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

[Audio Gap] half year results. Thanks a lot to those joining in the room and those following us online. We are here with Andrea Rossi, our CEO; and Kathryn McLeland, CFO. As usual, we're going to go through a short presentation, briefer than at full year, and then we'll have all the time needed for Q&A. So without further ado, thank you very much. And over to you, Andrea.

So good morning, and welcome to M&G's half year results. It is a pleasure to be here with you today. In March, we announced a new set of targets and dividend policy for the group aligned to our long-term ambition. Today, Kathryn and I will cover the operational and financial progress we have achieved since then as we position M&G for long-term profitable growth, which is diversified across business units, products and geographies. I'm pleased to say that we continue to drive positive momentum in both Asset Management and Life and to deliver strong client outcomes. It's been a busy first half, so let's review the main highlights of the year so far. You notice we have three priorities for the group: Financial strength, simplification and growth, and we are relentlessly focused on execution. We strengthened the balance sheet and reduced our leverage. We simplified our organizational structure and tackled costs. And now we are growing the business. In the first half of the year, we attracted GBP 2.6 billion of net inflows in Asset Management. This is a strong result powered by a market-leading investment performance and the continued success of our European and Asian operations. Every day, M&G becomes a more international, resilient and diversified business. Today, 58% of our external assets come from international clients, up from just 37% in 2019. While growing in Asset Management, we are also becoming more efficient and more profitable. In H1, Asset Management fee-related earnings increased by 14% year-on-year, reducing the cost-to-income ratio to 75%. This is the third consecutive improvement since launching our transformation program in 2023 when it stood at 79%. And while we have already made significant progress, we know there is more to do. We will remain disciplined on costs and drive top line growth. Our new strategic partnership with Dai-ichi Life will support this growth by giving us a strong platform to expand in Asia and to attract flows into our private market solutions. In Life, we continue to broaden the distribution of PruFund. Here in the U.K., we have successfully integrated PruFund onto FNZ technology, opening up digital platforms as new potential distribution channels. Tapping into this market of nearly GBP 700 billion will further support PruFund sales next year and beyond. Finally, we continue to make meaningful progress on the development of our With-Profits BPA solution, which we expect to launch in the first quarter of next year. This will give us a unique proposition and a competitive advantage to win business in an increasingly crowded market. Delivering on our strategic priorities means we're also making good progress on our targets. First, the GBP 443 million of capital generated in H1 is a good start to our GBP 2.7 billion 3-year ambition, underpinned by an 11% increase in the underlying results. Second, the cost-to-income ratio improved by 2 percentage points year-on-year, and we have achieved nearly 95% of the cost savings targeted by the transformation program. On both these areas, we expect further improvements in H2. And finally, we continue to drive positive momentum in adjusted profit. The headline result is up 1% year-on-year despite GBP 16 million of unexpected headwinds, which we do not expect to recur. Without this, our growth is already in line with our targets. We expect the growth in profits to accelerate over time as we remain firmly committed to our 5% average annual target. Kathryn will provide more details on this later. By continuing to generate capital, tackle costs and grow profits, we underpin our new progressive dividend policy and deliver strong outcomes to our shareholders. M&G's integrated, balanced and synergistic business model continues to give me confidence in M&G's future. It remains our competitive advantage to serve clients across their different investment needs. With the support of our Life operations, we have built a first-class asset manager, delivering superior investment performance and consistently winning external business. And thanks to the insurance balance sheet, we continue to see innovative investment solutions, particularly in private markets. This year, we have seen a renaissance of active asset management with a reviewed focus on Europe. This plays to our strengths and to what we do well. Our strong credentials are what has attracted leading financial institutions of the caliber of Dai-ichi Life to partner with us and invest in M&G shares. Every day, we're making our asset manager stronger, more profitable and more international. And by bringing together Asset Management and Life, public and private assets, we offer clients what they need at each step of their savings journey. For U.K. retail customers, we're building a holistic retirement proposition with PruFund at its core. And for corporate clients, we continue to strengthen our BPA capabilities and offering. Let me now tell you why I'm confident about the future of our asset manager. Our investment performance is consistently excellent. The UBS analysis on this page shows that for the third year in a row, we were ranked as a top performing publicly listed asset manager in Europe. Furthermore, at GBP 2.6 billion, net flows are the highest since listing, and we continue to improve the profitability of this business. I am very pleased of how we have turned around our Asset Management operations. Since launching our transformation program, we have remained focused on improving the quality of our cost base. We absorbed inflationary pressures, freed up resources and reinvested them to support our growth agenda, expanding our investment and distribution capabilities. In under 2 years, our cost-to-income ratio has reduced from 79% to 75%, a meaningful improvement in a short period of time. And we are not done yet. The flow data also shows three positive trends. First, the headwinds in the U.K. Institutional segment are gradually reducing. Defined benefit schemes continue to derisk but the pace at which they do so has slowed, and we are less exposed to these segments than in the past. Secondly, we're achieving strong net flows in wholesale, thanks to the outstanding investment performance we deliver to clients across both equity and public fixed income. And finally, we continue to grow at pace internationally across a number of different countries. The