M&G plc (MNG) Earnings Call Transcript & Summary

All right. Let's get going. Good morning, everybody. Welcome to our 2019 results presentation. Great to see so many of you here in the room. Welcome also to those on the webcast. Obviously, you'll have seen our announcement this morning. So what we want to do is just have John and Clare go through some of the key messages from the results today. Then we'll have plenty of time to take your questions, and we will do that both in the room. And for those of you watching on the webcast, you can also submit your questions over the Internet. So without further ado, John, if you're ready?

Yes. Thank you, Spencer. So good morning, everybody. Welcome to our maiden set of financial results as a newly independent company. I'd like to start by saying that this is a positive set of results against the backdrop of challenging markets in 2019 and markets that have become more challenging over the past few weeks as the world responds to COVID-19. Unlike others, we have restricted travel to business-critical activities. So thank you to everybody in the room for joining us. It's a much bigger turnout than we expected. Thank you. And to say that 2019 was a busy year for us would be something of an understatement. I am very proud of what we achieved. And I want to take this opportunity to thank once more my team for their dedication and commitment. I hope this morning provides you with a good overview of what we have done this year as we continued to advance and execute our business strategy, delivered positive financial performance and strong capital generation, and prepared ourselves to pursue future growth opportunities. So here below the line on this slide are the milestones to our demerger and listing on the London Stock Exchange on October 21. Above the line are some of the operational and capability changes we made to our business over the year. You can see that we have continued to innovate in our business while simultaneously executing a successful demerger and making progress on transformation. In this slide is 2019 in key numbers. The value of our business mix and the quality of our diverse earnings comes through clearly. Assets under management and administration are up 9% over the year to GBP 352 billion, mainly on strong investment returns. Adjusted operating profits are over GBP 1.1 billion, very much in line with our expectations. Over the year, we generated capital of GBP 1.5 billion, helped by market levels as the impact of management actions is lower than in previous years. Looking out over the next 3 years, we have set ourselves a target of GBP 2.2 billion for capital generation by the end of 2022. And recent falls in market levels make this more of a stretch. Nonetheless, I am confident we can hit the GBP 2.2 billion. And trust me, I am very focused on this. And from a capital perspective, we finished the year in a strong position, with a shareholder solvency ratio of 176%. Now against the challenging backdrop for the industry, we had modest net outflows across our Savings and Asset Management business of GBP 1.3 billion. This represents less than 1% of assets under management and administration. Institutional Asset Management was flat over the year, returning to positive flows in the second half, almost entirely compensating for the slowdown in the first half. In Retail Asset Management, net outflows were GBP 7.4 billion. These were largely offset by net inflows of GBP 6.2 billion into our Retail Savings business, which includes PruFund. This proves the value of having a diversified business model and a balance sheet to support smooth investment returns, particularly at times of market volatility. Now performance is key in any asset management business. Encouragingly, performance in our wholesale range of funds picked up in the second half of the year, with 59% of products delivering above medium returns over 3 years. There's no doubt that parts of the active asset management industry are challenged at the moment, partly because of the growing popularity of passives, but also because of changes to the distribution landscape. But we are not sitting idle. What I want to do in the rest of my presentation is to give you an idea of how we are tackling these challenges. Demand for active management is strong and rising where it delivers a specific outcome for customers and clients. It's why we are focused on innovation in savings and investment solutions. Here, profit margins are resilient and barriers to replication are high. To grow our business in active high-value investment solutions, we are doing the following: we're building out our investment capability, particularly in private assets; expanding our range of customer propositions; and extending distribution, both in the U.K. and internationally; we are overhauling our cost structure through transformation; and creating an operational platform that is international and scalable, again, through transformation. Through these actions, we can continue to deliver attractive and sustainable total returns to shareholders while retaining our capital strength. But how we implement our strategy is as important as the strategy itself. It's why in this slide, I wanted to remind you of our corporate values: of care, and that is treating others with respect and taking time to understand; and integrity, always doing the right thing. And always doing the right thing for the customer is at the heart of our ESG strategy, and I will cover that in a moment. So what progress have we made on delivering our strategy in 2019? Here's a reminder of our plans for customer and distribution. In short, how we are giving more clients in more markets access to more of our investment capabilities. And 2 points I want to highlight here. First, we are in advance talks with a number of European partners about the distribution of a PruFund-like proposition to bring the benefits of smooth returns to a wider group of savers. As we said back in September, we expect to see initial flows in the second half of the year. I cannot go into details about these discussions for reasons of confidentiality, but we will update you when we can. Second, we continue to deepen our partnerships with institutional clients through more local support in our chosen markets. It's one of the reasons why during the year, we had more than 100 institutional mandate wins in the U.K. and Europe. All of this is in line with our strategy of making our full set of investment capabilities available to more customers and clients, in more markets, in a wider range of formats. In investment management in 2019, our priority has been to build out our international investment capabilities. In private assets, we are putting more resources into local asset origination in regions which are important to our clients. It's helped us to commit just under $1 billion in new investments across the Asia and the U.S. in 2019. On the public asset side, we're also investing in local capabilities, including the hire last year of a team of fund managers and researchers, specializing in Asia-Pacific equities. Both initiatives increased our capability in areas where profit margins are resilient and where client demand is growing. Both underpin our drive to investment solutions. Now some of you may recall that when I first took on the job as Chief Executive of Prudential's U.K. and Europe business, I did so on condition of a sizable investment in operational transformation. Here, we show how we have laid the foundations for the digital experience for our customers and improved systems for our colleagues whilst restructuring our cost base. A milestone for the business in 2019 has been the migration of the most complex customer administration system in our Heritage business to the BANCS platform of Diligenta, part of the Tata Consultancy Services group. This successful transfer of 450,000 life and pension policies demonstrates our ability to drive efficiencies through our operations while improving customer outcomes at the same time. And transformation isn't just about modernizing old stuff. It's also about creating the right platform to scale our business safely and at pace. It's fundamental to our ambitions for a PruFund-like proposition across Europe. I've already touched on the key numbers for 2019, and Clare will go into more detail in her presentation. Still, there are a few additional figures I want to mention. Thanks to our strong capital generation results, our own funds have grown, improving our solvency position to 176% and lowering our leverage ratio to 31%. On transformation, we remain on track to hit our target annual cost savings of GBP 145 million by full year 2022. And when it comes to dividends, we are confirming a payout of GBP 310 million, that's 11.92p per share, to be paid in May. And there will be a one-off demerger-related dividend of GBP 100 million or 3.85p per share. Now what I have covered -- now that I've covered the numbers, I want to go back to our values of care and integrity that I mentioned earlier that underpin our all of our activity, including our approach to ESG. For more than 170 years, we have been responsible stewards of our customers' savings, first as Prudential Assurance Company, and second, since 1931, as M&G Investments. Throughout that time, the challenge has remained the same, to balance savers requirements for long-term strong financial returns against the wider needs of society and the economy. Today, impact on the environment is an increasingly important factor in how we deploy our customers' capital. As a major financial institution, we have a part to play in finding a solution to climate risk. That's why as a newly independent company, we are embedding ESG considerations across our entire business, both as a good corporate citizen and as an international asset manager. On the left-hand side, you can see our ESG commitments as an asset manager. As ever, our approach is to prioritize engagement over exclusion. However, we will consider this investment from companies who fail to engage. When it comes to climate risk, our ambition on carbon is for our book of assets under management to be net 0 by 2050. In terms of new propositions, we will expand our current range of impact strategies, actively seeking out companies which want to fix our planet, one investment at a time. As an international business in 22 locations, we want to be carbon net 0 by 2030. We also want to be a more inclusive and diverse employer and have set clear targets for better representation among the leadership on gender and ethnic background by 2025. Now before I hand over to Clare, I want to end by setting out our business priorities for 2020. Now pretty much all of them are a continuation of our work last year: improvement in the customer experience, extension of distribution in the U.K. and internationally build-out of investment capability, reaping the benefits of transformation and sound capital management. Now I'll hand you over to Clare who will take you through the financials in more detail.

