioned right at the start that we’ve got a different way of working, it’s great to see people in the room today. But we’ve spent some money on the hybrid working and looking at how we configure our office space is another below-the-line investment. That’s done. And then if you look at prospectively, the other aspect is that we spent some money on integrating the businesses that we’ve acquired.
Luca Gagliardi
Andrew Crean from Autonomous.
Andrew Crean
It’s Andrew Crean from Autonomous. Two questions. At the IPO, you set some tram lines, not targets for PruFund sales of between £5 billion and £15 billion. You’re hovering just below I think at the bottom end of that. Can you give us a sense over the next two years? I mean, you’ve got the recovery in the UK, which you’ve talked to a little bit I know you also got the entrant here. Can you give us a sense as to where that might go over that time.
And secondly, the annuity business, now that the high courts agreed with you, you actually allowed to transfer assets to somebody else, is this business still core — or should we view it as an asset which you will be able to determine the right time to take action on it?
John Foley
Thank you for those. So let me take the second one first, because it’s probably the quickest answer. We’ve been consistent with our explanation around the annuity business. I don’t think we’ve ever said that it’s core, but it is something that we manage very well. We do know our way around that business. It does generate capital. And it does give us opportunities as we talk about One M&G as between the asset loan and the asset manager.
However, what we’ve always said around that business is that we keep our options open. And you’re quite right to mention, Andrew, the way we think about that is that if we were to determine that it’s not part of our operation or not valid or operating anymore, we are probably in as good a position as anybody else to determine when that right time is and what we do about it. But that’s not at the moment. Off to top of your head.
Clare Bousfield
So it’s difficult to say, Andrew, because of the diversification impact of it. So I think it’s showing the capital analysis in terms of the split between the elements between the PruFund and the annuity book to give you a sense of the amount.
Luca Gagliardi
Page 31 in the presentation. Page 31 in the presentation gives you a little bit of idea.
Clare Bousfield
Do you want to take the PruFund while I’m still up.
Luca Gagliardi
You’re standing already Clare.
Clare Bousfield
So a couple of things. I’ll come back to the comment around what we disclosed before hand, Andrew. But what I would — a couple of things I would say is, firstly, the team at the moment is massively enthusiastic about the PruFund and the performance of the fund over the last 18 months has been phenomenal, and it’s absolutely doing what you’d expect it to do. And you can see it from the graph in terms of in the pack. So from that perspective, it’s a great proposition, and it’s doing exactly what it said.
Certainly, the pandemic has had its challenges. What we’ve seen is a shift towards a lot more digital platform, and that’s been the big driver in terms of the acquisition of Ascentric and what we are currently doing is basically integrating that, putting the digital front end on to it and putting PruFund onto that platform. So we would expect over time to basically see those flows sort of gradually improve.
But I think the one thing that I would say is for me, I’m very focused on the three elements of the value chain. So the ice, the help and support, and you can see the acquisition of Moneyfarm, the funding of acquisition has been critical, and we’ve seen a lot of consolidation in the advice market. And that’s something we’re very much playing in, partly because it links to our strategy, but partly also defensive in terms of ownership of the customer.
The scale point in terms of administration, if you look at our off-platform capability, one of the best in the market, the platform piece of the gap that was the acquisition of Ascentric. Again, we’re very much at the scale side of that. And as John said, not looking to do a lot to just buy scale in terms of administration.
The investment proposition is fundamental and obviously plays in terms of the asset manager asset owner. We’re one of the few in the market who has got a top quartile investment capability. And that for us is what we want to basically play on from a wealth perspective. So that was partly the reason for the acquisition of GCS. So the question of fund management capability, building that out, leaving us from mass market into more like mass affluent in terms of where we go, but also leveraging the investment capabilities across the business, and we leverage our footprint and scale in terms of using third parties to basically give that broad proposition.
So from our perspective, we’re very much in place where we’re building out that capability in terms of where we go broadening out PruFund, recognizing PruFund’s a really strong proposition.