international growth of M&G is a compelling story. Since 2019, we have consistently grown at double-digit rates. Having invested in and strengthened our distribution teams, our hard work is now paying off. Today, 58% of our third-party assets come from clients based outside the U.K., up from just 37% 5 years ago. We are now a leading international manager with an established footprint in Europe and growing access to attractive Asian markets. And this means that our asset manager is more resilient, thanks to a broader client base and has greater access to more growth opportunities. On this page, you can see our progress country by country. The Netherlands, Germany and the Nordics are key institutional markets for us. In Italy and Spain, we have outstanding relationships with local banks and wholesale distributors. And in Asia, we have a good footprint that we will build on, also thanks to the partnership with Dai-ichi. We are very pleased with our international expansion so far and the opportunities ahead. This is a top priority for M&G, and we are committed to build on this strong track record. Our other priority in Asset Management remains private markets. After completing the acquisition of P Capital Partners, our private markets franchise stands at GBP 77 billion with an additional GBP 6.5 billion in the capital queue. These are committed client funds that will start to generate fees as soon as they are deployed. It is a healthy pipeline that gives us confidence in the outlook of this franchise. You can see on this page the breadth of our proposition. We have a strong 20-year track record and all the key components for a holistic private markets offering. With critical mass across asset classes, we continue to broaden our fund range. Given the needs of our insurance balance sheet, we first focused on core strategies, which are on the conservative end of the risk/reward spectrum. We have since launched a number of successful high offer strategies, as you can see on the slide, across all asset verticals and in line with client appetites. One client that is keen to allocate capital to our high alpha solutions is Dai-ichi Life. In May, we announced a long-term strategic partnership with them, which we expect to be a key driver of Asset Management growth, both in Asia and in private markets. By becoming their preferred asset manager for Europe, we expect to generate at least $6 billion of new business over the next 5 years, of which $3 billion will be allocated to high alpha strategies. We expect the first mandates to be awarded before the end of the year with detailed fund level due diligence already underway. In July, I spent a week in Tokyo with the Dai-ichi leadership team. I returned energized and optimistic about the prospects of this partnership, which has significantly increased the profile of M&G in Japan and Asia. This collaboration proves that institutional investors are looking to increase their exposure to European assets. And when they do that, they want to partner with strong active managers like ourselves. The presence of our large insurance balance sheet is another key attraction for Dai-ichi as it proves we have real skin in the game. Once more, this is clear evidence of the value of our unique business model. And as you know, Dai-ichi is acquiring a 15% stake in M&G, aligning our interest in making this relationship a strong success. Let me just drink a little bit because my voice is going away. Good time to move to Life. PruFund flows were soft in H1 with the April events impacting retail sentiment. Nonetheless, sales rapidly improved in May, June and July as PruFund continued to deliver strong outcomes and to protect customers from market volatility. This recent trend is encouraging and we expect to see continued progress. Improving PruFund sales is only part of the solution as we build a holistic retirement proposition around this unique product. In doing so, we are broadening both client access and our product offering. From an access perspective, we hit a major milestone this year, integrating PruFund on FNZ technology. This gives us better access to the large and rapidly growing digital platform markets. From a new product perspective, we have launched our fixed-term retail annuity, and we remain on track to launch a lifetime retail annuity next year. Within Life, we also continue to invest in our BPA capabilities. Having reentered this market 2 years ago, we aim to generate annual sales of GBP 3 billion to GBP 4 billion by 2027. To do that, we have been scaling our capabilities across our origination proposition and pricing teams, investing in the talent needed to achieve our ambition. In a short period of time, we have improved our chances of success, scaling our ability to quote deals and implementing new longevity reinsurance capabilities. And in what is becoming an increasingly competitive space, we are building a truly differentiated offering. Last year, we launched a value share BPA, an innovative solution where capital requirements and rewards are shared with our clients. Early next year, we will launch our With-Profits BPA. The product development is progressing well and is on track for Q1 delivery. Benefiting from the With-Profits Fund lower cost of capital, this solution will be extremely competitive and will be a powerful tool to attract flows to the group. Having a differentiated offering also means we can remain disciplined on [ deal ] pricing and not compromise our financial returns. While market activity has been relatively subdued this year, we have closed GBP 300 million of new business so far with a further GBP 200 million in exclusivity and a healthy pipeline for the remainder of the year. So to conclude, M&G has financial strength. We continue to simplify our business and we are growing again. In the first half of the year, on the back of consistently strong investment performance, we have delivered fantastic Asset Management net flows (sic) [ net inflows ] of GBP 2.6 billion. And we continue to expand internationally, improving the diversification and resilience of our business. The partnership with Dai-ichi will take our international journey to the next level. We also continue to broaden our proposition both in Asset Management and in Life, including the launch of our With-Profits BPA early next year. All this work opens up additional avenues of growth for the group. In parallel, we remain absolutely focused on simplification and we'll continue to deliver meaningful progress on the transformation program and the cost-to-income ratio. We have now set the group up for long-term profitable growth across products, segments and markets. And with that, I will hand over to Kathryn, who will take you through our financial results in detail. Thank you.

