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

Ladies and gentlemen, welcome to today's M&G Business Update Q&A Call. My name is Jordan, and I'll be coordinating your call today. [Operator Instructions] I'm now going to hand over to Spencer Horgan to begin. Spencer, please go ahead.

Good morning, everybody, and thank you for joining us. You'll have seen the 2 pieces of news in our announcement this morning: firstly, quarterly business update, which we're doing by exception in this unprecedented situation; and secondly, we've announced the acquisition of the Ascentric digital wrap and wealth management platform in the U.K. market. With me as usual, I have our CEO, John Foley; and CFO, Clare Bousfield. Also joining us in light of the transaction we've announced is David Macmillan, our Chief Customer and Distribution Officer. I'll hand it over to John for some opening remarks, and then we'll be ready for the Q&A session. In that session, we will not be providing additional financial details over and above those you will find in the press release. John, over to you.

Thanks, Spencer. Good morning, everybody. Thank you for -- thanks for joining the call, especially at such short notice. I really hope you and yours are all coping in this unprecedented environment that we find ourselves in. Look, as Spencer has outlined, this is just really a quick opportunity for you to ask us some questions around the acquisition of Ascentric. And let me say that we are doing this deal from a position of strength, as you've seen from the release. That release demonstrates the financial resilience of M&G, and it's been that way throughout this pandemic. So my key message is that the acquisition of Ascentric will accelerate our growth strategy in the U.K., okay? So for M&G, this deal not only brings a well-established wrap platform used by more than 1,500 advisers and over GBP 14 billion of assets. It also takes us as a company into the wealth management. That's through Ascentric's discretionary fund management service. And that business complements our existing Prudential and M&G offerings in the U.K. and strengthens our position in our home market, which is essentially why we did the transaction. Over time, Ascentric will enable us to offer more Prudential and M&G investment solutions to more advisers and their customers across a greater range of tax wrappers and service propositions. I'm not going to eat into the Q&A session any more than that. I'm glad we've got David on the line. So I'll just hand it back to you, Spencer, to coordinate the Q&A. Thanks.

Thanks, John. And certainly with that, operator, thank you. We're ready for questions.

[Operator Instructions] Our first question comes from Andy Sinclair of Bank of America.

I'll just keep it to 2 for me, please. Firstly, just I wonder if you can just give us an update on PruFund. And what have you seen in terms of adviser and client reception recently and flows since the lockdown? Is there an appreciation of the relative outperformance of PruFund, or a surprise, around the lockdown? So that's the first question. And secondly is just on the GBP 2.2 billion cumulative capital generation target, punchy but good target and being reestimated today, when you take into account the market moves in Q1. Just wondering if you can help reconcile as how you'll get to that GBP 2.2 billion despite the market moves in Q1.

Thanks. Well, David, do you want to take the PruFund question? And we'll let Clare go first with the cap generation target question.

Yes, I'll do that, John. So on PruFund, as I think we've said before, we have a very solid adviser base that clearly knows how that product works and is designed to work, clearly, in respect of big market corrections. So yes, we saw unit price adjustments go through. No surprise there, as I say, and certainly there was clear expectation that was going to happen. I think, with respect to PruFund, what we've seen is the usual in a crisis, that you'll have some people tapping cash. They'll have some advisers moving, still on our products, into cash from PruFund. They will inevitably come back, but we haven't seen anything particularly different from that, which we went through the last time we had a financial crisis. And the proposition stands up through that scrutiny.

Yes. The one thing I'd add to that, David, is that the unit price adjustments, valid adjustments, were between sort of 10%, 13%, 14% against an equity market down of sort of 25%, 30%. So in terms of actually what the proposition is doing, it's absolutely doing what they expect it to do in terms of smoothing out some of the volatility. And there are a number of funds that potentially will have a positive movement as we -- effectively as the market has gone through a rebound, so again doing exactly what's expected. Andy, on your question on capital generation: So I look at this in 2 ways; firstly, with 5 months into a 3-year period. And therefore from a market perspective, yes, we've seen a fairly volatile market in that first 5 months period. And that's undoubtedly made that GBP 2.2 billion more stretching, but there's still well over 2 years in terms of market position. The other aspect I would draw your attention to is if you look at the history over the last 4 or 5 years in terms of the level of management actions that we're capable of delivering in terms of that track record. That's why we're comfortable that -- overall, that GBP 2.2 billion, we're comfortable to commit to that. Now as I said, it is definitely stretching. We also delivered in the first quarter management actions that were broadly in line with what we've delivered before. So that's why we're committing to that target.

