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

Good morning, everyone, and welcome to the M&G plc Half Year 2021 Results Q&A. I will now hand over to Luca Gagliardi to begin.

Good morning, and welcome. I'm here today with John Foley, our Chief Executive; and Clare Bousfield, our Chief Financial Officer. John will be giving a short introduction, and then we'll be happy to take your questions. Over to you, John.

Thanks, Luca. Good morning, everybody. Thanks for joining the call. Today's results, I think, show very good progress on our actions to reposition the business for sustainable growth, while we continue to generate strong capital. Institutional assets under management reached a record GBP 89.7 billion, following net client inflows of GBP 2.2 billion, mostly from Europe, and we're very happy about that. In Retail Asset Management, net client outflows more than halved as investment performance improved, with 63% of funds in the top 2 quartiles over 1 year. In July, we launched PruFund Planet, the U.K.'s first smoothed savings proposition that offers positive societal and environmental outcomes. Today, we are announcing an interim dividend of 6.1p per share, taking our cumulative payout since listing in October 2019 to 40.1p per share. And thanks to that dividend policy and share price performance, we have delivered total shareholder returns of over 30% since the merger versus 6% for the FTSE 100 index. We still have much work to do to set up the business for sustainable growth, but I do believe these results show we are making good progress. So I'm happy now to hand over to Luca to take your questions.

We had a couple of questions submitted from online before the start of the conference. So the first 2 are for you, John. Being how comfortable are you that the action that you've taken on Retail Asset Management will increasingly slow net outflows? And what the ideas you would expect as the flows to return to positive? The second one is where we can have an update on improvement in Europe and expectations around launch?

Okay. So on the Retail Asset Management side, obviously, we've made good progress there. And we are in this for the long term. So it's about shaping the activity so that we've got long-term sustainable, capable performance in the funds. So there will inevitably be a little bit of volatility. So if the question is around a specific date, when will we sort of be definitively in -- with all of our funds in the upper 2 quartiles? Obviously, that will depend on the market and performance. But generally, we are heading in the right direction. This has already had an impact on flows. Some of those flows -- outflows have been one-offs. So the picture from my perspective looks even a little better than we've said today. So I dare say it will be a bit choppy as we go through the period towards the end of the pandemic. But directionally, we're going in the right place. And actually, more importantly, from an organizational perspective, from a management perspective, it is absolutely the right -- I think I would characterize it that the medicine is working. On PruFund in Europe, so we continue to talk to the regulators on this. As I've said before, we are operationally ready to do this. Our clients are keen to have this proposition. Certainly, the partner banks in Europe are very keen to be selling this product to their customers. So -- but I think from a regulatory perspective, it's -- how will I say? It is a potentially a very large opportunity. We certainly see it that way. And I think quite rightly, the regulators want to be very clear about what the growth rates of this product might be, what the impacts might be in their environment. So it's reasonable that they are taking their time to analyze this product. So I'm not going to give time scales. I've done that before. And we'll -- but we're working hard on the proposition.

Thank you, John. And certainly 2 for you, Clare, coming before the session. The first one is in regards our annuity capital generation, the underlying one. So noticing that there was a little bit of possibly miss versus consensus. I'm trying to understand what drove that and how is the longer-term expectation. The second one is about our total capital generation target of GBP 2.2 billion. And the question is, why didn't we simply revise the target rather than adding a new one, the GBP 2.6 billion target for 2021 to 2023? And then, does the health of the capital position mean anything for how we think about short-term dividends. So actually, it's more like 3 questions, not 2.

Thank you, Luca. So on the first question, around the underlying capital, you're absolutely right. The key driver in terms of why the underlying capital is down is driven by the annuity book. And there are 2 reasons why that underlying capital is lower than prior year and in terms of consensus. So firstly, we look to basically pass all of the excess capital up from the operating companies up to M&G plc. So there was a significant dividend up from the insurance company up to M&G plc as part of the strong returns in 2020. And as a result, the portfolio that we operate at the M&G plc level is basically on a more conservative basis. So the returns are lower in terms of -- so that is one of the key drivers. The second one is driven by the way Solvency II effectively operates. So if you think about the opening yields, that is the position that we basically put in to the underlying capital returns in terms of -- so the yield was low at the beginning of the year. If you look at the yield now, then it's obviously higher. That had quite a big impact in terms of actually the excess returns on the surplus in the annuity portfolio. So those are the 2 drivers. Obviously, when you look at where yields are today, we're in a much stronger position. So in terms of actually thinking about that going forward, but obviously, it will depend on where yields are at the year-end. The second question, around operating capital generation. So as part of the long-term incentives that are basically delivered at the end of each year, what we do is part of that is one of the key measures is the capital generation. Historically, we basically used total capital generation -- is one of the key measures. And that's because we wanted to be completely aligned with our shareholders. For the years '21 to '23, predominantly driven by the pandemic and the fact that it's very difficult to basically say that markets will be smoothed over a 3-year period, we've gone with an operating capital generation target for '21 to '23. So every year that we basically issue another tranche of long-term incentive plans, what we will have is another capital generation target for the next 3-year period. What that basically does is drive sustainable capital generation for us from a management team perspective in terms of how we're incentivized. So that is how we think about it rather than actually adjusting the original targets because they're obviously linked to the original issuance of the long-term incentive plans. As far as the capital position goes, yes, the balance sheet is very strong. We're very pleased in terms of the financial position. And from -- when we stand back and look at that in terms of how we think about capital management, I think, firstly, we have to remember that we are still in a pandemic. The government is still providing a lot of support to the economy. And therefore, there is uncertainty around volatility. And you've only got to look back at what happened in the first half of 2020 versus what happened in the first half this year, you've got 2 very different periods in terms of volatility. So from that perspective, we are mindful of that. And we need to make sure that we've got a strong balance sheet and we retain flexibility. Secondly, we're obviously looking to basically invest in the business to generate growth, but also to drive an operating model in terms of efficiencies, in terms of what we're doing. And you can see that in terms of the profile, in terms of what we're expecting to do around the '20 to '22 capital target. We have no interest in keeping excess capital and cash in this business. We've said that consistently. But we also need to maintain a degree of prudence as we're thinking about the current situation in terms of the pandemic.