Thanks, Andrea, and good morning, everyone. I'll now go through the details of our first half results, which I'm pleased to say reflect the continued delivery against our priorities. Covering first the key highlights. Net flows from open business of GBP 2.1 billion improved by GBP 3.2 billion year-on-year. This is a great result, underpinned by GBP 2.6 billion of net inflows from external clients in our Asset Management business. And this achievement is particularly noteworthy given the volatile external environment we saw in the first half of this year, and it was made possible by the market-leading investment performance and by the continued international expansion that Andrea talked about. In our Life business, PruFund saw net outflows of GBP 600 million. However, we are encouraged by the improvement we've seen recently with flows turning positive in the months of June and July. Group adjusted profit of GBP 378 million reflects the positive momentum across our business. Asset Management fee-related earnings were up 14% during the first 6 months of this year. While in Life, growth improved [indiscernible] Traditional With-Profits more than offset lower earnings in annuities. At GBP 408 million, the operating capital generation benefited from a growing underlying result of GBP 331 million. And with both Asset Management and Life contributing strongly, this result demonstrates once again the value of our diversified business model. And finally, management actions of GBP 77 million in the first 6 months of this year are in line with our guidance of GBP 100 million to GBP 200 million for the year. So thanks to this strong operating performance, the Solvency II ratio reached 230% as at the 30th of June. Turning now to flows. Closing AUMA of GBP 355 billion was GBP 9 billion higher than the opening balance, supported by the GBP 2.1 billion of net inflows from our open businesses and by GBP 11 billion of impact from markets and other items, which does include the GBP 2.7 billion from the acquisition of P Capital Partners. As I mentioned, net flows from our open business improved by GBP 3.2 billion year-on-year. Asset Management net inflows were driven by GBP 1.9 billion from the institutional segment, where continued strong international growth more than offset U.K. headwinds, which I'm pleased to say are gradually abating. And also contributing to the positive picture, we achieved GBP 700 million of net inflows in our wholesale business as we continue to deliver excellent client outcomes with over 70% of our assets ranking in the top 2 performance quartiles. Life flows remain broadly unchanged year-on-year. However, we are confident that there will be a stronger second half as PruFund flows have gradually improved since April and as activity in the annuity market picks up after a quieter first half. At GBP 378 million, our group operating profit was up by 1% year-on-year. And the key features of this result are, first, higher revenues and stable costs in Asset Management leading to a 2 percentage point reduction in the cost-to-income ratio year-on-year; secondly, an increase of GBP 40 million in PruFund and GBP 12 million in Traditional With-Profits, mainly driven by higher opening CSM balances; third, reduced annuity earnings of GBP 130 million driven by lower returns on excess assets, as we flagged at our 2024 full year results, along with an GBP 8 million headwind from a legacy contract; and finally, a stable Corporate Centre result as lower debt interest costs offset reduced investment income and with head office expenses remaining stable. Not on this page but worth noting, our statutory result increased meaningfully year-on-year from a GBP 56 million loss to GBP 248 million profit after tax. And this turnaround was driven by the strong operating result and by significant improvements in short-term investment returns and IFRS 17 mismatches. Let us now look at the Asset Management result in a little bit more detail. At GBP 324 billion, AUM ended the period up by GBP 11 billion reflecting strong flows in favorable markets and the acquisition of P Capital Partners. Our average fee margin continued to be resilient at 32 basis points despite a competitive environment as we continue to focus on high value-add solutions for our clients. So thanks to higher assets and stable margins, our revenues were up by 3% year-on-year. We also kept a tight control on costs and improved the operational efficiency of our business, leading to a 2 percentage point reduction in our cost-to-income ratio to 75%,or 74% when including performance fees. And I'm very pleased with the continued improvement in the cost-to-income ratio as it demonstrates our relentless focus on delivering positive operating jaws. But we know we have more work to do and we remain committed to maintaining strong cost discipline and to drive sustainable, profitable growth. Performance fees of GBP 7 million were down GBP 6 million from last year due to lower carried interest, and the GBP 5 million loss in investment income is largely attributable to an GBP 8 million FX revaluation loss due to the weaker U.S. dollar. So in summary, high-quality fee-related earnings rose by GBP 15 million year-on-year, offset by a lower contribution from performance fees and investment income. And this led to the stable operating result of GBP 128 million. Let's now turn to our Life business. PruFund operating profit increased by 14% to GBP 112 million due to higher opening CSM balance, marginally higher attrition rates and a much improved new business strain. Profits from Traditional With-Profits were up by 11% year-on-year, also benefiting from the same dynamics of a higher opening CSM and attrition rates. We are pleased with this growth as it occurred despite the lower expected returns and risk free rates that we've previously flagged at our full year results in March. We expect