Our next question comes from Andrew Baker of Citi.

So maybe just on -- you just mentioned the management actions you took in Q1 to strengthen the solvency position. What exactly did you do here? And I guess, what was the benefit to the ratio? And then secondly, as on PruFund's and potentially taking that to Europe, are those discussions still going on? Or have they been put on hold because of the crisis?

So Clare, I'll pass to you for the management actions. On the European aspects of PruFund, no, those discussions are not on hold. And I think we've told you that -- last time we did a briefing that we were in discussions with 2 different partners in 2 different markets and close to signing MOUs with those partners, and I can now confirm that those have been done. So that -- the PruFund in Europe proposition continues at pace, which I'm pleased to report. Clare, do you want to take the management actions question?

Yes. So on the management actions, I'm not going to go into the details of the exact magnitude and the exact details of them, as Spencer highlighted upfront, in terms of just sort of more detail on the numbers. But as I said, the level of management actions was consistent with the prior periods. They were around areas like asset trading and also the overall kind of provisions on the balance sheet. And as we've said before, those management actions, they were management actions that we took without giving up overall value in terms of profit. And that -- again, that's something we've been consistent around. It's that we will not just take management actions where effectively there is cost on ongoing profitability going forward.

Our next question comes from Ashik Musaddi of JPMorgan.

Just a couple of questions I have is, first of all, can you share some thoughts about how do you see dividend? I guess it is too early to talk about 2020 dividend, but I mean, how should we think about dividend? You have clearly reiterated that you will pay the 2019 dividend, which I think is a good news, but -- from investors perspective, but how do you see dividend for this year? I mean, at what level of capital do you think that dividend will be -- will go into question mark? That is one question, especially given the discussions that you are having with the regulator. What sort of discussions are there? So that's the first one. Second one, I would -- it would be great to get some color on, say, cash flows. I mean, how should we think about capital generation, especially in life business? I mean, has the cash flows from, say, Heritage or annuities business gone down because of weaker markets? Or has the smoothing mechanism helped to maintain the sustainable level of cash upstreaming or, say, cash flows that you think will get upstreamed in the future? Has then been -- that been offset because of smoothing? So that will be the second one. And just one last question is about investment in this new platform. I mean, how much money do you think you are going to spend in building this platform like Ascentric? How should we think about that? Is it -- are we talking about triple-digit-million number here? Or are we talking about double digits? So any thoughts on that would be appreciated.

So John, shall I take all 3 of those?

Well, I was going to say that we probably -- we're just going to reiterate what we previously said on dividend. But by all means, take -- you can take them, Clare.

Yes. So Ashik, on the dividend forecast, to John's point is the dividend is obviously linked to capital generation. And our dividend policy remains in terms of stable and increasing, and clearly it's part of the discussions that we have with our Board and the regulators. We're looking at the affordability of the dividend but also sustainability of the dividend, but all of that is subject to markets and market volatility. From a cash flow perspective, in terms of the Heritage book, I mean, one of benefits of being an asset manager and an asset owner is the diversity of earnings that we have and the stability that comes particularly from the Heritage business. And clearly, in terms of the annuity book, credit is one of the key areas, but fundamentally in terms of the key kind of Solvency II generation, that is relatively stable. But credit is the key area. And downgrades and defaults are the key area of risk in terms of that annuity book. We're very comfortable with the credit portfolios that we have, and you've seen in the trading update in terms of some details around just the level of credit risk that we've got. And as we say, we have not experienced significant downgrades and no defaults over this period. From a with-profits in terms of the shareholder transfer, the key elements around in terms of future earnings is the level of equity markets. And obviously, the lower the equity markets are, the lower the future value of the shareholder transfers is. And that affects the ongoing earnings in terms of that book but, again, relatively smooth because of the underlying diversification of the assets that the with-profits funds invest in. In terms of the platform, the Ascentric platform. So firstly, I would say that at GBP 14 billion that platform is still getting to scale. So as part of the acquisition, we absolutely acknowledge that there will be investment into that platform, but it operates, and it operates well. So that gives us flexibility in terms of when we need to put further investment into it. And also what we're able to do is leverage off the investment that we've made across the broader business from a transformation perspective and effectively bring the front ends of the 2 platforms together so that we can create effectively 1 proposition, recognizing the 2 are basically providing quite different outcomes in terms of to our customers and our advisers.