Thank you very much, Clare. Now we can move on to the live Q&A from our sell-side analysts. The first one on the list is Dominic O'Mahony from Exane.

3 for me, if that's okay. Firstly, just on Institutional Asset Management. You show a chart on Page 12 with a very nice trajectory, upwards of the revenue margins, albeit with a small blip this half, I think, because of the mix of new business. Are you confident that, that trajectory will continue? I mean as you continue to emphasize the real assets where you see a lot of growth for the market. And I suppose the other part of that question is, a lot of asset managers would like to be big in real assets. And maybe you have an advantage there. But you might have thought that there'd be competition there, which then puts pressure on the margins that you can achieve. Is that something you recognize? Or would you disagree? Second question, on management actions. Page 27 shows an extraordinary track record in delivering these. And you've been very -- and you're very confident about delivering these going forwards. You provide some of the categories of types of management actions on the right-hand side of this slide. I was curious, what proportion would you say is down to sort of asset trading? And the reason I ask is, historically, that that's the bit that actually sort of creates lifetime cash rather than sort of accelerate it. So if you could give me some sense of what proportion comes from that, that would be very helpful. And then the third question, on PruFunds U.K. In the press release, you reiterate the point about the economic environment and the lockdowns making it difficult for advisers to operate on a business as usual basis. You also point to a shift towards platform and consolidation amongst advisory firms as being factors that might sort of weigh on flows. I wonder if you can flesh that out. And in particular, are there things you can address that? So for instance, have you considered offering PruFund on third-party platforms? And if not, why not?

Okay. Thank you for those. I'll take first, Clare will take a second and then we'll do a combo for the third, I think. So on the institutional business, confidence, Dominic, remains strong because we've talked about the pipeline of new business. And we've talked about that consistently since we've been a separate company. So we talk about the pipeline of new business, for which we're looking for assets, is in the range of GBP 4 billion to GBP 5 billion. That remains the case. And I've talked about this funnel type of approach where it gets topped up as the assets are found and the capital is deployed. The other thing is the advised wins. So those, if you like, a slightly further out wins that we have that are yet to see the sort of contracts signs. So there's a good pipeline and that is still strong. We've also won more mandates just this week, which I'm very pleased about. So again, all the signs are positive. In terms of the competition, yes, of course, I mean, we are not complacent on this business. We are very strong. We happen to be strong in private assets. We have a very good network of people around the world looking for these types of assets for these strategies, but you cannot be complacent. The thing is though that this comes back to the combination of being asset manager and asset owner, where we deploy these sorts of techniques for the asset owner. And that then gives confidence to our institutional clients to award us mandates because they've seen the track record that we've been able to achieve over a very long period of time now. I think that, again, I'm definitely not complacent. But if you are somebody who's saying that this is a good opportunity and you want to get in, you do have to put quite a bit of capital in and you do have to establish a track record that isn't that easy to do. So that would be how I'd answer that question. And then -- so you also asked about pressure on margins. And we've talked about margins before in this business, where we bring on a new client or new clients, and sometimes, typically, as we get to know them, that's in the more vanilla strategies. So we can't charge the sort of fees that we would hope to charge later on when we're doing more interesting things for that. So we would see that as a sort of wave effect, but generally going up. And again, pressure on margin. In that world, it's all about -- it's about negotiation. There isn't kind of a market standard. So -- and if we're good at what we do, people will pay us for doing it. So I think I've covered that question. Clare, do you want to take second one?

So on the management actions in terms of the proportion of asset trading, so I think we've talked about beforehand in terms of asset trading, big of the sort of range, GBP 50 million to GBP 100 million in terms of what we would expect to generate on an annual basis. If you look at the numbers for 2021, it's just over GBP 100 million is basically the asset trading. And that's a combination of effectively where we are buying higher-yielding assets, and in terms of maximizing that return versus the capital, and leveraging the private asset capability, but also sales of real estate, which I think you'll notice, we sold one of the properties, that generated a positive result in terms of our asset trading. The other thing I would say is in terms of those management actions, don't treat that as an exhaustive list. There are also other areas that we would look to drive, rather than they're just good examples of what has been historically in terms of the track record, in terms of where we're at. So I wouldn't necessarily say that asset trading was the only one that basically talks about changes in terms of long term as opposed to timing aspects. But you're right that, that is one of the core strengths in terms of the asset trading and leveraging the private asset capability.