this new and improved level of profitability to be sustainable for the second half of this year. Let's now turn to shareholder annuities. Our annuities result was down 14% year-on-year, and this was driven by a lower opening level of annuity surplus assets and lower rates of expected return, which we guided to in March. This was partly offset by a higher CSM release due to higher opening balances, supported by last year's large longevity benefit. The results also include an GBP 8 million headwind from a legacy book, excluding which the annuity results would have been broadly in line with expectations. Other Life was a small GBP 1 million loss compared to a GBP 2 million profit in the previous period, impacted by sterling-euro FX headwinds and slightly higher losses in our Advice business. Before turning to underlying capital generation, I wanted to remind you of the meaningful size of our CSM balances, which ended the half year period at a strong GBP 6 billion. And you can find more detail on the operating change in CSM in the appendix. Our underlying capital generation in these 6 months of GBP 331 million was up 11% or GBP 34 million year-on-year, though with some SCR impacts that may not repeat. The Asset Management contribution was GBP 18 million higher, thanks to an improved fee-related earnings and a GBP 12 million SCR reduction due to lower market risk requirements. Life delivered a GBP 6 million increase to GBP 289 million. And within it, both PruFund and Traditional With-Profits benefited from a higher opening PVST balance of GBP 4.3 billion and lower new business expense overruns in PruFund. This more than offset the headwind from a lower rate of expected returns on the PVST of 7.8% versus 8.2% in the prior period. Annuities result saw a modest increase versus the prior period, thanks to a lower strain of GBP 30 million from new BPAs, which more than offset the lower return on surplus assets. Our Corporate Centre benefited from an GBP 18 million SCR release, primarily relating to lower treasury lending activities. I'll now turn to operating capital generation. Our operating capital result was a resilient GBP 408 million or GBP 443 million excluding new business strain, which is a good start to achieving our GBP 2.7 billion cumulative target by 2027. Management actions of GBP 77 million were lower year-on-year as the first half of 2024 benefited from GBP 62 million of one-offs from excess surplus distributions in our With-Profits business. However, they are in line with our guidance for the full year. And the main components of the management actions we saw were GBP 118 million primarily reflecting equity hedging activities, GBP 35 million of adverse experience and assumption changes on expenses and investment management costs and a small GBP 6 million adverse impact from model refinements with our Traditional With-Profits products. So thanks to the strong operating result, our Solvency II ratio improved by 7 percentage points to 230%, and the solvency surplus remains stable at GBP 4.7 billion despite the payment of the final dividend for 2024 in May. Own funds of GBP 8.3 billion, of which GBP 4.2 billion relates to the With-Profits PVST are slightly lower than the opening balance of GBP 8.5 billion, predominantly reflecting the dividend payment. I am pleased with the strength of our balance sheet as we continue to carefully manage our risk exposures in the volatile macroeconomic environment. I'll now cover the progress we've been making in our cost transformation program. So as at the end of June, we've achieved GBP 230 million of savings under our transformation program, which means we've already overdelivered on the original GBP 200 million target we set in March 2023. And given our strong progress, we're confident that we will meet our upgraded target of GBP 230 million by the end of the year. And I would like to reiterate that when we do achieve this target, our efforts to drive further cost transformation and simplification will continue. We will remain focused on improving the quality of our cost base, freeing up resources to invest in and grow our business. The strong progress achieved to date reflects the actions taken to create additional capacity and enhance our operational efficiency, as shown on this slide. And for example, since the start of the program, we have transformed the operating model of our private markets teams, delivering GBP 20 million of savings. And with similar levers, we've achieved another GBP 18 million of cost reductions in our Life business. And we've also improved the efficiency of our tech environment by decommissioning over 500 applications and outsourcing IT services for further cost opportunities. Through these actions, we were able to fully offset inflation, invest to grow our businesses and end the period with a cost base that was GBP 8 million lower and of a better quality. We will continue to focus on improving our operational efficiency over the second half of this year and beyond as we transform the cost base of the group, deliver better customer outcomes and, of course, drive profitable growth. So in summary, the first half of 2025 reflects a period of disciplined execution, strategic progress and financial resilience. We will continue to deliver for our clients and our shareholders with our diversified business model positioned for long-term success. I'm pleased with the results in the first 6 months of the year, which showed record net inflows in Asset Management and encouraging trends recently for PruFund, strong operating profits despite nearly GBP 16 million of adverse headwinds, positive operating jaws in Asset Management, a resilient contribution from Life with a double-digit growth in PruFund and, finally, a good start on our GBP 2.7 billion operating capital generation target. Thank you very much. Andrea and I will now take your questions.