Thank you, John, and good morning, everyone. Our results demonstrate the strength and resilience of our business and are in line with the expectations that we shared with you last September. The environment has been challenging, especially across the asset management industry. Being an asset manager and an asset owner enables us to produce good earnings even in tough market conditions. I'm going to draw out some of the key points on the underlying numbers before John sums up and we'll then take your questions. Our overall assets under management are 9% higher than last year-end, mainly driven by the performance of the markets. On flows overall, we've shown our resilience. While the picture on Retail Asset Management has remained challenging, our institutional business showed a positive trend in the second half and PruFund has continued to produce strong positive flows. Taking each in turn. Retail Asset Management remained in net outflow at GBP 7.4 billion, primarily impacted by weak consumer confidence. As we've previously acknowledged, we're very proud of our overall investment performance, which has been strong, particularly over the medium term. However, there are a few funds where performance is weaker than we would have liked, particularly in the value-orientated strategies. We are addressing areas of weak performance through independent deep-dive exercises, supplementing the analysis done by the fund managers. As John has commented before, our role as management is to actively manage the active managers. Despite these headwinds, our retail assets under management closed the year just slightly lower at GBP 75 billion. Institutional Asset Management showed broadly neutral net flows for the full year at a positive GBP 700 million for the second half. Over the course of the year, our institutional assets under management grew by 9% to GBP 77 billion. PruFund remained a highly popular proposition in the U.K. market despite some pressure caused by the fall in DB to DC transfers across the industry. Net flows into the PruFund amounted to 15% of the opening net assets. This included sales from the smooth element of our new PruFolio range, which allows customers to combine the PruFund proposition together with active and passive mutual funds, leveraging both our asset allocation and stock selection capabilities. These flows combined with another year of strong investment performance drove PruFund assets up 25% to almost GBP 54 billion. Lastly, as you're aware, the High Court has denied our request to transfer the annuity policies we reinsured in early 2019 to Rothesay Life. It's a new experience for all of us because such a process has never been done before in respect of a Part VII transfer. We expect a hearing on our appeal in the second half of 2020. Because of the uncertainty on both timing and outcome, we're required to bring the GBP 11 billion back into assets under management. Previously, it was reported as held for sale, and therefore, excluded from our assets under management. Growth in the assets under management before this effect was 6%. I'm now going to move on to adjusted operating profit, which was over GBP 1.1 billion for 2019. In 2018, we released GBP 441 million on longevity and had GBP 166 million insurance recovery in respect of TRASP. In 2019, we released GBP 126 million from longevity and we're fined GBP 24 million by the FCA on TRASP. When comparing 2019 to 2018, these impacts, all from the Heritage book, were the most material on the adjusted operating profit. Our savings in asset management business delivered a slightly higher result of GBP 474 million for 2019. Asset management was lower, With-Profits was stable, and the other result improved from a loss of GBP 59 million last year to a profit of GBP 38 million this year. This was due to a one-off negative of GBP 56 million in 2018 related to our international insurance operations, with the remainder of the improvement explained by higher investment returns. Corporate center expenses increased as expected due, firstly, to the interest costs on the debt, which we inherited from Pru plc in October, and secondly, to the build-out of our capabilities to become an independently listed entity. I'm now going to cover the key profit drivers, starting with asset management. Whilst overall assets under management were higher at year-end 2019 compared to 2018, it's the average level for the assets under management across the period which is most relevant for the revenue. This was 4% lower because the drop in markets in 2018 only occurred towards the year-end. This, together with a moderate degree of ongoing margin pressure in the retail book, resulted in 7% lower fee revenue. Costs were slightly higher year-on-year by GBP 12 million or just under 2%, GBP 3 million related to the increased FSCS fees. In both years, we also had positive one-offs. In 2018, approximately GBP 18 million from accrual releases, and in 2019, around GBP 30 million from changes to the staff pension schemes and other items. Importantly, we've been changing the nature of the costs, with lowering the back-office costs in favor of building investment management capabilities for future growth. You've heard John mention some of the initiatives that we've started. As a net result, primarily for lower fee income, the cost income ratio increased by 4 percentage points year-on-year to 63%, a number which continues to compare favorably to our peers. The savings business has continued to perform well, driven by PruFund. PruFund showed strong growth sales again in 2019 at GBP 10.2 billion, although below the prior year level of GBP 12 billion. As I mentioned earlier, we expect DB transfers to reduce given the limited number of advisers who have the experience and permissions to write this business and potential changes in adviser charges proposed by the FCA. These transfers accounted for less than 1/5 of our PruFund sales in 2019. Gross outflows have also increased as expected as the book matures. This is important because we only recognize the cash transfers and the profits to shareholders when customers take their money out. Shareholder transfers grew by 9%, broadly in line with the level of withdrawals. In terms of adjusted operating profit, these increased transfers were offset by a lower hedge result, which I'll explain shortly. For the traditional With-Profits book, I commented back in September that even though the book is closed to new customers, we expect shareholder transfers to remain broadly stable for the next few years assuming normal market conditions. And that's exactly what we've seen in 2019 at just over GBP 250 million. As with PruFund, the hedge result is more negative than last year, driven by the increase in equity markets. In our July presentation last year, I explained the cash flow hedging of shareholder transfers which we've been doing across the traditional and PruFund books. What you're seeing in the operating result is the gain or loss on the hedging we put in place for the shareholder transfer in 2019. The more negative result reflects the strength of equity markets since the hedges were initiated. We have included some further detail in the appendix to give you a better feel for how the numbers will move in the coming years as these hedges mature based off different equity market scenarios. At the end of 2019, rather than putting in a new tranche of these cash flow hedges, we switched to a structure focused on the protection of dividends up from the life company in the event of a market shock. Since it's not a hedge of the IFRS earnings but on Solvency II, the impact of this new hedge will be excluded from operating profit. This slide shows our shareholder annuity and other businesses. Results remained strong. As expected, the particularly large positive effects from longevity and TRASP last year did not repeat. The return on excess assets fell mainly as a result of lower releases from our credit default reserves and lower investment income. As we highlighted in September, part of this was related to us returning a significant amount of capital out of the insurance entity up to the parent ahead of demerger. And so some of that investment income has just simply shifted up the group structure. Longevity of GBP 126 million reflects the adoption of CMI 17 which we executed in the first half of the year. In 2020, we'll be reverting to our usual practice of reviewing the assumptions at the year-end. And of course, it's too soon to give any guidance on what that might look like. In the TRASP line, we had GBP 166 million recovery from our insurers last year. The small loss you see this year is in relation to the FCA fine that was announced in September. Finally, other items contributed GBP 137 million from close to 0 last year. The main contributors are mismatch gains of GBP 55 million and a one-off benefit of GBP 29 million from changes to the staff pension schemes and some other minor items. I'm now going to move on to capital