Just one follow-up on this cash flow rate. I mean it appeared that, if equity markets are lower, your shareholder transfers from with-profits will be lower. But is it fair to say that part of that is offset by the hedging gains that you might have seen on your hedges of shareholder transfer of with-profits?

That's right, Ashik, yes, absolutely.

Next question comes from Dom O'Mahony of Exane BNP Paribas.

Just have 3 from me, if that's all right. The first is I realize you won't give specific numbers, but clearly the flows numbers that you've given are through to Q1. Can you give us maybe some qualitative commentary on what flows have been like so far in Q2, in retail in particular? I think that it's probably the area that is of most interest. The second question is just on performance. So could you give us some sense of how the performance has been going so far this year in terms of net quartile in the asset management business? And then thirdly and, I guess, more broadly, John, clearly the transaction is it's -- from the way you describe it, John, it's an important part of a -- as you describe it, a wealth proposition. I wonder if you might expand a little bit more on what you see as your strategy there. This presumably is a building block within your wider thinking. Maybe you can just flesh out how you see M&G's proposition and prospects in that segment.

Sorry. It was on mute. Thank you, Dom. So yes, the flows situation. Look, it's been a mixed bag. March was not at all good. I mean that stabilized in April. I don't want to say too much more about that. I would also say and make the point quite strongly that our institutional business continues to go from strength to strength. And the PruFund proposition, as Clare has already said, is doing what it says it would do on the tin. So overall I would say things have improved since March, for sure. That was a lumpy, old month. On the performance, and that's obviously one aspect of it, we've been working hard on the biggest of funds to make sure that we understand what is going on in terms of relative performance. And that too is improving, but we won't -- we're not going to update with specifics at this time. And I'll just pass to David on the strategy for wealth since we have the benefit of him on the line.

Thanks, John. Dom, that's a great question and segued into my answer. I think, John, starting to clear myself of various things, have made clear the criticality of the U.K. wealth market to our business. And I think it's fair to say that this acquisition is absolutely in the sweet spot of your building block observation. Post RDR in the U.K., a significant number of wealth advisers moved, as I'm sure you know, to discretionary fund management as a service model, where they take clearly much greater interest in the underlying investment mandates. So that's not particularly an open-architecture play. That's a very specific discretionary decision-making framework that allows advisers to pick and choose who to work with. But what we get with respect to this transaction is technology capability and, frankly, people that we simply don't have in our business today who have clearly brought demonstrable expertise in model portfolios and DFM construction. So if I look at it through the lens of both of our operating brands, we have with this acquisition the opportunity now to seed M&G's asset management capability in the shape of solutions, sub-advised mandates into a range of models and into a range of distribution relationships we simply don't tap today because we haven't been participating in the wealth space. So it opens up a very different waterfront of distribution. It certainly opens up a very different waterfront of innovations for asset management. And then on the Pru side, we've been -- frankly, the demand for a kind of wrap-based accounts that would have PruFund as an anchor and a series of model portfolios has been something that we've been looking out for more than a year now. What this acquisition does, frankly, is accelerate getting to market with that proposition, frankly, probably 2 to 3 years in advance. So it may be a small acquisition, but it's a huge capability gain for us.

Our next question comes from Louise Miles of Morgan Stanley.