I'll take my water. Thank you, Kathryn.

Thanks, Andrea.

Where do I stand?

Somewhere in the middle.

Always with this slide. It grills my head.

Just in front in the screen behind you. Good. So just -- so Larissa will definitely be first because she's the fastest end. [Operator Instructions] Please introduce yourself with name and firm you work for. So Larissa, over to you.

Larissa Van Deventer from Barclays. Two questions, please. The first one, congratulations on your Solvency II capital ratio, extremely robust. If you can please give us some color on how would you think about the strength of the ratio versus your capital allocation preference and how you keep the strong ratio from negatively impacting ROEs, please? And then second, on your bulk annuities. We know that it's a seasonally slow start to the year. But how should we think -- now that you're gaining momentum, how should we think about margin and new business strain, please?

So Andrea, do you want to take the first one? I can answer the second one.

Yes. As you -- thank you for reminding everyone that we have a capital management framework. Generally, we always put it back, but this time we didn't put it in the slides. And indeed, as you all know, we have been following this capital management framework, and it's been a journey for us really. If you remember well, our first priority was making sure financial strength and that we strengthen our balance sheet. And we did deleveraging, and we are now in a much better place. But more importantly, we continue to deliver on our capital generation. And then at the same time, we wanted to deliver attractive dividends to our shareholders. And we came up with a progressive dividend policy, as you know, in March this year. But to do so, we need to underpin it by a growing business in terms of profitability. And to do so, we have been doing the transformation program and we have been selectively also investing in the business to grow and also doing some selected acquisitions. So what we want to focus on moving forward is making sure we deliver that sustainable profitable growth to underpin the progressive dividend policy that we've come up with. I mean we do not see at the moment the Solvency II ratio as an opportunity to do any capital returns. By the way, I think that if you do capital return, you should never do it from a stock. You should do it from a business that is doing much better. So we're very much focused improving and continuing the momentum of our business. And as you saw today, when I look at some of the underlying KPIs, the fact that our fee-related earnings in Asset Management are improving by 14%, you saw the underlying capital generation growing by 11%, PruFund and Traditional With-Profits, also up, all that gives me confidence that we will continue on this journey and deliver on the progressive dividend policy.

Great. And I think your second question, Larissa, was on BPAs and strain and margins. So as we said, we've written GBP 300 million so far this year, GBP 200 million in the first half. You can see that the capital strain we had was more than GBP 13 million, where we delivered a margin on CSM of about 3.5%. Now what we've said is that we always have a double-digit IRR hurdle rate, which we want to do, and that's genuinely how we think about the economics for these transactions. It's very pleasing that we are participating in a lot of the transactions that come to the market, but we are going to remain very disciplined in terms of the deals that we will do. We've not used reinsurance yet. We've said we've got the capability to do that. But obviously, it makes sometimes more sense when we do on larger transactions than smaller transactions. So we like having the flexibility to reinsure, but that's partly reflected in the economics that you can see. So we will remain very focused on delivering the double-digit IRRs. And obviously, having the ability to do a BPAs now with profit fund in 2026, that's a very exciting opportunity for us. And we gave some guidance around the proportion of both With-Profit BPAs and the value share BPAs for '27 in March of about 3 quarters and 1 quarter. So that also gives us confidence around the ability to participate in the expected volumes in the BPA market.

So the next one would be Dom and then we've got the row here on the right.

Dom O'Mahony, BNP Paribas Exane. So three, if that's all right for me. First on institutional flows, really very strong indeed. I wonder if you could give us maybe the next layer down in terms of detail on where it's going, what you're seeing in the second half and also whether the margin on the new business coming into the book is lower or higher or in line with the margin on the [ in-force ]? Second point, I mean, just picking up again on the very strong solvency. It's nice to see the tax plan generously contribute to that. Could you think about -- what have you thought about using that more aggressively to take risk? So if you're not thinking -- you don't use it for capital return, but could you be more aggressive about seed capital? Could you be more aggressive about underwriting risk maybe on the annuity side? I mean, why bother doing longevity reinsurance? Your thoughts on that would be very interesting. And then the third question. Over the last few years, we've got used to thinking through the impact of higher bond deals, but the curve has changed quite interestingly. What does that mean to your business? I don't really have a good feel at all actually for what that means for capital cash and, indeed, earnings.