And on PruFund, yes. So we've talked to you before about the impacts of the pandemic on the face-to-face, the bias that IFAs give their clients. In talking to our colleagues in the channels, it's clear that that's still the case and that we're finding it difficult to talk to clients. Obviously, the PruFund product itself is still the go-to product. I mean, the performance has been outstanding. And we have, as you've seen, launched PruFund Planet that we think will be -- will really resonate with clients, both here and overseas. And it will be interesting to see how that -- I mean we haven't got any sales of that just yet. We only launched it last week. But that will be a very interesting proposition, because, again, that proposition has got all the sort of hallmark characteristics of the conventional PruFund. So we wait to see, still good inflows. I mean GBP 5 billion is -- on an annual run rate is still strong. I think it was 2.1 or 2.2 in the first half. But there is still an impact on the IFA channels. And we know that because we have our own group, and that's what's causing the issue.

Your point, Dominic, on platform and in terms of platform consolidation, so that was the big driver to the Ascentric acquisition, is effectively being able to effectively leverage that platform, both in terms of all the wrappers, but also in terms of PruFund. And today, we do offer PruFund on that platform, although what we're working to do is integrate that further in terms of the solution. When you look at PruFund in Europe, that is actually us putting PruFund onto other people's platforms in Europe. That's how it will work in terms of an institutional play. So absolutely, we have no -- there's nothing here about saying that it's specific to us in terms of our platform. But one of the things that's really important when you get a platform play linked into an adviser's business is you naturally get flow. Now it does take longer because you're effectively embedding that platform into the business. So it's important in terms of how you get those flows. Historically, we've been really successful at effectively a transactional process because the proposition is so strong. But it -- but what we're seeing is that gradual shift towards platforms. And that is definitely putting a bit of pressure on the flows from a PruFund perspective.

Next up is Andy Sinclair from Bank of America.

3 from me, if that's okay. Firstly was on annuities, going again to asset trading and optimization, but this time, on the IFRS side. I know you guided that was going to be lower this year, but I think 4 million was quite exceptionally low. And in your script, I think you mentioned an accounting loss on a property disposal. Just wondering if you could give us some color on how much was that accounting loss. And just any color on what we should look at from the IFRS side going forwards. Secondly, sorry to go back to capital deployment. But I mean you've got GBP 1.7 billion of cash at holding, which you've somewhat euphemistically said is more than one year's central outgoings. I think it's about GBP 1 billion more than one year's central outgoings, not to mention the strong Solvency. I get prudence, but it kind of looks excessive. And we have seen more companies across Europe putting capital to work as we emerge from the pandemic. Really what is the trigger to start putting that capital to work? And third question for me is just on the asset management cost to income ratio, which have been creeping up a bit. I realize you've added some teams. But in fact, as the cost to income ratio has been creeping up, when will your cost management actions see that peak and potentially come back down again?

So on the annuity side, Andy, in terms of the property, so this is a nuance with the way IFRS accounting works in terms of the liabilities. And what basically -- what -- we basically sold a property pretty much at market value. And you can see that from the capital benefit that we got in terms of the asset trading and optimization. But on an IFRS basis, you end up taking an accounting hit as a result of it. So that's the reason why you get this loss that basically nets us down to GBP 4 million in terms of the other. From a capital deployment perspective...

Sorry. Just to check. How much was that property loss on the accounting side probably if it hadn't been for the property loss?

Yes. I was going to say it was around GBP 20 million. Luca is telling me it's GBP 17 million in terms of loss. So on the capital deployment, in terms of the strength of the balance sheet, absolutely, we're very pleased in terms of the strength of it. But I think it is important. And if you go back to the first half of 2020 when we had about a GBP 700 million loss as a result of volatility in the market versus what we've seen in the first half of '21, I think anybody would say that you've got to acknowledge that, that volatility is still out there in terms of the context of where we're sitting in the pandemic and the fact that the government is still supporting the economy. So we need to make sure we think about this balance sheet over the medium and long term rather than necessarily just purely the short term. Absolutely are we committed in terms of investing in the business, in terms of generating growth. And you can see in terms of the strength of the institutional proposition, in terms of what we've been able to deliver. We've also repatriated about GBP 25 billion of assets under management and built teams in Asia and the U.S. in terms of actually what we've built out. So there are some examples in terms of actually where we are putting money to work. We're also being investing in terms of actually improving the efficiency of the business and generating the right operating model, leveraging technology. And that's been a big focus in terms of investment over the last 2 to 3 years. So that is fundamentally what we're looking to do. It is capital light. That's our strategy. That's how we operate. So we're not expecting to deploy significant volumes of capital. But it is important in terms of actually making sure that we're driving growth across the business, but also efficiency in terms of what we're doing. So I wouldn't describe it as overly cautious or overly prudent. I would say, right now, we're taking the right approach. But we're very much on a wait and see in terms of -- and constantly monitoring and thinking about what do we believe the capital position of the business should be. In terms of the cost to income ratio, you'll see in terms of the slides on Page 33, you can see in terms of the cost base and what we're expecting the cost numbers to -- or sorry, what we've delivered in the first half of '21. And you can see that we have delivered significant cost savings across the business. You need to recognize that on the asset management side, there are a number of places where we are investing. So I talked about those 2 teams in Asia and the U.S., but also, we've added capability on the private asset side. So what you're seeing in that sort of bottom green asset management cost base is efficiency, but also investment in terms of the future of the business. So yes, we are very focused on the cost to income ratio, but it's also a reflection of the revenue as much as the cost. And we do need to think about effectively driving growth at the same time as driving scalable efficiency.