generation. We had a very strong year. Total capital generation from continuing businesses came to GBP 1.5 billion, including GBP 538 million of positive impacts from the markets. And it also did not include a full year of interests and head office costs, which we will, of course, have going forward. After pre-demerger dividends and related adjustments, the overall increase in our surplus capital was GBP 0.5 billion. Pretax operating capital generation was GBP 1.3 billion, of which just over GBP 800 million was underlying capital generation. The remainder other operating capital generation is less recurring in nature. The decline of GBP 79 million in the underlying capital generation is primarily due to the corporate center, where we started to incur debt interests and head office expenses in the latter part of the year around the demerger. We have enhanced the methodology for allocating capital generation between the PruFund and the traditional With-Profits business to be based on underlying asset shares, which has resulted in a higher PruFund number, with a corresponding reduction in the traditional With-Profits within Heritage. The other operating capital generation incorporates a number of elements. Asset trading and hedging contributed GBP 251 million, including GBP 80 million from the new With-Profits hedge program. As reported in the first half results, the impact of longevity was just over GBP 100 million. A number of other smaller items, including, for example, experienced variances and other operating assumption changes, generated GBP 95 million. The decline from the prior year was mainly driven by the TRASP insurance recovery. The capital generated resulted in an increased solvency ratio of 176% before dividends, up from the pro forma of 170% last year-end. The Solvency II debt leverage ratio fell from a pro forma 34% at the first half, as we disclosed in September, to 31%, driven by the growth in own funds. We estimate that the negative market movements up until last Friday have had a negative impact of around 10 points since the beginning of the year, in line with the sensitivities that we've published. The With-Profits fund is an enormously important part of the group, something no one else can replicate. And we continue to explore ways in which we can leverage it as part of our ongoing development of our broader proposition and drive our long-term returns to our customers and investors. Capitalization of the fund has continued to strengthen, with a solvency ratio of 267%, up from 231% last year. It's also becoming increasingly resilient. The older style guaranteed products are running off and being replaced by PruFund customers, the vast majority of whom selects the nonguaranteed option. As a result, the sensitivity to equity markets is very low. If equity markets were to drop by 20%, the fund solvency position would reduce by around 1 percentage point. This strength and resilience is why, as we announced last month, we will be making a distribution of excess surplus to policyholders of GBP 1 billion. And being a 90:10 fund, shareholders will receive 1/9 of this amount from the fund coming through to earnings when the customer takes their returns as cash. We expect this effect to be of the order of GBP 10 million per annum over the next few years. The impact on the shareholder solvency position is negligible since the positive economic impact is offset by the TMTP. Finally, on the balance sheet, the parent company's initial liquidity position. This slide shows the most significant transactions which founded the parent company's liquidity position, including those related to the demerger. First of all, we have payments up from our subsidiaries of GBP 1.7 billion, including a GBP 1.2 billion exceptional return of capital up from the insurance business, as I referenced when talking about the Heritage result. The next 2 transactions are the debt for equity swap from Prudential plc. We received GBP 3.2 billion in consideration for the debt we inherited and then paid a demerger dividend of GBP 3 billion. Finally, you'll see the normal dividends we paid to Prudential plc last year and some minor other movements, including head office and interest costs. So we ended the year with a cash and liquid asset balance of GBP 1.3 billion, well ahead of the minimum we aim to hold according to our financial management framework, which is to cover 1 year's expected outgo. I now want to build on the update John gave on transformation, where we've completed the second year of our 5-year program. We're making good progress, having implemented key outsourcing arrangements, commenced legacy system migration work and upgraded customer-facing platforms. These are just some of the initiatives, all of which are improving customer outcomes, our control environment and the efficiency of our business. The efficiencies we are delivering are not short-term tactical cost savings. They are driven by fundamental, deep-rooted changes to the way that we run the business. We remain on track to deliver around GBP 145 million of shareholder cost savings by 2022. We are slightly behind where we wanted to be on timings, because in 2019, we took the active decision to prioritize demerger activity in some areas. Finance is a good example of that. But we know what needs to be done to reach the target, and we remain committed to our 2022 timetable. Our priorities from here will include further decommissioning of legacy IT infrastructure, increasing the scalability of our operations in our growth areas and driving out costs. With much of the groundwork done, the level of resources we need will inevitably decline. That's why we're announcing today a voluntary redundancy program, which aims to reduce headcount-related costs by around 10% this year. This runs across all areas of the business and on all levels of seniority. In terms of 2020, it's early days and there's obviously uncertainties, but you'll see here some indications of what we expect. The headlines are, for Savings and Asset Management, we'll be fully focused on delivering our medium-term growth initiatives. We remain positive on the outlook for institutional business. And we're working to improve flows in Retail Asset Management, recognizing the need to refocus on the U.K., which has been underinvested in historically. We have a number of initiatives, including developing our investment solutions expertise, continuing to expand our subadvisory capability and capitalizing on our strong and broad propositions. We expect PruFund will continue to be a highly appealing proposition in the U.K. markets, and we've started to see strong traction for PruFolio. There is further uncertainty on DB to DC transfers given the FCA's review of contingent charging. In Europe, we're on track to realize the ambition of exporting PruFund. The duration of the current COVID-19 outbreak and the associated market volatility will obviously be a factor in terms of how flows develop across the group, especially in Retail Asset Management. We expect fee margins in the institutional business to remain resilient, but for some fee pressure to remain in the Retail Asset Management. This is why it's absolutely imperative that we are sharply focused on costs in 2020. Shareholder transfers from the With-Profits business should continue to grow as the book matures. In Heritage, we expect broadly similar transfers from the With-Profits book. For shareholder and EOTs and other, we'll see some compression on the return on the excess assets following the dividends up in 2019, although there will be an offset in the corporate center, which will now earn interest on that money. This year, we will return to our normal practice of reviewing longevity assumptions at the end of the year. For corporate center, we continue to expect GBP 80 million to GBP 100 million of overheads, mitigated by the interest earned on the liquidity now at the parent company. Coupons on the debt will be around GBP 190 million, as previously guided. We will also have an accounting effect of the amortization of the fair value premium under IFRS, which will net off against this. To wrap up. All of the management team are highly energized post demerger. We've continued to deliver on improvements in customer outcomes, reducing operational risk and creating an efficient and scalable business. We're absolutely focused on cost and ensuring that we deliver the transformation on time. Financially, 2020 will also be an important year because the clock starts on our 3-year target of GBP 2.2 billion of capital generation by 2022. Our 2019 numbers demonstrated, once again, the potential of the business and we remain focused on the necessarily growth initiatives and the balance sheet optimization measures to meet our goal. In short, we're aiming to deliver to our investors good long-term growth prospects with a healthy dividend yield. Thank you. And I'll pass back to John for some closing remarks and then we'll be ready to take your questions.