I guess I'll take the first one and the two other ones are for the CFO. So indeed, we're very pleased with the momentum. And indeed, you saw the institutional flows were very, very strong, particularly international. And you want to know where -- in which asset classes that went. And what we saw, we saw a renaissance and an interest again into Europe. There's no doubt, the first half of the year, many investors have sort of allocated more into Europe. I think that also helped in our partnership with Dai-ichi Life because they clearly wanted to increase their allocation to Europe as well. And in particular, when you look into Europe, we have seen both in public and on the private side flows, but in particular, on public equities. Yes, there are still asset managers managing public equities. If they do so well, well, thank God, I mean, it's true. And if they do so well, they get mandates and they get also flows in the wholesale side. So on the institutional side, we saw significant interest into European equities but also Article 9 listed equities, which, of course, if you think of what is happening on the other side of the Atlantic, some American asset managers who have sort of, let's say, softened their stance on ESG probably was also helpful. So we've seen a lot of momentum on equities. Japanese equities, by the way, also continued to see inflows. And then on the private asset side, there was interest in particular on real estate, given where in the cycle valuations are. And more importantly, on the private credit and structured credit, in particular structured credit, where we have a strong franchise, been in that market since a long time on, for example, SRT. And we had significant interest from pension funds from Asia but also from North America, in particular Canada, into these strategies. So I would say, well diversified. And if you look at this number, you think -- you asked me about H2. We have continued to have strong momentum. Of course, we also have Dai-ichi Life. There were no flows from Dai-ichi Life in the first half. They are doing due diligence on several strategies at the moment. We expect a mandate before the end of the year. So that will come. But we continue to have a very strong capital -- strong capital queue as you saw, GBP 6.5 billion, but also a strong pipeline. So you should expect positive net flows in the second half as well. But don't take the 2-point -- sorry, the GBP 3.2 billion institutional number as a baseline. I think first half was rather unique in the sense that many people increase their allocation to Europe. I'm not saying that they are going to decrease. But I don't think we're going to see the same increase in the second half.

And so back to the choices around capital deployment across the group. And as you rightly said, we've got a meaningful stock of capital at 230%. We've got the capital management framework that Andrea talked about more generally. And you'll remember at the full year results, we also talked about the GBP 2.7 billion and how we'd choose to use it, and we have the option if we want to continue to simplify the business, so investing in improving the operating leverage in the business and supporting the capabilities in Life, for example. And also, there was an allocation certainly towards traditional shareholder strains. So your point around automatically reinsuring or not, no, not necessarily. We will have a view. It really is about delivering the right returns on that capital, and so being thoughtful around where we use it. But we do look at it group wide. And we've got the tremendous GBP 6.8 billion of surplus capital also in the With-Profit Funds that clearly go through a very robust governance, but it's another source of capital for the With-Profit BPAs. So we look at and evaluate options to deploy that capital, but it really is all around making the right choices around that capital. And you've seen the guidance we've given around how we want to use it. And it was pleasing to get the tax benefit, as you said, in the half, which is great that we've got stronger earnings, and we can use the DTA on a solvency basis, which is really good. And now we did expect a question on rates and the steepening that we've seen this year. So it's about 110 basis points between very short rates and long rates over the course of the year. And obviously, the numbers in our financials are for June 30, and there's been pretty big moves in parts of the curve since June 30. And one of the answers we gave actually this morning was we're lucky as a group that we do have a business model and a business mix that is successful through all interest rate cycles. And so when you think about -- let's start, perhaps, with the insurance business, and you've seen our sensitivities more generally around interest rates, so we would expect obviously a benefit on the solvency ratio when rates go up. The duration that we think about in terms of the balance sheet is not right at the long end. I mean parts of the assets might be very long duration, but in overall, because our annuities book was only reopened in the last couple of years, we do look at the 10-year part of the curve, which actually hasn't been as volatile this year. And we have seen a reduction at the short term, which I mentioned. And obviously, that may have plateaued now given inflation moves that we've seen in the U.K. and expectations for further rates. And that was part of the reason we guided at full year around lower interest accretion and expect returns because of the 1 year. So generally higher rates would benefit some of the earnings metrics for flow in the insurance business. And of course, we monitor what it does to our statutory shareholders' equity as well. So we'd look at that. And on the Asset Management side, it depends on where in the curve it is, again, because a large part of our Asset Management duration on the fixed income side won't be super long. It will be sort of short, medium term. And so we think about impacts on AUM and the business. But again, we benefit fortunately, as a group throughout different interest rate cycles.

And maybe, Dom, just to clarify for everyone's benefit the tax impact. Clearly, we pay taxes and in the IFRS results, you can see that there's "tax bills" there. On our capital side, it is a SCR benefit because having made statutory profit, we've got more capacity to use deferred tax assets in a stress scenario, which reduces the SCR. So it's a little bit technical. But taxes have been paid. They're there on the IFRS side of things. It's just a quirk of Solvency II in the 1 in 200 stress case. Let's go to the row left right. So Andrew, Andrew and Mandeep. And then I think there's also Nasib and Andy.

Okay. It's Andrew Crean, Autonomous. Can I ask three questions? Firstly, in terms of the BPAs, could you give us the margins on premiums as opposed to IRRs for your current BPAs versus the value-based ones and the With-Profit ones? Secondly, for clarity, I think your excess capital over GBP 190 million is about GBP 1.4 billion. Are you absolutely clear that you will never pay that out from stock buybacks, and so we'll need to go for regular buybacks from flow? And then thirdly, I think on an annualized basis, the operating capital generation impact on the SCR was minus 8%. What is that likely to be long term? Do you continue to see, as your business grows, the SCR reducing?