Okay. Thank you very much, Clare. Thank you, Andy. The next person up should be Andrew Crean from Autonomous.

Right. I've got 3 questions. Firstly, what's the Solvency coverage ratio up to date? Because clearly, there's been a significant move in rates since June. And secondly, I think in terms of deployment of capital, you say that you want to deleverage first this GBP 300 million debt falling due in 2024. By the end of 2022, do you want to have fully catered for that or just a pro rata amount? And then thirdly, coming back really to Andy's question. Markets are always uncertain. Companies can always say, we're holding on to capital because there's an uncertainty in the future. Are you really saying that you will not make any decisions about capital return until you hit the 31st of December 2022? Or are there any market conditions as we recover from the pandemic, where you're prepared to take a slight more bolder approach?

So Andrew, on rates since June, you're right. Interest rates have dropped a bit since June. If you use the sensitivities in the appendix, that will give you a reasonable proxy in terms of what's happened to our solvency position. It's dropped off a little bit, but it's not significant. The second question, I didn't fully catch all of it. So you're talking about -- so the tranche of debt that comes up the call is GBP 300 million in 2024. Clearly, in terms of when we hit that '24 date, that gives us an opportunity in order to be able to actually deleverage. But ahead of that would depend on economic conditions and just the commercial position in terms of whether we did anything. But can I just check what was the remainder of the question that you were asking on leverage?

It was really -- I mean you've got to pay down GBP 300 million in 2024. At the end of 2022, do you want to be holding GBP 300 million of excess capital ready to do that? Or will it be a pro rata amount, say, GBP 200 million, and then you'll build up to GBP 300 million in the years?

Okay. I mean, I think what we need to -- I think, certainly from my perspective, the way I look at the capital position is, I'm looking at it overall. And I'm looking at the sensitivities in terms of market movements to make sure that we're in a position that we can actually take advantage of that call option at that relevant point in time. But I'm certainly not building up amounts and then holding it and sort of earmarking it in terms of what we're doing. We're just looking at the overall capital number in terms of that perspective. And then in terms of market uncertainty, absolutely, I think today, there is market uncertainty. And that's why I get back to 2020 and compare it to '21. I don't think we're testing that we're basically going to hold till the end of '22. I think what we're saying is, basically, we need to recognize that short-term volatility in terms of the strength of the balance sheet, but continue to monitor it in terms of the context of the sensitivities we have. Hedging is also an element in terms of this. But also thinking about the investment opportunities that we have in terms of investing in the business, obviously, to generate good returns in terms of those opportunities. And then post that, we then say, right, have we got excess capital, when you thought through all of that. And that is something that we're doing on a day-to-day, monthly basis in terms of an assessment. There isn't some kind of trigger point at a future date. It's really just looking at all of those elements, the macros, the opportunities. And then saying, right, what do we want to do from a capital perspective? But as I've said, we have no interest in retaining excess capital, excess liquidity in this business, doesn't make any sense in terms of where you go. But we need to take into account all the different elements.

Yes. I mean I take your point in terms of volatility of markets. And obviously, in a normal cycle, there is volatility of markets. And management teams and boards need to make up their minds around what they can do to deploy capital to better affect strategy or find some mechanism to give to shareholders. And that debate, of course, we have. But I would take issue with you that this is a pandemic we're coming out of and it is an unusual time. And I think that our shareholders would expect us to have a degree of caution around this, both in terms of what we do and what we say. And that's the strategy we are deploying here. So we can maybe agree to disagree on that.

Thank you, Andrew. So next questions from Ashik from JPMorgan.

Luca, I'm so sorry, we're actually experiencing some technical difficulties at the moment. So we're going to have to pause the webcast for a little bit. We will be back shortly. Thank you very much. [Technical Difficulty]

Thank you very much for bearing with us. We experienced a small technical difficulty. We can resume to where we left. It was Ashik's turn to ask a question. So Ashik from JPMorgan. Over to you.

Just 2, 3 questions from me. So first of all, this GBP 2.6 billion capital generation guidance for next 3 years, I mean it's good that it is clean of macros, so at least the visibility is that, let's say, GBP 2.1 billion over 3 years, so that's GBP 700 million a year. I mean, is that a simple way that you are thinking as well as GBP 700 million is what you're trying to deliver a year-after-year? Or would you say that it includes lots of, okay, there are some one-offs, which you have planned for, there are some recurring item within that. So what's your thinking process in coming up with this GBP 2.6 billion pretax or, let's say, GBP 700 million a year post-tax number? That's the first one. Second thing, again, sorry to go back on the capital point. I mean your Solvency ratio is around 200%. If I look at the peers like Legals and Aviva, which are much higher asset risk compared to yours, they are running at about 180%. If I look at peers like Phoenix and Just Group, who are a bit more similar to your business model, they are running at about 160%. So you have about 30, 40 points of extra capital compared to your peer set. That's about GBP 2 billion of extra capital. If I look at the asset risk you have versus others, I mean, annuities is the only place where you have asset risk, because your With-Profits, I would say, is pretty much protected from like even extreme macro scenarios. So what macro scenario should we worry about from your Annuities business perspective, I mean, that would make you hold this much capital for more than 6 months to 12 months? So any thoughts on that would be very helpful. And third question would be, if I think about underlying capital generation, Clare, you mentioned very clearly, it's partly because of the way Solvency II mechanic work is you need to take into account the beginning of the year's interest rates or macro. Where would that number be if we are talking about current rates, current macro? I mean, would it go up again 20%, 30%? Or would it be maybe like what you reported in first half, plus/minus 5%? Is it like a small difference? Or would you say the numbers will go back again up to a reasonably higher number?