Behind, I’m very optimistic but don’t necessarily expect everything is going to turn around tomorrow because there’s quite a lot of structural aspects that needs to happen. And then just to point out on your tramline both — 5 billion, 10 billion and 15 billion, they were just scenarios. They were not tramlines or target pretty expensive — terms of what we said.
Luca Gagliardi
Thank you. Thank you, Clare. Dom O’Mahony. Yes, he almost given up hope, but great.
Dom O’Mahony
Hello. These are looking great. Dom O’Mahony, BNP Paribas Exane. Thanks for taking questions. I will just try to stick to two. Just on Future+, really like to see that early out. I wonder if you could start up in a little bit more detail on the structures. I think in your presentation, you say that it’s — the economics are more like an asset management products. Maybe could you — I seem 100 — hundred zero while 190 tonne, but may just sort of about, in particular could you explain how the distribution arrangement works? And how the costs work, so is there sort of an upfront load versus the stream? I realize it’s small right now, but I guess the it’s model for Future rollout? Second question, just on the dividend, technical point. I mean you say stable or increasing ordinary dividends. Is that a sort of per share commitment or a cash spend commitment? Thank you.
Paul Cooper
So it’s a cash spend. So if we keep the cash spend stable with the buyback, you’ll see that the EPS will be rise. So depending on what share — what price you buy shares back at that is likely to end it in. In terms of Future+, obviously, we can’t give away any commercial arrangements that we have with the distributors. We think of it as an institutional product, and Clare has talked about that in the past. So we are looking — so we don’t own the end customer.
Clearly, the reason we started in Italy, for example, is that there’s way over €1 trillion of cash on deposits with banks, and they’re not making any money on it. So this is a first step into investments, and it’s really an important one. And it’s — as we know, from a track record perspective, it’s a really good one.
So we believe the traction that, that product will get will be very strong. But it’s early days. We only received approval — regulatory approval towards the end of December. So first sales in January or the end of January, so we’re yet to see the proof of the pudding.
But then we’ll roll that out and probably on different commercial terms, as dictates by the different markets. So we’ll probably elaborate on that this time next year when we see what’s happening with the proposition.
Luca Gagliardi
KBW?
Charlie Beeching
Hi. Charlie Beeching, KBW. It’s encouraging to see continued positive momentum within retail asset management in the period with a significant reduction in net outflows. Are you expecting to see positive flows this year? And what might derail that? And just a follow up on capital, it does seem like you’ve increased the level of Solvency II comfort from 170%, which I believe you did mention at the demerger.
Paul Cooper
Sorry, Charlie, I didn’t get that last bit. Can you —
Charlie Beeching
It seems like you’ve increased the level of Solvency II comfort up from the 170% that you mentioned at demerger up to the 190% mentioned now. Could you just discuss the reasons for this? And if so, would this be subject to change over time, for example, back to the 170% level?
Paul Cooper
Okay. Thank you. So in the asset management business, yes, we’ve explained the medicine that we’ve been taking in Retail Asset Management. The overall flow position in the business is strong. As you’ve seen, we’ve been in net inflows this year, so that is a very good position. The institutional business continues to do a great job and had another great year.
On the retail side, we’ve launched new propositions. We have cut our fees, so we are more competitive. We have sought to review how the fund’s performing in slightly different ways. So we’ve talked in the past about taking risk tick dives into the funds and having a more team-based approach and so on, which is not surprising, given the success of the With-Profit fund, which is how they manage that fund, all of that. There’s no one particular thing, all of that, has, I think, culminated in this position.
The momentum is strong. So for the — so in — so far this year, we’re in positive territory, which is good. But with the macroeconomic and geopolitical environment, as it is at the moment, you wouldn’t expect me to predict where that might go.
The one thing I will say, though, is that we honestly truly believe, because we worked hard on this as the right propositions for customers, people want what we are now delivering to them. And so, that has made a big difference. So the momentum in the business, the morale in the business is palpably stronger than here for two. So Jon, was there anything you’d add to that?