I think, yes...

The first question on margins. I think I mentioned that on the GBP 200 million, we had 3.5% in terms of the CSM on premiums. So we haven't given any guidance. And also, what we've said is as we write more of these transactions and bigger ones, you will see more of the earnings or CSM margin and also more of the capital strain around the transaction. So we've not given any more guidance. But what's quite important is that when obviously we think about BPAs in the With-Profit Fund and we think about hurdle rates, it's obviously a very different capital base that's being deployed for those BPAs. We will have criteria around the profitability of those transactions and the sorts of risk and sorts of transactions we want to do. But it won't be the same hurdle rates as we have or cost of capital as it is on the shareholder side. And that's a really interesting piece of work that we're doing now as we get ready to write With-Profit BPAs in early 2026. And so yes, I can see...

But I mean, given the fact you're going to try and write GBP 3 billion to GBP 4 billion a year with a quite large chunk, does it matter to us to know what kind of margins relative to that 3.5% you're talking about?

Yes. And of course, Andrew, when we start writing more, and we're hopeful around a better second half or an exclusivity an additional GBP 200 million, so that's about GBP 0.5 billion so far this year. Fully appreciate, we are equally focused on margins for our shareholders, on shareholder capital. I mentioned that with profit. And we're focused -- so we think about the CSM, and that's very important to us. But also around the returns on the shareholder capital that we're delivering. So absolutely, we understand that and we agree. And when we give more -- do more transactions, we'll give more color around that. So the excess capital, I think, Andrea's comment around distributions to shareholders from stock versus flow, the really critical thing for us is to drive sustainable earnings growth. And we've got strong capital, strong capital generation, strong cash generation. We want to deliver earnings growth, and then that's what will unlock any higher potential DPS growth. But we've guided to progressive. We've done 2%. So being able to increase that further will depend on sustainable, consistent earnings growth. I think it was less a comment about share buybacks, which are not on the horizon for us at the moment. And so that it was more around the DPS than actual share buybacks, I think. And then on the SCR, we have called out about GBP 30 million of one-off benefits this year. And obviously, we do continue to look to improve the efficiency of our capital base and look to optimize their capital requirements. But of course, we also -- and there's market impacts on that, that we have at the moment given the rate moves that we're seeing. But we also do want to deploy the business. So that's, hence, the question earlier around strain, around using capital in the business. And we also benefited, as you saw on the PruFund side by some improvements and changes we made around pricing last year, which reduced some of the PruFund as well. So more efficient writing back business, which is great. So yes, it will depend, but we're being very disciplined around shareholder capital management and capital across the group and got sufficient budgets absolutely to write profitable business with the right margins in terms of CSM and earnings as well as capital.

Andrew Baker, Goldman Sachs. So the first one, apologies, I'm going to go back to it, but excess capital. We're all looking at sort of Solvency II shareholder ratio to form the view on excess capital. Is that the right lens? Is it -- so just trying to get a sense of is there another constraint on deployment of stock, whether that's the regulatory solvency ratio, local GAAP, equity, anything else? I hear you on you're not looking to deploy it right now, but anything that could prevent you from deploying it going forward? Then secondly, just a technical one, the GBP 8 million charge that you called out related to the legacy annuity plan and the adjusted operating profit, what is that? And then thirdly, just on the underlying capital generation, the lower treasury lending that you mentioned that gave the strong result at the center. Should we expect treasury lending to normalize going forward? Or are these levels sort of sustainable?

So when we think about capital and what we're using that capital for, I go back to some of the guidance we gave with the capital management framework and then the GBP 2.7 billion over the next few years where we talked -- where in the group, we'd obviously use some of that capital that we do generate. And so we know that we've got a very strong solvency which we're quite -- which we do have. We also look at leverage. And that was one of the other questions, I think, we answered at the full year results around using that capital to buy back shares which would impact own funds. We know our leverage is very conservative versus peers. I would also say that we've done already the deleveraging last year on the holdco debt. That's quite a meaningful amount of debt that we've redeemed. We've got a call date coming up in 2028, a dollar bond. But I also -- we need to think about the capital structure and the cost of it, and our debt is very cheap compared to you've seen where rates are at the moment, so 5.5% to 6.5% coupons for our holdco debt. So we look at the quality of the capital. We look at the ability to generate strong capital, strong cash earnings and make sure that we've got a disciplined allocation framework with the right hurdle rates across the company. So 230% solvency is absolutely one of the metrics that we look at. In terms of the balance sheet equity, that will be another lens. We look at -- and both at the holdco, where I think we're at GBP 3.3 billion in terms of shareholders' equity. We've got strong retained earnings in the subsidiary, strong capital, strong liquidity, pretty much at the holdco and at the subsidiaries. So it's one thing we'll look at and we talked before about impacts on rates. But we're very strongly positioned at the moment. But we do look at a range of things. And we value financial flexibility, and we want to have the capacity to write business, we want to have the capacity to deploy that capital across the group and to continue to deliver strong results for our customers and our policyholders. In terms of the one-off annuities impact of GBP 8 million, it's just a one-off. And it's a legacy scheme and it's really as simple as that. So it's an old scheme that we had, a payment that we made. So nothing more to read into that. And then, yes, it's a really good question on the benefit we saw in holding -- in the Corporate Centre in terms of capital. We do have treasury activities where we can do very vanilla but optimize the balance sheet. And so at the period end, it just happened to be lower market risk and rates and credit. And so that could definitely normalize at some point in time, and we're just thoughtful around, obviously, the longer-term expectations for that. But it's very conservative and it just happened to benefit that June 30 moment from a lower position.