So Ashik, on your -- on the capital generation in terms of -- so the way that we think about it is -- and this is partly why we originally had the total capital generation because one of the things that's really important for us is making sure that the balance sheet is robust. So if you look back at 2020, particularly in the first half of 2020, we pulled the lever on management actions in order to compensate some of the volatility that we saw in the markets in that first half of the year. And that's why you saw slightly higher than normal kind of capital generation through the first half of 2020, and to a certain extent, 2020. So you've got to think about -- we're not thinking about just managing the capital in terms of individual buckets. What we're thinking about is it holistically in terms of making sure that we've got a robust balance sheet. Clearly, the underlying capital generation is much more driven by the underlying business performance in terms of what we're doing. And that is pretty easy to predict in terms of actually what we're looking at in terms of -- but when you get to management actions and the market movements, we're obviously looking at the overall Solvency position in terms of what we're doing. So we don't necessarily think about it as GBP 700 million per year. What we're thinking about is just making sure that that's the position we're trying to get to. And to a certain extent, the hedging strategy plays into that in terms of how you're overall managing the balance sheet. The second question you had, around the capital position. So the one thing that I would say that was missing from your analysis is on -- is the shareholder transfer for the With-Profits Fund. So we have got an annuity portfolio that is positioned relatively conservatively. That's a position that we've taken as a clear strategy that we've had. So yes, there is volatility from interest rates. And yes, there is exposure to credit downgrades and defaults. But as I said, it's a pretty conservatively positioned portfolio. But the With-Profits shareholder transfers do contain underlying asset risk, basically based off the underlying assets that are in that portfolio. We do hedge some of that exposure through the equity hedging. But the With-Profits Fund is investing in a very wide range of assets. Now that does create diversification, but it also creates some volatility. So that's quite different to our peers in terms of the companies that you quoted. So when we look at the overall Solvency position, what we've talked about is 170% at the point in time that we went through demerger as being the Solvency level in those market conditions that we felt comfortable with. What we're saying today is we're in a pandemic. And basically, there's been a lot of volatility over the last 12 to 18 months. And that, we need to make sure that we can see through that in the short to medium term before we're in a position to say, right, this is where we want to be. That's all we're saying. It's nothing more than that. In terms of underlying capital generation, so the difference between the yield at the beginning of the period and the yield today will basically flow into market movements. So whatever the market portfolio is and the difference between what you put in the underlying capital generation, the difference goes into market movements. That's how it works in terms of it. So In some ways, those have blown up if we have taken yields on a month -- on an average monthly basis in terms of the opening position, if that makes sense.

Next one on the list is Steven Haywood from HSBC.

I've got 3 questions, if you don't mind. I think you mentioned that there was GBP 4 billion pipeline of institutional AUM. And you said there was GBP 5.5 billion of mandates agreed in principle. For me, it -- I don't understand how long it takes for these to become into your invested AUM. If you could give us a bit more color on when this would come into your AUM, that would be very helpful. Secondly, on the U.K. PruFund new business. Obviously, it might be a bit disappointing in the first half. But has the new business and the adviser-driven selling improved in the last couple of months as the economies have opened up? Some of your peers have obviously had a bumper, let's say, 6 to 9 months in terms of selling by your advisers. Does it mean that M&G has missed out to a certain amount on the pent-up demand and the high level of deposits in bank savings account? And then finally from me, on your operating cash generation target of GBP 2.6 billion. Can you confirm this is a pretax target or is it aftertax? And therefore, should I be looking at the GBP 309 million or GBP 309 million minus a assumed tax rate?

Steven, thanks for those. On the institutional question, I'm afraid I can't be precise. It depends on the strategy that we are working on plan. And it depends on where we can source the assets. We have deployed more resource internationally to find assets in other markets, private assets in other markets. And when we talk to potential -- well, existing or potential institutional clients about their portfolios and about strategies, we have brought into the conversation much more about international opportunities to acquire assets. So it depends is the long and the short of it. And then it could be a couple of months, it could be a year. And as I say, it will depend on the strategy. But we're talking private assets, if it's a private. If it's a public asset transaction, then obviously, it's deployed quite quickly. So -- and that really -- whether it's the -- I mean the teams are all over this in the sense that if they're talking to clients and it's -- and the signs are positive, then of course, we're looking for the assets almost immediately. But they're not always available or that quickly. On the U.K. PruFund, the economy has opened up a bit, absolutely agree with that. But in terms of the target market for that product, it's still people who are making kind of life decisions in retirement. And we haven't really seen that, that come to life, so to speak. We know there's pent-up demand there. But I think to your suggestion that others have got the jump on us, I don't think that's right. It's a different segment of the market. And there's a different deployment of customer capital that you're looking at. So my view is that this is still a very strong proposition, and particularly so now we've got proof on planet being available. But I'm not going to sort of hold out [ for storm ] on that. Clare, do you want to take the...