Jonathan Daniels
Yes. I’ll just add a couple of things. Thanks, Charlie. I think we laid out six months ago, 12 months ago, what we were doing around the retail asset management business. John has covered a number of, but there were about four things that we were focused on.
One was the value for money points, and we reduced the fees and we’ve managed to reduce those fees and also maintain that top line revenue within the Asset Management business. So I’m pleased about that. And the feedback we get from clients now is that, that price is not an issue on the retail side anymore. So that’s very positive.
Secondly was around proposition and relevance of proposition. So what we’re seeing is that some of our existing funds that are floating rate in nature or inflation linked are getting some good flows as we see rates go up and inflation is becoming an issue.
Some of the funds we launched three years ago, positive impact, listed infrastructure, some good three-year numbers coming through, so we’re getting some good traction there. And then we’re launching a new range of products around sustainability. So climate solutions, better health, diversity and inclusion, and they’re getting a lot of interest from some of our intermediary clients.
Third area was performance. We’ve seen an improvement there. Still more to do, one is a bit volatile, particularly in some of our older and larger funds, but some of the newer funds coming through, performance is much better.
And then finally, working with our intermediary clients on what we call solutions, which is not necessarily distributing funds through their network, but working with them on more bespoke arrangements and developing strategies that they want and know that their clients want. And that’s important because you tend to see less volatility in flows in those solution products, and the pipeline there looks good.
I think that’s the other thing. Pipeline does look pretty strong at the moment. And you can see the capital queue on the institutional side. That’s in the deck. But on the wholesale retail side, we’re also seeing a decent pipeline.
Paul Cooper
And then on the Solvency II question, look, we are capital generative business as we’ve clearly demonstrated today, we like to get the good custodians of shareholder capital. We want to be, I’ll say we — in today’s environment with the geopolitical macro uncertainties that there are, I think being at the top end of that range is a good position to be in. So we don’t manage the exact percentages either. So we don’t take action at the point of 191 or 159, but it does trigger a debate. And we may take derisking actions below 160.
We may — it depends on the market environment. What we tried to do is just give you the context that we think about it. So the rate in Solvency II range, the thought process that goes behind the strategic acquisitions that we make balanced against the returns to shareholders and how we think about share buybacks and so on.
So I reiterate point that if we haven’t got any interesting acquisition opportunities, then we’ll return excess capital to shareholders. But that obviously will depend on the macro environment and it’s a little uncertain at the moment. But we’re very happy to be doing the £500 million buyback, as I say, that will take the best part of the year, we think. Did I answer your question, Charlie?
Charlie Beeching
Yes, Paul, I’m still not totally clear with that [indiscernible]
Paul Cooper
Yes. Sorry, to be clear that we would prefer to be operating within the range. But in a normal, whatever normal market environment looks like, we haven’t had a normal environment for a while. But when we ever get back to one, we would expect to be operating within the range. But the last three years, 2.5 years, we’ve had some interesting macro things to worry about. And so we prefer to be at the top end of the range for reasons that I think are obvious.
But that said, notwithstanding operating at the top end of the range, we are still delivering to shareholders, keeping the dividend level and giving back a further £500 million as well as setting aside £300 million for the call on the bond.
Luca Gagliardi
And maybe, Charlie, the only thing to add there is that you said we increased the level of comfort from 170 to 190. The 160 to 190 framework has always been in place internally since we merged. So we haven’t changed anything. We have seen given that transparency externally. And we were comfortable at 170, as John said, exactly because it’s within that range. So nothing has changed in a way. It’s simply a different transparency that we are providing to you guys today.
Mandeep Jagpal
Mandeep Jagpal, RBC Capital Markets. Two questions from me, please, and in the absence of Gordon, both on mortality. First one is you announced £125 million released today, which is around 20% of the operating profit.
John Foley
Sorry, I don’t know if others are getting hard to hear.
Mandeep Jagpal
You announced £125 million of longevity release today, which is a significant proportion of operating profit this year. Please could you let us know the split between base table releases and longevity improvement assumptions for this year?