Just 3 questions from me, please. So firstly, looking at the flows out of the Retail Asset Management business, which were GBP 5.6 billion in the first quarter, we just wonder if we can get a bit of flavor for which funds actually have those significant outflows. And then our second question is on the deal. So what kind of technology platform is Ascentric actually using? And does it need an IT infrastructure refresh or any kind of significant investment? And then finally, we've seen -- we're getting a lot of interest from investors especially about ESG and how insurers especially have been responding to the COVID-19 pandemic. And what we've seen others do is they've introduced -- they've contributed medical equipment. They've made charitable donations. And they -- we've even seen cuts with executive pay across the sector. So we're just wondering what kind of measures has M&G actually introduced.

Okay. So on the flows question in terms of which funds, inevitably the biggest funds have seen the most significant outflows in March. And as I've already indicated, that significantly stabilized in April, and we're not going to go into any more details of -- in that release. In terms of the -- any significant investment in the platform, I think, between David and Clare, they've already answered that. So unless there's anything else, Clare or David, you feel like augmenting to your previous answer...

There's probably one comment, John, I would add. I would simply just add probably for clarity sake that Ascentric has already re-platformed to the very same technology that we use from a company called Bravura. So we are effectively operating both businesses on the same fundamental software. So we're not looking to change that. Thanks, John.

Thank you. And as for your last question, around all those sort of blended ESG issues. So we have as a firm been donating to various frontline charities since the absolute beginning of this pandemic. We've got a number of people that we work with already in the charity space, as you can imagine, and inevitably we've had a whole host more people come to us since this started. Our view has been that we will give money where it can be deployed rapidly and with sort of significant frontline impact. So the charities we've been working with have been precisely those, as well as the usual charities that we work with. So we don't -- I'm personally not a fan of shouting our activities from the rooftops when it comes to things like charitable giving and so on. The staff has done a tremendous job in giving to charities, not only their money but also their time. A lot of that has been going on. We have regular updates with the staff around the business to find out what they're contributing, and the firm matches those contributions as well. So there's a lot that goes on from within on the charitable front, and I'm very proud of it, quite frankly. And when it comes to other measures as well, we'll make announcements, if relevant, about those in due course, but there needs to be -- so you talk about cuts in salaries and so on. I mean we've furloughed no staff. We've not made people redundant. I've gone out of my way to be -- to, hopefully, be supportive to our colleagues so that they understand that the firm will support them during this pandemic. We as an investor are very keen to ensure that companies we invest in treat their employees appropriately and fairly, and that's what we absolutely do. And so we put our customers and our staff first in this crisis, and we continue to do that. Thank you.

Our next question comes from Andrew Crean of Autonomous.

May I ask 3 questions? Firstly, why didn't the solvency margin rise from the end of March till now given where markets have been? Secondly, it's difficult from the net flows on the retail side to understand. Are you still targeting and capable of generating sort of GBP 10 billion to GBP 15 billion of gross flows this year from PruFund? And thirdly, on the adjusted operating profit of GBP 134 million, can you talk at all about how that squares with ambitions and consensus for the year? And what I'm really after is seasonal issues which might bring profit in, in another quarter like sort of management actions and things like that. I understand the GBP 134 million is very little from the with-profit fund in the first quarter. I'm also slightly surprised that there was a negative mark-to-market on corporate assets of GBP 43 million. Why isn't that below the line?

I'll pass the questions for you, Clare.

So on the solvency margin post the 31st of March. If you look at what's happened to interest rates, Andrew, they dropped in that period. So that's offset the positive from an equity market perspective, but it's the interest rate movement that's the main driver. In terms of retail flows around PruFund's: So as David said earlier on, PruFund is doing exactly what we expect it in terms of impacts, and the flows have maintained the levels that we saw in 2019, although in the period around about March we definitely saw some reduction in new business flows predominantly driven by just the advisers' access to digital and mobile capabilities, but that is definitely starting to pick up post the end of March. From an operating profit perspective, the main area where there is one-off items is the line that you call out, the corporate center. And there are 2 items in there around the assets from the U.S.-denominated debt, and we've got revenues that is U.S.-denominated as well. So from a hedging perspective, we took the position that the U.S. debt that we had matched with the revenues. But unfortunately from an accounting perspective, the 2 don't end up in the same line in the P&L, which is why you get the hit into the corporate center into operating profit. And then the second piece is we have some seed investments that we make as part of supporting the investment proposition, and obviously the market impacts of those impacted. And those, we've historically put through the corporate center instead of below the line. So those are the main key drivers of those one-off items in the corporate center.