Yes. So on the operating capital generation target, Steven, the GBP 2.6 billion is pretax and the GBP 309 million is also pretax in terms of -- so those are comparative numbers.

Now we've got Deutsche Bank with Rhea. [Operator Instructions].

Sure. Sure, Luca. I'll keep it to 2 then. So my first one is on the Pru Money. So you've captured about GBP 25 billion of assets from Prudential. How much assets under management is left to win back? And what asset classes are these tend -- do these tend to be invested in? And my second question is around expenses. So firstly, how much of the GBP 145 million of annualized cost savings target is left to deliver? And can you remind us if this is gross or net of inflation?

So to your first question, Rhea, the bulk of the assets have moved. So there's pockets of -- small pockets of assets between the 2 companies, but not at all significant. So I think of the GBP 25 billion as the significant shift. Those assets are deployed into various strategies, which is why we have teams in North America and in Asia. So Asian equities and fixed income multi-asset, North America into predominantly fixed income and some equity. Clare?

So on the expenses, we're around about 2/3 of the way we are in terms of actually delivery against the GBP 145 million. One of the things we've always said is that the cost savings were very back-ended just by the nature of what we were doing. So a lot of it is about investing in technology and infrastructure and really driving the underinvestment that has been in the business over the last sort of 10 to 15 years. So we were always expecting that it would be a much more back-ended delivery than front-ended. And the GBP 145 million is gross of inflation in terms of the target that we set. I think there's a chart that we included a couple of investor presentations that shows you in terms of how you get to the GBP 145 million, and you'll see the inflation is in there.

Perfect. Thank you very much, Rhea. Given that you have a colleague at Deutsche Bank, which has also asked a question, yes, submitted them online. Wondering whether we should take also Oliver's question yet too. The first one is, looking at future management actions, how do we expect this to split between generating value accretion versus acceleration of future cash flow? And the second one is, we clearly had positive market movements in the first half of the year. To what extent do these translate into future cash remittances?

So in terms of the management actions, the -- I mean it's very difficult to give [indiscernible] in terms of whether they're acceleration or pure value creation. Obviously, the ones that are pure value creation are the more attractive opportunities, and we certainly would prioritize those in terms of the opportunities. But also, what we're trying to do is manage ultimately what the total cash flow is across the book and make sure that we've got fairly consistent earnings and a reasonable view in terms of the best estimate. So that's what we're ultimately trying to do in terms of both of those. But the ones that generate value creation would be clearly a priority. And then in terms of market movements, the vast majority of the market movements arise in the insurance company and in terms of actually the ability to basically dividend up those cash flows up to M&G plc. There's no issues around the cash and the capital that comes up in terms of -- from the insurance company up to M&G plc. Obviously, what we're looking at is both capital and liquidity in the insurance company and making sure that we're comfortable with both of those. But the philosophy is that we get the excess up into M&G plc so that we've got maximum flexibility across the business. And then should the markets go against it and there isn't sufficient buffer within the insurance company, then what we would look to do is pay back down to the insurance company to make sure that it would be in a sufficiently robust capital position. And that is how we think about it in terms of the philosophy around cash and capital.

Perfect. Thank you, Clare. Next one in line would be Louise Miles from Morgan Stanley.

I'll just take 2 as well, Luca. My first one is on the capital position as well. I'm not sure if you can say too much. But I believe you've got the hearing for the annuity transfer to Rothesay in November. If this is successful, would we expect that to be about GBP 100 million of capital release by the end of 2021? I think that's what you guided to before. I just want to check if that's still correct. So I think that's about 6 points of positive capital. If you could just confirm, that would be great. And then just another question on PruFund. I mean, it seems like you're trying to kind of shift the distribution channel mix a little bit as well by getting more digital and moving on to platforms in Europe as well. I mean, longer term, I mean, presumably, there'll be some cost increases shorter term. But longer term, would you expect the cost base of PruFund's to actually decrease because of this? And also, should we expect any shift in mix in the wrappers that are sold? i.e., could there potentially be a shift towards [ ICE's ] more than they have been previously?

So on the capital position around the annuity transfer, you're absolutely right. The court -- there is a court case for the Part VII transfer in November. And yes, the release of capital is around about GBP 100 million, which is around about 6 percentage points in terms of solvency position. Do you want me to continue in there?

Yes. Why not?

So on the PruFund, I think the first thing I would say, Louise, is that -- For the U.K. proposition, the shareholder basically gets 1/9 of the investment performance. So it's actually the With-Profits Funds that is basically taking the expense risk in terms of the ongoing cost of delivery of PruFund in the U.K., subject to our new business, actually making sure that the product is profitable. So what we are releasing in Europe, we're writing that on a [ 100 0 ] basis, so just like any other asset management products. So absolutely the expense part of that is relevant. The scale is obviously important with any one of these propositions in terms of what we're looking to do. But certainly, we do see a significant opportunity across Europe to be able to drive that scale in terms of what we're able to deliver. Yes, we are looking at digital technology. That's what we've been effectively putting through in the U.K. solution, both in terms of to improve the customer experience, the adviser experience, but also to [indiscernible] perspective in terms of what we're trying to deliver. And we will be leveraging that in the delivery of PruFunds in Europe.