And then secondly, I noted in the press release that it states future improvements in the assumptions will be a key focus in 2022 and alternative approaches in determining portfolio specific assumptions will be considered. So I assume the tent approaches are required as the CMI ignoring 2020 and 2021 data. So, could you just give us any insight into the approaches that M&G will be taking when the new assumptions? And the direction like equity is looking like it’s going in your book?
Paul Cooper
Thank you for those questions. I’ll take that. So if you look at longevity, really essentially, the move from CMI 2018 to CMI 2019 that influenced our results was broadly neutral this year.
And then if you look at sort of CMI 2020, we don’t expect significant changes from adopting that either. And I think that’s principally if you look at sort of the COVID environment, we’ve not taken sort of a benefit in terms of changing assumptions from that perspective. And I think that’s sort of partly what we were referring to. And I think that’s pretty consistent with the sector from that perspective.
Now, for the more sort of specifics around the company, you would know that in 2020, we had quite a meaningful longevity release. And as Claire mentioned before me in previous results presentation, a lot of that was to do with really examining the base mortality model and getting comfortable with refinements to the data and getting basically more, let’s say, more comfort around that.
So that triggered the release in 2020. We’ve seen more of that come through in 2021, which is the 125. But just not to the same extent as 2020. And then prospectively, we’d expect to gain some release but nowhere near the sort of size of the 2020, 2021 outlook. I think sort of going back to the sort of general view around the balance sheet, we still are pretty prudent from that perspective.
Luca Gagliardi
Alan?
Alan Devlin
Thanks. Alan Devlin from Goldman Sachs. A couple of questions. One on the acquisition of responsibility. Is that going to be kind of managed as a boutique using your distribution? Or would that be kind of incorporated into the wider M&G strategy? And how this boutique would we expect kind of further similar type of acquisitions?
And then the second one just on capital and following up from the last question. What is the outlook for kind of management actions and asset trading in 2022, particularly in this volatile environment? Does that make it any tougher or actually give you opportunities? Thank you.
John Foley
Thanks Alan. Let me take the second one. I’ll take the first one. So, in terms of responsibility, it’s got a great brand in Europe, and it’s got a really strong reputation. So, we — our strategy there is to actually, how would I say, distribute more product through it both ways. So, any of these acquisitions that we make, it’s about what they can do for us and what we can do for them.
So, we have a bigger distribution network, for example, so we will be able to scale that proposition won’t get. And that’s the point of buying — would we do more to accelerate the strategy? Absolutely. We’ve — people said, you’re quite acquisitive because we bought four or five different businesses. We looked at a whole a lot more since independence, and you could understand the reason why. We identify what our gaps are and we want to fill them quickly and we want to get on.
So, you may see some more of those types of — they don’t really move the needle in terms of earnings. That’s why they’re small, and that’s why we give you the aggregate number. But they are really important in terms of building blocks for what we’re doing and how we see this business growing over time.
And I can also see us acquiring more teams and integrating those into the business. We haven’t done anything in that regard since we did the Port Meadow team back in the 2019, but we’re always on the lookout.
And I think the proposition that is M&G today with the power of the seeding from the asset owner to the asset manager is a very strong proposition for people who want to get on and do new things.
SafePro, the Catalyst team that we put together. I mean they are — that is a fantastic proposition. It’s also to working in that group of people, 25 people globally, looking at these sorts of opportunities. Not a lot — there’s not a lot of people out there who can do that. So, it’s — I wouldn’t say it’s unique, but it’s quite a strategic imperative for us. It shows you where we’re going. So naturally, we get questions around the mutual fund business, which is very important for us. There’s no doubt about it. But in terms of where we’re growing, where we want to accelerate the growth, it’s in the areas that are interesting and frankly, where you can charge more by way of fees. Paul?
Paul Cooper
Yes, capital and management actions, so I think it’s similar to the earlier point I made, so that if you start out and look back on the two years, the past two years, the £1.4 billion of management actions is pretty substantial and something we are pleased with. If you go back further to sort of pre-public base, we have got a good track record of delivering on management actions. And I think that should give a degree of comfort around that £2.5 billion target that was set out today.