On the Heritage side, do management actions tend to be fourth quarter related? Is there a seasonality around the management actions on an IFRS basis?

So we -- the management actions. We took some management actions in the first quarter. Historically, we've done that before in terms of first and second quarter, and they've tended to be more front-end loaded than back-end loaded. So there's no reason for that. The big assumptions review that we will -- that we do, we typically do in Q3, Q4, but at first quarter we did do some management actions that will have -- they have small impacts on the Heritage book. But as I said, they're broadly in line with what we've done historically.

Our next question comes from Gordon Aitken of RBC.

So 3 questions, please. First, on PruFund, what is the surplus currently in the fund? And secondly on, if you can talk about your annuity liabilities and how have they been performing during the crisis. And just connected to that, in terms of the base table, what experience will you be bringing into the 2020 results? I'm assuming, like others, you use a 4- -- 5-year rolling average. Will it be 2015 to 2019? So the question really is when will you bring the 2020 experience? When will it be the 2020 results or the 2021 results? And finally, on the acquisition: The key in these wrap platforms is -- I know you're making money across the different value chain, but a goal, a big goal, is to make money on the asset management side. And you've mentioned that as well. So in terms of Ascentric's current assets, what proportion are in Royal London asset management products? And what do you hope that percentage to be for M&G's products?

So I don't know the exact number in terms of the surplus in May in with-profits, Gordon. It's of the order of GBP 9 billion to GBP 10 billion is the -- effectively the estate on the with-profit fund. The with-profit fund, in terms of the solvency, as we've gone through the crisis, has held up very well. And that is driven by the diversity that we have in the underlying assets. So it's performed well, as you would have expected. And at year-end, we showed the sensitivities and the resilience of the fund itself, which as you will have seen was very resilient. From an annuity liability perspective, and I guess there are 2 aspects to this: firstly is the longevity and then secondly is the discount rate and obviously the credit element around it. As I said earlier on, the credit portfolio, we're very comfortable. It's positioned conservatively. That was a proactive decision. And what we've seen in terms of downgrades and defaults is well within our expectation, but obviously that is something that we're watching very closely and also in terms of managing that credit portfolio. In terms of longevity, the -- in terms of the experience, the 2020 experience will not come in until '21. But whenever we're doing effectively analysis of the longevity experience, what we're always doing is looking forward and looking at the data that whether it's market developments in terms of what's going on in kind of medical conditions. Obviously, COVID is something that is potentially a one-off but also potentially have some impacts in terms of longer-term trends. And we will take that into account but much more from an expert judgment perspective than necessarily data because you'll have limited data in order to be able to effectively do the experience. As I think you know, we're on CMI 2017, so when we do the longevity assumptions review later this year, we will obviously look to move to CMI '18. But as part of that, we'll also look forward at '19 and '20. So its longevity is going to be a key area of judgment this year, and there are lots of different elements that we'll need to take into account, recognizing there'll still be a degree of uncertainty in terms of what the data and the experience actually looks like. From an acquisition perspective in terms of on the asset management side, you're absolutely right that one of the key things here is to leverage the strengths of our asset management capabilities and our investment proposition in the way that we service the clients and customers on the Ascentric platform. Royal London certainly has -- a percentage of the book is invested in their own assets. Off the top of my head, I don't know the percentage, but it's not -- it wasn't enormous. And there was definitely an opportunity in order to enhance that into the future. And absolutely, in terms of the platform at GBP 14 billion, the importance of generating flows, getting that, taking advantage of the scale and the fixed costs of the underlying technology is absolutely fundamental to the strategy.

Thank you, Clare. So I think we're out of time. Thank you all again for joining us and for your questions. If there are any others, please don't hesitate to contact the IR team. Stay safe, and goodbye for now.

Thank you.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.