Thank you very much, Clare. Thank you, Louise. Next question is from Andrew Baker, Citi.

So 2 for me. The first, on capital generation. And really, it goes back to the slide that you showed at the full year, showing GBP 10 billion of underlying capital generation over the life of the annuity book and the With-Profits book. Obviously, the return on surface points created some volatility that you laid out. Has that view on the sort of the amount over the life of the book, so that GBP 10 billion, changed materially based on what you've seen in the first half? And then secondly, just on expenses. I think you mentioned in your comments that the asset management expenses were roughly in line with 2019 after adjusting for some one-offs. 2019 saw second half expenses significantly higher than the first half. Should we expect that to be the same as well in 2021?

So in terms of the capital generation, no, I wouldn't expect the GBP 10 billion to materially change, Andrew, in terms of the profile, because, obviously, that's over the long term. Obviously, interest rates do have a potential impact. But I wouldn't see the move that we've seen this year as being necessarily fundamentally changing in terms of that GBP 10 billion. And in terms of the asset management expenses, yes, historically, we have typically seen lower expenses in the first half of the year and higher expenses in the second half of the year, largely driven by some of the incentives in terms of how they operate. Now clearly, that links into revenue because that's one of the key drivers in terms of -- so where the revenue is stronger, what typically then happens is, obviously, the bonuses and the incentives go up. But that from a net-net perspective is actually positive in terms of where we go. So we have been doing a lot more work to effectively try and make sure that we get the kind of accruals appropriately balanced between the 2 periods in terms of half 1 and half 2. So I wouldn't expect to see the same level of disparity between the first and second half of the year. But it obviously does depend on what happens to the revenue in the second half of the year.

Next question is from Trevor Moss, Agency Partners.

Okay. This is either 2 questions, 3 questions or one very long question, depending on how you like it. It strikes me, Clare, that within the GBP 2.6 billion of capital generation target that you target, there's probably about GBP 1 billion of other capital generation, kind of management actions stuff, which will take the total management actions capital generation to about GBP 3 billion on a 6-year view. Sorry, GBP 3 billion on the 6-year view out of a portfolio of about GBP 20 billion on the annuity side, which is -- which strikes me as a lot. Okay? So I'm not quite so sure that you're going to reach a cliff-edge in terms of the underlying -- in terms of the operating capital generation from management actions, but you're certainly coming to a conclusion where there's not much left. So it strikes me, you're going to be much more reliant on the underlying performance of the business to generate capital beyond that point and to satisfy dividend expectations. Now coming back to one of Andy's original questions. On the asset management side, which is clearly going to need to be one of the big drivers. The last 3 years since 2018, your revenues are down GBP 150 million and your costs are up GBP 30 million, taking your cost to income ratio from 58 to 71. I think we need to start thinking about what that trajectory looks like. And I'd quite -- I'd be quite interested in any guidance you might be willing to give on that trajectory on a 3-year view, on the cost to income ratio or on revenues or on costs.

Yes. So one of the things, Trevor, that I think is important is the track record that we've built up in terms of management actions is strong, as you can see from that -- from Slide 27. It's not purely about the annuity portfolio, though. There are management actions there that we're driving around the shareholder transfer on the With-Profits Funds. So the hedging that we do in terms of what we're doing, in terms of how we look at that as an important component around it together with some of the underlying assumptions around that book. So I wouldn't necessarily say it's purely about the annuity portfolio. The one thing I would say though is that the annuity portfolio has a long runoff. So in terms of actually being able to manage and managing the private assets, the illiquidity premium, but also some of the assumption changes, whether it's expenses or mortality, is also important in terms of that context. So yes, they're not going to be infinite because the book is in runoff. But I still would challenge your premise that they're going to run out anytime soon in terms of our ability to kind of drive that piece. Absolutely, in terms of the core underlying result is of strong focus. And you look at what we've done in terms of the institutional book, in terms of continued growth, good, steady margins, again, very long tail business, sticky business because it's typically pension schemes and insurance companies in terms of what we're delivering. Retail Asset Management, we've obviously shown really good green shoots in terms of flows, but also, the core underlying performance in terms of what we're doing. We are creating a more efficient business model in terms of what we're driving across the business. But we are also investing in terms of growth, in terms of the future. So expansion of the institutional book across Europe. We've talked about the Asian and U.S. capability that we're building out in terms of where we're at. So I'm not going to give you any kind of future view around cost to income ratios or revenue. But some of what you will have seen over the last 18 months is a combination of us actually driving clear value and addressing the price and the sustainability in terms of what we're doing, but also in terms of broadening out the products in terms of what we're offering. So we've now got a lot of, what I would say, new sustainable, innovative product that basically allows us to diversify in terms of some of the big funds that we've historically held. So from my perspective, we're on that route to grow in terms of where we're going. And you're right, we will then end up less dependent on management actions in terms of where you go. But that is our key focus. That's what we're trying to drive.

And importantly, performance is a key area in that. And we've been -- over the period you talked about, we've been in the doldrums on performance. And that's why we've had to address that since we became an independent company. That's why you see, I think, the jaws opened the wrong way in terms of the cost to income ratio. So that is something we really had to address. But again, there's no quick fix because you clearly are set against the market that judges by 1-, 3- and 5-year time periods. So those are the time periods that we have to show that we have improved performance, and the trajectory is the right one in the world.