Okay. Thank you, Clare. So I just wanted to end by reminding you of the growth opportunity we see in markets and why M&G is well placed for that opportunity. Savings gaps continue to open up across the developed world as societies age and states restrict retirement provision. In the U.K. alone, the savings gap is currently estimated at $8 trillion by the World Economic Forum, and it's growing. Faced with longer lives and negative real returns on cash, people want a financial partner who can deliver reliable savings and investment solutions. M&G is well placed to become the partner of choice. We have the right mix of investment capabilities, a unique offering in our With-Profits and the client insights of an asset owner. Our plan is to grow our offering in solutions at pace, leveraging our client relationships in 28 markets and our 2 well-respected brands. Now with independence, we also have an energized leadership team determined to grow this business. And that growth coupled with sound capital management will drive attractive and sustainable total returns for shareholders. Thanks again to all of you for making the time to be with us today at our first set of annual results. We're now, I think, ready to take your questions. We have the leadership team in the front row if the questions get a bit too tricky. And you can spot them because they're all wearing the uniform. I didn't know we had a uniform.

Great. Thank you, John. Thank you, Clare. So we will take questions both in the room and if we get some over the webcast as well. So usual rules, please. If you want to ask your question, raise your hand as you already have. Two at a time, please, if we could. And don't forget the microphones are in -- sorry?

Two questions?