I think if you look at the nature of them, certainly, it goes back to sort of what I said. We do focus around longevity, asset trading, hedging. We’ve covered off longevity in the earlier question. Certainly, to your point around volatility, we see that could provide potential opportunities for greater levels of asset trading on a prospective basis. And I think the last one is I go back to what we’ve laid out today in terms of investment and building the business really is sort of not only to focus on the management actions, which we do have that track record of, but also to build out the underlying and generate that and grow that.
Luca Gagliardi
Steven?
Steven Haywood
Hi. Thank you. Steven Haywood from HSBC. Two questions, please. In the presentation webcast, I believe, Paul, you said there was £10 billion underlying cash in the Heritage portfolio. Can you just say is that discounted or undiscounted? And can you split that between the With-Profits and the annuities business? And then secondly, quickly on the PruFund, year-to-date, has there been any negative UPAs? Thank you.
John Foley
You go with that.
Jonathan Daniels
On the PruFund?
John Foley
On the UPAs.
Jonathan Daniels
So on the big funds, there’s been no negative UPA. We launched PruFund Planet at the end of last year, and those funds are in the process of basically investing fully in all of the different asset classes. So in a number of places, they’ve had been invested in public assets where as we buy out the private assets, that has caused some volatility in those earned periods, but those are in very small funds in terms of impact.
Paul Cooper
And then sort of the point I made in the script is if you look in the back, really all that we were highlighting is — and in the appendix, we see a point about the annuity capital generation that’s thrown off. And really, that should give a degree of comfort around both the sort of, I guess, the capital generation on a prospective basis, but also the ability to sort of underpin the dividend. It goes beyond that, though. There’s a number of other things like asset management and the capital that’s thrown off by that is also another component.
Luca Gagliardi
And Steven, for your specific question, the cash is just the — is not the present value of the cash, it’s just how much cash will be going through the time. And the chart shows you the in-force book, so it’s annuities, traditional With-Profits and improvement sold to date. But just to be clear, it’s only underlying capital generation. It exclude management actions and so and forth. We do not provide in the stack the split between traditional With-Profits and annuities. We did in September 2019 when we merged we had a chart that provides you the shape for the underlying development for the annuity book. And there’s no reason to believe that it would have fundamentally and massively changed. Obviously, there are always movements here and there, but that gives you a good idea. Larissa? You’re right at the back there, Larissa.
Larissa van Deventer
Larissa Van Deventer from Barclays. Thank you, Luca. Just two quick ones. You mentioned a 30% leverage target. Is that an IFRS to Solvency II basis or otherwise? On what calculation basis should we use? And the second one is, you mentioned efficiencies on costs going forward. Shall we think about cost growth then being inflation related? Or should we add a buffer for growth?
Paul Cooper
Yes. So on the first question, it’s very much a Solvency II basis. And you know on demerger, we were at 34%, and we’ve always said that we look to reduce that. So I think the steps take can bring us to 28. And then as John mentioned, we earmarked the additional GBP 300 million. I think from a cost perspective, again, what I mentioned earlier, and one of the things we’ve been pleased about is the ability to absorb inflation over the past 4 years, and we’ve demonstrated that.
I think the sort of general aspect is, we remain very much focused on cost. It’s a high priority for management. But one of the things that we will be doing is looking, as I said, to reinvest the efficiency savings we get back into the business from a growth perspective. And you’ll know looking around the room, we are very much a people business. So that’s a great proportion of our cost base. And I’m perfectly willing to and happy to invest in people, either from a retention perspective or from a talent perspective to acquire them to grow the business further.
Luca Gagliardi
Thank you, I think Rhea has been patiently waiting. So apologies for getting to you so late.
Rhea Shah
Thanks. Just 2 questions for me. So the first is going back into this investing into the business idea, how would that be split? Not little like reinvesting the efficiencies. But in terms of the excess cash that you’re generating, how will that be split between organic investment into the business and then inorganic bolt-ons and M&A? And then the second question is, a lot of the Solvency II gain in 2021 came from market gains. Now that’s being crystallized into cash, how is your attitude to Solvency II investment risk changing? So would you look to reduce your market sensitivities?