Okay. The one thing, if I could come back on that, is on the cost side, it's very difficult to get a clear view of how much investment cost has gone into that cost line for the asset management side. So I mean it's obvious when you look at all the narratives and you talk as you do. There's been a lot of things going on. So the challenge, I think, for me is understanding whether the jaws opening in the future is going to be from holding the cost line relatively flat from this level or whether it's going to be driven by revenues. You may say, well, it's a bit of both. But a clear view on the costs would be a starting point because I have no idea how much investment has gone into that cost line.

Yes. So while I'm going to give you the answer that it's a bit of both, Trevor, because fundamentally, what we're trying to do is generate growth across both kind of the business, recognizing the margin dynamics quite different. And even within the institutional book, you've obviously got public fixed income and private where you've got quite different dynamics. So the mix of business is also relevant in terms of that. But it's also relevant in terms of the cost base as well because private assets do incur more costs just by the nature of them in terms of the value add and the quality in terms of what we're doing. So yes, we have put in a fair degree of investment in terms of building our capability in the U.S. and Asia. But we have also invested quite significantly and generated efficiencies in terms of the operating model in terms of how we deliver. So it is very difficult to say it's all costs and it's all revenue. You wouldn't expect us to do that because you want us to grow the business. But also, what you want to be able to do is grow the business without the cost base growing incrementally on the same basis.

Moving on, Farooq from Credit Suisse. We should be having a question from you.

Yes. Firstly, just a quick one. On the GBP 2.6 billion of underlying capital generation, can we just assume that the vast majority of that can be remitted? And that's what we should be expecting now given your capital position?

Yes.

And then secondly, going to the retail performance -- Great. Going to the retail performance, you talked about kind of being judged on a 1- to 3-year basis. I know from my own history, as working as an investment consultant, it tends to be sort of more 3 to 5 on the institutional side. But on the retail side, kind of how quickly do you expect that to respond? And what can you say has been driving that outperformance? So what would you -- between luck and process, what can you tell us about that?

About process and markets, of course. So gosh -- so where to go with that one? Look, the -- so the one year is very important in the European market. So when you're looking at the CCAP, you don't have to wait for a 3- and 5-year performance metrics to come through. If you're looking for inflows in Europe, the European market responds to the 1-year number. So that's heading in the right direction. 3 and 5 years will obviously take time, which is more the U.K. market. On institutional, yes, I mean, it's -- as you rightly point out, it is a -- these are fairly sticky asset classes, and they just tend to build. So -- the mandates, I should say, and they just tend to build. So we remain positive about those. Otherwise, I think that what we're trying to say here is that, within these markets, and directionally, we're making progress, clearly, we've taken some fairly bold action in terms of how we address the management of funds. So whether that's more of a team-based approach. We do risk-based deep dives on them. A number of things that others may do, but we as M&G have perhaps not done them before, so we've inculcated these sort of disciplines into the group, which has gone down extremely well. The fund manager is obviously the person who at the end of the day makes the calls on his fun. But he's got a lot more tools at his disposal now, his or her disposal now, to make those calls and make those decisions. But it will be a fluctuating picture, but we hope to see that, that fluctuation is on a rising trend, so to speak.

Last of the analysts on video is Larissa from Barclays.

Just 2 quick questions from me. The first one, on fees. You've seen some changes in your fee charging structure in the last year. Are those done? Or are there any more that we should consider coming up? And then the last one, very big picture. But you -- there's quite an emphasis on sustainability in your wording in today's release. 3 years from now, how do you believe we're able to differentiate yourself from your competitors as this is a very hot space at the moment?

So do you want to take the first one, Clare? I'll take the second one.

Yes. So on the fee structure, Larissa, when we basically -- we've done 3 separate changes in fees around the portfolio: one in '18, one in '19 and then again in 2021. The 2021 was the OIC range. And what we have tried to position with the changes that we've made is probably a long-term sustainable price. That was the kind of underlying strategy and philosophy. Now you can never say they'll never ever be more fee changes. But that was our underlying philosophy, is that we wanted to address this head on rather than necessarily have a continual reduction in fees.

On sustainability, there's a couple of things, and I don't want to give you a trite answer, because in one sense it isn't a competitive thing at all. When you look at what's happening around the globe today, we want everybody to be moving to a sustainable solution because that's what the planet obviously needs. Not just from an environmental perspective, but also from a societal perspective. So we actually really believe this, and we believe in it, which is why we've launched Catalyst, which we've talked about in the previous session. We've launched PruFund Planet. We're moving our seek out range to SFDR. These are all very important things. We've joined any number of groups that are moving, powering against coal, for example, and so on, because we want to send out that very strong message to the whole organization that is M&G, but also to the wider universe as well. That -- of course, we're in a competitive and dynamic environment, and we want to have better sustainable funds than the next firm. But actually, it's right that we all have really good sustainable funds because that's where we need to go as an environment and as a planet. So I don't really consider this from a competitive perspective. It's more about what we really have to do and all of us have to do. That said, I do like to see our sustainable funds performing well and achieving good inflows, which I have to say they are doing. So that's a positive byproduct.

I think that's also a perfect ending to our session. We are slightly longer than the hour that we budgeted at the beginning, but I guess we've made up for the time that we lost with the technical interruption. So thank you very much for watching, listening and joining us today.