Two questions, yes. Microphones are in the seat pocket in front of you. I sound like an airline steward assistant. But if you press the button on the microphone to switch it on. And we'll start with Andy.

It's Andy Sinclair from Bank of America Securities. Two for me, I guess, if that's okay. So firstly, which is on the holdco cash figure, the GBP 1.3 billion. It looks to me about twice what you've guided for what you need at the holdco. You've ruled out buying back debt, special capital return and M&A. Does that mean we should feel a bit more bullish on the regular dividend? Or is there something else we're missing on that cash? First question. And secondly, just on Institutional Asset Management, you've talked about quite a lot of mandate wins in 2019. I just wonder if you could tell us a bit of color on pipeline for mandates that have been won but not yet funded, and what that means for 2020.

Yes. So on the first question, the level of holdco cash, yes, it's a bit higher than we'd originally guided in terms of numbers. But overall, we're pretty comfortable in terms of that being a sufficient buffer in order to manage the business. So from a dividend perspective, I think we've guided in terms of where we believe the future is. You've got to recognize as well that the markets right now are certainly pummeling in terms of interest rates and the overall capital position. So we're comfortable with the strength and the resilience, both in terms of the level of capital and the liquidity. But obviously, we need to have that strength in terms of just being able to survive some of the market conditions.

And on the institutional business, the last time I looked at the pipeline, it's around GBP 4 billion. Not surprising, we've put a number of people in various locations around the world actually to start to source assets. I mean it's getting trickier in private assets. So we have people on the ground in Asia and in the U.S. now as of yesterday to actually source assets for those propositions. So it's a big business for us and it's one that we are working hard to keep the momentum going behind it.

Sorry, just to be clear. So that's GBP 4 billion of mandates that were won in 2019 but will fund in 2020?

No. The pipeline is GBP 4 billion and the actual -- we've had 100 mandate wins in 2019. And the pipeline is 4 -- it's about GBP 4 billion. I haven't got the exact number.

Sure. And can you say for those 100 that were won in 2019, are some of them effectively still to receive the funds in 2020? Or is that all received in 2019?

They will -- some of them will be funded in 2020, yes.

This is Ashik Musaddi from JPMorgan. Just a couple of question. First of all, on your cash flows. I mean you have a GBP 2.2 billion cash flow guidance, but any visibility you have for this year 2020? And the reason I'm asking is, given that we are already 2.5 months in, you would have reasonable plans about longevity, say, the tables which you said you will review in the later this year, but you would have plans about asset rerisking in case you are considering longevity reinsurance. You would have reasonable plans around that given the close life nature of the annuities book. So any thoughts on that as to how we should think about cash flows one-off nature, especially for this year? The second, on asset management cost, I mean revenues is it is what it is. But in terms of cost, you put an extra emphasis that, that is definitely a focus, especially in these markets. Are you managing that on a basis point way? Or are you managing on an absolute cost basis, like GBP 642 million? Is that GBP 642 million going up, going down? What -- how should we think about that, especially given where markets are? Or how much flexibility you have on that GBP 642 million?

Okay. So on the cash flow and the GBP 2.2 billion, we're obviously -- we're looking to manage that over a 3-year period. It's an all-inclusive number. And we recognized during that 3-year period that markets will move up and down during that period. So right now, you would say there's -- we've already got quite a challenge in terms of where current markets are. Yes, we have got a line of sight in terms of actually looking at our longevity in terms of the base assumptions. CMI 18 is what we'll be looking at in 2020. But we'll obviously have line of sight also to the 29 CMI table as well in terms of that. It's a calibrated table. So it does depend a lot on your underlying experience in terms of where you're at. And then the other elements that we are also looking at as we put some equity hedging on, as I mentioned in the speech during 2019, and we also put some further interest rate hedging on in terms of what we're doing. Right now, the market side of it is where our focus is. What we want to make sure is with any of that -- with the target that we've got, that we're managing this business for the long term. We're not making short-term decisions just to drive capital in the short term. Asset trading will continue. That's been something that we've done consistently, and you can see from the numbers that we've shown in terms of the amount of asset trading, that does depend on the market conditions. But right now, we would expect to make something similar. But obviously, if there are market opportunities, then we'll take advantage of it. So absolutely, we have ongoing plans, but it's about how do you manage it over the long-term rather than necessarily just purely focused on the short term. In terms of asset management costs, so as I talked about, the transformation program is about -- fundamentally about customer outcomes. It's about the control environment, but it's also about the efficiency of the business. And the efficiency of the business is also about how do you structure those costs. So which costs are variable, which ones are fixed, how do you use technology and automation in order to improve what we're doing. And clearly, with some of the ambitions that we have around growth, particularly on some of the asset management, the private asset capability, what we're working through at the moment is how do we build that scalable growth, and that is our focus as opposed to purely the cost income ratio or any absolute level of cost level. Because again, the Retail Asset Management business, particularly in the mutual funds, is cyclical by nature. So what you want to make sure of is you've got a cost base that is actually sustainable and efficient in the future. So that's where the focus is. From -- in terms of that cost income ratio and where we would expect it to go in 2020, obviously, over the long term, we're expecting it to come down. But what we want to make sure of is, during 2020, we're investing in the right things in order to get that cost base to where we want it to be.

Oliver Steel, Deutsche Bank. In your presentations previously, you've talked about business growth and investment expenditure. And I think that was sort of up to GBP 200 million by 2022 or 2023 against the GBP 145 million that you were saving on the transformation program. How much of that -- how much of the costs in 2019 include that business growth and investment expenditure? And I don't think you've ever really talked about the sort of returns that you expect on that and when you expect those returns to come through, so perhaps you can give a bit more detail on that today. And then the second question, if that's not too long, is back to Ashik's question about the capital generation guidance. Frankly, I can't see why you're targeting a total capital generation figure because it's clearly being moved by markets. But implicitly, you've lost GBP 600 million of the solvency so far this year. So are you saying that the GBP 2.2 billion can be made up, that you can make up that GBP 600 million organically or through exceptionals over the course of the next 3 years?