John Foley
I’ll take the second one, Paul. So the — so how do we think about organic versus inorganic and which areas of the business. Look, predominantly, as you’ve seen, the M&G wealth proposition is potentially a fantastic proposition. We’ve got the end-to-end building blocks for all manner of different distribution to our customers in the UK. So whether that’s robo or bus or whether it’s direct or whatever. So it’s important to actually consolidate that and then build on it, and we will continue to do that.
So you’ll see — hopefully, you’ll see more of that going on. In terms of the asset management side of the business, it is about sustainability. It is about making sure that we’ve got the right positions in private assets and solutions. Jack’s talked about that earlier. It’s something we’ve always done, but it’s a real growth area for us. It’s — the market would really love some of the capabilities that we have in this space. And we are attractive as an employer to people who have these capabilities because we already do it. So the downside is of one another and make the proposition that much more compelling from a corporate perspective.
So that’s what you can expect from us going forward on the acquisition trail. Inorganically, yes, absolutely. I mean I think the Catalyst team is entirely inorganic fair sake and organic, I should say. And putting — there aren’t many firms that could get GBP 5 billion allocation of funds and then build a 25-person team globally to actually execute on the proposition, where they’ve already achieved GBP 1.3 billion. They’ve already deployed GBP 1.3 billion into different strategies. And we’re talking about private assets.
So these capabilities are going to be in demand for third-party clients, which is the whole proposition of what we’re about with M&G is seeing new propositions that benefit the internal client that we then sell to third parties.
Paul Cooper
Okay. Yes. And on the second question, I mean, directly from a sort of sensitivity perspective that we’ve put out in the appendix, you can see the sort of risk sensitivities we’re exposed, and we’re very comfortable with that. What I’d say more broadly, though, is that we’ve got a strong investment team that’s constantly looking at the strategic asset allocation and the classes of investment we might want to either go into or increase or decrease, and that’s on a dynamic basis.
So it’s not just a case of looking at the great gains we’ve got from the market perspective in 2021. But you’ll know that — and John referenced it, we’ve been through pretty volatile periods over the past — well, certainly since demerger. And as a consequence of that, that team is constantly looking at call it, optimizing the strategic asset allocation and returns within a risk appetite so defined. And so we’re very comfortable with where we are now.
John Foley
I think there are two things that we are very focused on as a team. One is cost, and we’ve tried to demonstrate that with the acceleration of the target that we talked about before. But I can assure you that is a focus of ours. And the other is on capital generation and management actions, in particular.
I think I said in my remarks, if you read them, that in the five years I’ve been in this job, we generated £6.7 billion core, £3 billion of which has been management actions. It’s a very strong focus for us and will continuously — it won’t be the same every year, obviously, and it won’t be — it won’t increase year-on-year. But we are very focused on this, because it does — it is a source of good income for shareholders.
Luca Gagliardi
Andrew.
Unidentified Analyst
[Indiscernible] Can I ask two more questions? Firstly, if you believe John Glenn is going to allow you to reduce your capital base by 10% to 15%, that’s going to push you back at 190%. Are you prepared to take the politically identifying decision time you have back to — ill-gotten gains back to shareholders?
And secondly, I’m clear that you can dodge this question if you want. IFRS 17 in Board construct, you don’t write a new business, With-Profits business under IFRS 4 is very, very conservatively accounted for. Can IFRS 17 be broadly neutral?
John Foley
So to the first question, we’ll see. I mean I was assumption recently where the debate, it seems to me is still raging. And we’ve heard the bank to be very clear that overall, they don’t expect any windfall capital gains by any changes that might happen as a result of Solvency II. So, on the one hand, you’ve got the politicians and on the other hand, you’ve got the regulators.
I don’t know where this will end up, but we will definitely tell you how we’re thinking about it when it’s resolved for IFRS 17. So, we’ve got a program running. It’s well underway, making good progress. I think to your point though, and to the question, the sort of majority of the business that’s growing is, it’s completely unaffected by IFRS 17 from a growth perspective.