So going to the first question, Oliver, on the growth in terms of, yes, what we'd included. So obviously, for -- there are certain elements of our business where the growth actually requires us to have more people in order to be able to deliver it. So if you think about private assets as a good example, you can't use technology and automation to get you that growth. So that's what was included in that GBP 200 million. And remembering it's over a 5-year period, so effectively, it's the ongoing cost to be able to support that growth. And as I said, we have invested during 2019 in the front office in the business in terms of the growth, particularly on the institutional business in terms of actually building private asset capability, whether it's putting people in Asia or in the U.S. in terms of building that out, and we'll continue to do that in terms of the approach. The numbers in that chart were all built off where we see the future in terms of the revenue. So what we were basically assuming is that there is an element of incremental costs that aligns with the revenue. And clearly, some of the pressures that we're currently facing from a Retail Asset Management perspective, we're very conscious around balancing the cost initiatives versus being prepared for the growth in terms of the future. In terms of capital generation, the total -- we always set the target to be total because, basically, we wanted to be totally aligned with our shareholders. And over a 3-year period, the expectation is that market should -- it should be able to even out some of that volatility. And if you think about it, we basically made just over GBP 500 million of positive market returns at the end of 2019. And as you say, the beginning of this year has pretty much reversed that position. So there's an example of where you would expect for it to be over the period. It just didn't feel right as to basically have a 3-year target that wasn't based off the total returns. So that's how we look at it. And just going back to the first question in terms of how do we assess returns on the business. So we look at it very much on a cash generation basis and we look at it using IRRs to effectively save. So a very simple approach in terms of how we decide where are we going to spend our money and what are the things that we want to grow the business from.

It's Jon Hocking from Morgan Stanley. I've got 2 questions, please. On the capital front, your solvency ratio is optically low, but obviously, the With-Profits fund is very strong. I just wondered how much you think this is actually really economic and how much of it is just the risk margin giving it a low optical number. And in the statement this morning, John, you made the comment that it is within your risk appetite. What levers do you have to pull to get the ratio back up if it becomes an issue? So I can accept it's not really an economic issue, but it's headline is, you're screening very low versus the rest of the industry. And then secondly, some of your peers gave some sort of early trading indications, sort of post-election in terms of flows, et cetera. And I guess you've got a bit of an each-way bet on in terms of having PruFund that works well in a risk-off environment and the rest of the business which has recovered. Can you talk a little bit about what the early experience was in January and February in terms of the retail flows?

So on the solvency ratio, Jon, we basically match the annuity liabilities and the assets on a Solvency II basis. So if you look at, for example, interest rates in terms of the impacts of it, we don't get much impact in terms of just what's happening with assets and liabilities. That obviously creates a little bit of a mismatch on the IFRS, which you saw come through the results in terms of where you're at. The place where we get the interest rate impact is basically from the capital. So this is the SCR is where because, effectively, you're getting that. We've put some hedging in place in the middle of August to effectively dampen some of that, but that is a noneconomic hedge in terms of actually -- in terms of that exposure, so -- but that is one of the key areas that causes the volatility in the solvency ratio. We're pretty happy with the resilience. So if you look at the sensitivities, we're pretty resilient in terms of these markets. And we're comfortable where we sit right now. We're above risk appetite in terms of -- but clearly, some of the tools that we can leverage is effectively putting some more hedging on around that interest rate. We also use -- we also have put additional hedging around the equity side of it. We're all obviously looking for asset optimization in terms of risk and reward and using the private asset capability that we have across the business. Reinsurance and longevity is also options that we have. Although from that perspective, you've always got to think about the value that you give up versus the risks that you're actually mitigating, particularly where you see upside in longevity in the longer term. But yes, we have a lot of levers that we can pull in terms of actually from a solvency perspective, but each one of them needs to be weighed up against what benefit you're actually getting. Yes. In terms of flows, so it's interesting I guess from a flow perspective because the election happened in December. You then had Christmas. And then basically, we pretty much got hit with the coronavirus kind of the sentiment in the markets in the early part of January. So it has been pretty difficult to actually see where -- any kind of movement in it. January is always a relatively slow month on the retail savings side of things. But with market volatility, we're starting to see some advisers actually wanting to come into the product in a heavier way than they've previously been in, which shows the customers are thinking about, right, given these volatile markets, if this is a great proposition. So it's an interesting proposition, particularly the guaranteed option, but also the nonguaranteed option in terms of giving customers more certainty in terms of outcomes because it effectively takes out the kind of top slices of the volatility in the markets. And that's what we've -- that's exactly what we've seen over the last couple of weeks is the fund has performed very well. So but it's still early days. And because of the amount of uncertainty in the markets, it's really quite difficult to call right now.

But you're right in terms of PruFund and the mutual fund business and the institutional business. I mean you will continue to see solutions business being attractive both from us and from a client perspective because it's outcome-orientated. PruFund, both in terms of the down market and an upmarket, it's still a very strong proposition. And the mutual funds, it's a volatile business. That accounts for about 20% of our book today. And whilst we -- that's a very important part of what we do. And as Clare said in her presentation, we are going to some lengths to actually make sure that we start to deliver consistently the right returns to clients on those funds. The actual jump that we've got on the market is around the PruFund proposition and the passives and the institutional flows. There's no question of that. And that's what makes us feel that we're quite resilient to these choppy markets.

We're going to take Greig in the room for the next question, and I'll take a couple on the Internet, and then we'll come back in the room. Greig?

Greig Paterson, KBW. Two questions. One is, could you just -- of the GBP 26 billion annuity fund that's not the Rothesay part, can you just give me the percentage of that that's reinsured by longevity swaps at this point? And the second thing is, in terms of this With-Profits hedging program, you made a comment in the presentation that you renewed it. Is my understanding correct that the old program remains unchanged to run off in the operating profit and the new program comes in below the line? And if that's the case, does that mean we can expect more volatile IFRS operating profits going forward in aggregate?

So the simple answer to your second question is yes. What we've done is the old program effectively hedged kind of the 5-year -- the transfer 5 years ahead, and that will run off over the next 5 years. The new program effectively focuses on the capital, the Solvency II capital generation rather than the absolute Solvency II ratio. And that will potentially create a bit more volatility in the underlying IFRS numbers. But I wouldn't expect it to be significant, Greig. On the annuity fund, we'll have to get you the exact number. It's around 40%, 40% to 50% in terms of how much is reinsured.

And so there's not much -- is there capacity to increase that further?

Well, you could clearly increase it even right up to 100%. And -- but this is about -- this is a risk-reward in terms of just how much of that kind of future value do you want to give away.

So on the Internet, we have one question, which is, there's a potential gap between the cash flow generation target and the dividend commitment. So what are the management priorities for the use of that surplus capital? And related to that question, how do share buybacks fit into the capital framework given the current share price?

So I guess in terms of the gap that -- because the total capital generation is basically covering the full impact, including all the market movements, then what we have done is built in an element of recognition that that gap needs to be there in order to be able to support the company and the resilience of the balance sheet. So right now, if we have excess capital, then what we will do is we'll look to return it to shareholders. We've got no interest in basically retaining excess capital for the business. But certainly, for volatile market conditions that we're in at the moment, absolutely, it's the right thing to do to have a resilient balance sheet.

Andrew Baker, Citi. Two questions, please. First, so for 2019, I think you said less than 20% in PruFund flows were from DB to DC transfers. Are you able to give that number for 2018? And then are you expecting this to still be a headwind then in 2020, so that 20% coming down, I guess? And then secondly, on Solvency II sensitivity to 20% downgrade -- credit downgrade scenario is only 6 points. Is there any management action assumed in that sensitivity? And if so, are you able to give a little bit line of sight into what that is?

So I don't know the 2018 number off the top of my head in terms of the percentage of DB transfers, but it has come down reasonably significantly between 2018 and 2019. So we do expect there to be some headwinds around DB transfers because of the FCA's consultation around contingent charging. But the one thing I would say is there is an element of resilience in the adviser market. And also, the quality of our proposition is very strong. So right now, we don't know what the outcome will be on that consultation, but it does look like it could potentially have a reasonably significant impact in terms of just how the advisers operate. Yes. And then, obviously, we've got the initiatives around launching PruFunds in Europe, which is a big focus right now in terms of -- and there's a lot of interest in terms of that opportunity. So from a broader perspective, we're very comfortable in terms of the ongoing flows on PruFund. On downgrade, I don't believe that there is any management actions included in that 20% credit downgrade, but I'm looking at Spencer to double check that.

We will double check it, but I think that's right, yes. Andrew?

It's Andrew Crean for Autonomous. Can I ask 2 questions? First one, on costs, asset management costs. I think you're sort kind of talking to continuing to invest and continuing to grow the cost base. Should we grow it from the GBP 652 million you've reported or about GBP 687 million, including -- after taking back the one-off DB writing that you had? And then secondly, in terms again on the Retail Asset Management flow situation. As I understand it, quite a lot of the flows and the growth over the time has come from expanding into European business. I just wonder how that performed the European flows into Retail Asset Management in 2019. And how it's doing under coronavirus?

So on the cost for asset management, I'm not guiding that I'm saying that I think they're going to increase over time. They will come down over time. What -- I guess there's a couple of things. One is what we want to make sure of is that, structurally, we fix the underlying operating model so that we've got scalable growth in the future. The actual investment that will be needed or has -- we've already started on is included within the transformation costs beneath. So this is more around making sure that in the period as we go through the transition through 2020, it's just managing that you're not going to see a sudden drop in 2020 is really what I'm trying to acknowledge. You're absolutely right.

Is the base GBP 687 million or GBP 652 million?

So you're absolutely right that the pension -- you've got to adjust for the pension credit because that was effectively a one-off gain in 2019 that won't repeat in 2020. Do you want to cover the...

So in terms of the Retail Asset Management business, U.K. versus Europe, it's pretty evenly spread across the whole of the market. The problem really comes in as much that with the virus, as you alluded, we've got -- the office in Milan is closed, as you would expect. We've got a mature book. So what we are finding is a big asset manager with a mature book is that it matures -- every part of it matures every year. So it's a question of keeping the flows coming in. That's going to be tricky in certain parts of Europe as we have endured this lockdown. And that's why, I mean, candidly, we're replacing that to a certain extent by the PruFund proposition, which will be structured quite differently to the U.K. proposition. And that will, as I say, we're talking to a number of parties in Europe, and we're close to signing MoU with 2. And we're hopeful for that as a solution to the issues across Europe. So that's the current picture. But with this virus, I'm not going to make any predictions. It would be a brave man who'd do that.

Sorry. Just to follow-up again on asset management cost. Where would that $100 million additional transformation plan you have will fit in? I mean are we talking about an absolute benefit, or like will that be able to offset any potential investment you are doing in asset management cost? Or you think that additional investment could actually outgrow this GBP 100 million savings, so it could be like GBP 150 million, GBP 200 million, something like that to your additional investment?