And then, if you look really about how we run our business, it’s completely off of the Solvency II basis. So the dividend, capital generation, the solvency levels are all Solvency II, more to come in IFRS 17 when we adopt it in 2023.
Luca Gagliardi
We didn’t dodge it really. Dom?
Dom O’Mahony
Hi. It’s Dom O’Mahony from Exane again. Two more questions, if that’s okay. In the presentation, you mentioned that you’re distributing 1.5, but recently cited to distribute £1.5 billion from the With-Profits state. Can you just help us understand how that’s going to impact shareholder capital and cash? So is it remittable that the portion of that, that contributes to the shareholder? And is this full year 2022 or 2021? So is it already in numbers? Is it new?
And then second question, you’ve been relatively aggressive, lots of very exciting capabilities that you’ve already been speaking about. I wonder if you could give us a little bit of a sense of the economics of the business cases for those acquisitions. It sounds like in the way you described them. You see significant synergies, mainly on the revenue side, from cross-selling products and the like. What sort of IRRs are you expecting on some of those deals? Thank you.
Paul Cooper
Yes. So the first one on the £1.5 billion, it shows the strength of the With-Profits fund. In essence, the way that, that comes through is it gets apportioned out to the policyholders. And then basically, as they cash in, we get up to or around 1.90 for — in terms of the shareholder transfer. So that will come through in the future as claims are made. What — can you repeat the sort of second question, sorry?
Dom O’Mahony
They were on the IRRs and the acquisitions. So, how do we think…
Paul Cooper
I mean, the acquisitions are — they’re pretty small in terms of cost, and we’re not breaking down the numbers as we’ve discussed earlier. Clearly, this is about acquiring capability. So we’ve given you the overall cost of these acquisitions, so you can better apportion the capital generation to the different elements as we show on Slide 12, I believe, but I could be wrong. I need to show off with the slides.
So we don’t think — I mean any large-scale acquisition, of course, you talk — you think about in those terms. But we are a capital-light business. So we are expecting to push through product or push product through these. But as I said, both of those, the important thing here is both is about putting product through those capabilities and also taking their products and pushing it throughout. And you’re seeing that — and I’ll give you a very clear example of just that, which is when we talk about PruFund in Europe or as we call it future plus, we are using the asset manager distribution network to put the proposition into. I mean this is what we’ve been talking about for the last three years. And now I think you can see that we’ve got this inflection point where it’s all coming together.
Luca Gagliardi
Thank you. I’m not sure, if there’s any other questions in the room. There was only one submitted online by Faruk from JPMorgan. It’s probably more Paul material. So he’s asking about model changes that contributed to management action in full year 2021 and future scope for such changes? And then the second question is around cash remittances. How should we think about cash remittances going forward? And how linked will it be to operating capital — well, or total capital generation?
Paul Cooper
Yes. So from the model change, in the nomenclature, we call it the major model change, but that’s what sort of the application is when we put it into the PRA. We’ve got a benefit this year. It was less than £100 million in terms of capital generation. I think it goes to the point that John made earlier, just around a long — including the suite management actions, looking at refining and improving our internal model is one of those tools available to us. And we’ll look to continue to refine that on a prospective basis.
Clearly, sort of that is dependent very much on regulatory approval before we can take the benefit of that, and I’m pleased that we got the approval for that major model change at the back end of last year that enabled us to take credit for it.
I think from a remittances basis, you’ll see that the general principle is we’ve got some very strong operating subsidiaries that generate strong capital. We look from a — and we distribute that and remitted up to holdco. What you’ll see is we like to have at least one year of outgoing at the holdco level. And then essentially, what dictates the pace and quantum of how much we’ll distribute up is really conditional upon the economic returns that are available within the subsidiary versus those that are available at holdco and the demand of that cash. And so that’s what will dictate the remittances.
Luca Gagliardi
Perfect. Good. I think there are no more questions. So we can close it there. Thank you very much for joining us today.
Be the first to comment