So bear in mind that the -- so we're about 1/3 of the way through in terms of actually what we're delivering in terms of cost savings. But the cost -- the way that the cost program is done and the transformation program is across the broader business which picks up both the With-Profits and the shareholder element of it. So not all of the additional GBP 100 million would flow through to asset management because there'll be an element that flows through to the shareholder component on the insurance business as part of that. In terms of what we're looking to do, the program is all part of the transformation program in terms of actually the investment that we've made in order to improve the underlying processes. Some of that cost has already been incurred in order to get to start the process and that will continue to be incurred through 2020 and into '21 in terms of the outcomes.

We're going to take one more from the Internet. So what is the latest position on the suspended property fund?

So well, it remains in suspension. You know we closed that fund for the -- or we gated that fund for the benefit of customers. Well, the team are making very good progress in terms of generating cash. So that when we do eventually open the fund, we can meet any redemptions that have been storing up. And the team have been quite successful in rebalancing the fund to make sure that we're not in a fire sale situation. So we'll keep it gated until such time as we are confident about opening it and how we would respond to redemption. So I'm not going to make any predictions around that at this point.

Just wanted to check, just one final one for me, which was PruFund. I just wanted to check, have any of the versions of PruFund had a negative adjustment to the unit price over the last few weeks of pretty significant market volatility?

As far as I'm more aware, no, they haven't.

There's an optimist. Oliver?

Oliver Steel, Deutsche Bank. You talked about identifying levers for balance sheet optimization. What sort of things are you looking at?

So that includes hedging that we do around interest rate, equities, looking at the risk and reward on the asset portfolio in terms of the use of illiquids and private assets and how do we maximize that. Also, obviously, longevity and any of the other provisions that we have in terms of on the balance sheet, potentially reinsurance in terms of -- although as I've tried to balance that in terms of making sure there's a value piece of that in terms of where we go. So those are a number of the different levers that we have in terms of how we manage the balance sheet.

Yes, Marcus Barnard. Just one question. Your capital generation target by 2020, presumably, that doesn't include any benefit from acquisitions. But how would you adjust that figure if you did make any acquisitions?

So the capital generation was set to be total capital generation. So to a certain extent, I think it would depend on the size of any acquisition. So clearly, if we did something very significant, which I'm not suggesting, by the way, by making this comment that, that's what we're looking at, then I think there will be a different conversation. For small acquisitions, we'd expect that to be included, including both the costs of it and then also the benefits that you would get from the acquisition.

Sorry, did I say acquisition? I actually meant disposals. I'm thinking something.

Same answer to the question.

Another one from the Internet. It's Tom Howarth at Barclays. Well, actually two questions. So the first one is the 2019 restructuring costs were GBP 190 million with the GBP 62 million transformation. What's the remainder? And particularly, what run rate should we expect? And then also, how significant are Italian flows given that that's one of our larger market?

Do you want to take the Italian flows?

Do you want me to do that first?

Yes, I guess.

So on the Italian flows, I mean we are clearly not seeing much activity there either way because of the lockdown and the virus -- because of the virus. It's probably still too early to determine what is actually happening. What will actually happen? My guess is we will be in outflow an Italy as a consequence of this, it's almost inevitable, and that might run into other markets as well. But it won't surprise you to know that one of the institutions that we are talking to about PruFund or the version of PruFund is an Italian institution.

So on the difference between the restructuring costs and the transformation costs of GBP 62 million, there are a number of other costs related with the separation from Pru plc. So whether it's the IT infrastructure that we have based in the U.S., the rebranding that we've had to do in terms of the move away from using the Prudential Red and some of the elements around Prudential there. So that's the difference between those 2 amounts. They're not -- it's not recurring amounts. It's one-off amounts that we're not expecting to have any future cost.

Any more in the room? Greig?

Sorry. Just say -- I'm just trying to understand the magnitude of one element of the management actions. You had a benefit this year from asset optimization. I wonder how many -- if you could tell us what -- how much assets that actually involved? So we have some kind of feel for you do x amount, you get y amount.

Off the top of my head, I don't know the nominal value of the actual assets that were traded. But effectively, what you're doing here is you are looking at the use of illiquids and private assets to effectively increase the yield of the bonds for something that is an equivalent risk profile, if not lower risk profile. So that's effectively what we're doing. The illiquids -- so what -- so the constraint to our, I guess, the way that we look at this is, what proportion of the annuity portfolio do we feel comfortable are invested in private and illiquid assets. And there's still a reasonable margin above what we're currently in that would take us up to, I guess, our risk appetite level in terms of what we're looking to do. But that conceptually is what we're doing, Greig, in terms of optimizing the portfolio because if they're illiquid liabilities, so they're ideally matched by illiquid assets. But clearly, you want to make sure you've got sufficient liquidity should you need it in the event either from a market or a customer perspective.

[ Remind me, given that ], how much have you got in this? How much is going to go to? And what's the benefit?

So there's a...

Yes. But price moves in the market. You've got price moves versus cost of assets. It's -- you wouldn't be able to calibrate that and then project what that would mean over time for the whole book. I mean that's just not possible given the way markets move, especially over the last couple of weeks.

And that's always one of the considerations is making -- is you've got to find the right market conditions to purchase the right assets is critical in terms of actually what you're doing.

Someone was commenting that, that opportunity has reduced in the sense that interest rates have come down. Do you also recognize that?

It comes and goes. I mean that's why we have a team of people doing this. Some days, some weeks, some months, it looks positive. Others, it doesn't. I mean that's -- it's in a moving market. You can't optimize at the drop of a hat. You need certain conditions, and one of them is a friendly market, shall we say.

Thank you, Greig. Are we all done in the room? Good. So I can see there's a couple of questions left on the Internet. But actually, I think we've covered them. So the IR team is just going to get in touch with you to make sure your questions are properly answered. Other than that, thank you all for participating. It's been a pleasure to have you here. If you have any further questions, obviously, the IR team is available. And otherwise, we look forward to seeing you next time.

Yes. Thank you.

Thank you.