Mandeep Jagpal, RBC Capital Markets. Three questions as well, please. First, on Asset Management. You've been able to keep absolute costs relatively flat over the last 2.5 years. And you spoke about a continued improvement in the cost-to-income ratio in the second half. But how should we think about the absolute growth in the cost base from here as you balance investment in growth versus operating efficiency? And how much flexibility do you have there? And then on BPA, you've reopened the BPA portfolio with the aim of doing more value share and With-Profits BPA over time. But what are you observing in terms of the level of competition in the traditional BPA market since you wrote your first deal in 2023? And how do you expect to develop here following some M&A in the sector? And then finally, on DC pensions, how are you accessing the structural opportunity in the DC Master Trust space given M&G's wide-ranging asset management proposition, including private assets? Could it be a particularly attractive option for you to have your own Master Trust?

So Andrea, I don't know if you want to -- well, probably, I guess, you could go all the 3 of them if you want, certainly the top two.

So on the cost-to-income ratio, obviously, we're very pleased with how we have delivered improvement over the last 18 months. Let's not forget that we moved from 79% to 75%, and this was delivered thanks to both an improvement in the revenue and, of course, managing costs in inflationary environment, keeping it flat. So pleased with that. But we had a target. We have a target of 70%. We are committed to that target. We will not deliver it by the end of the year. If not, we will be super people, but we're not. In that sense, we're doing well. But -- so we are committed to continue in that sense. When I look at how the business is doing and how we have momentum both in terms of pipeline in both private assets and public assets, when I see how we have been able to keep also the margin, we're probably one of the few asset managers would have kept margin flat. I always like to show this. This is rather unique. I mean, I -- there are not too many other asset managers who can show fee margins remaining flat as we have done. That is also thanks to a mix. I talked before where we see momentum. We see momentum in equities. Equities have higher bps. We see momentum a lot in private assets, higher bps as well. So that will help. So we are committed to continue to improve our cost-to-income ratio. We will do so, and we will continue to invest, but we will be careful also taking out costs. And you should expect that you should see a similar momentum as you have seen so far in the last 2 years moving forward.

And then the second one on BPA?

So on the BPA, as you have seen, we have a good -- we launched a value share last year. What we wrote in the first half was plain vanilla BPAs. We've had interest in value share BPAs. They are actually larger in terms of size, and we are in discussion with several schemes to see if we can arrive to a conclusion on them. I think what is key here is that you should look at what we can offer to schemes out there because, of course, we can be plain vanilla. That's supported, of course, by a strong private assets franchise. But more importantly, the value share, of course, gives share the rewards with the pension scheme. And when we'll get With-Profit BPA, then we will have a significant competitive advantage because we will have a lower cost of capital. And once again, when you look at competition, as you said, I'm not concerned about competition. I'm not even concerned that there are new entrants. Frankly, when I see the new entrants, they sort of have the similar business model to us because there are two alternative asset managers and they want that permanent capital side. So it is effectively playing into our strength. Look at what we're doing. We reentered this market 2 years ago. We have written GBP 1.7 billion of BPAs so far. We have significantly improved our capacity in order to originate, to price, to propose. And we are very much committed to the GBP 3 billion to GBP 4 billion number by 2027. I think we will do so, thanks to excellent asset manager. I mean it is performing extremely well but, more importantly also, thanks to the innovation that we bring. I mean, the With-Profit BPA will be something very, very unique and the value share BPA still remains the only solution in the market.

And last question on U.K. DC and Master Trust.

Yes. Would you -- do you want to take that? I don't know who wants to....

I was going to say -- well, Clive is getting the mic. The other fortunate ability we have around delivering the right returns and in the market where there are a large number of players, it's also just having that private assets capability internally to make sure we optimize our asset returns, which is good for us.

And you have met Clive before, but Clive is the CEO of our Life business.

Just a brief word on workplace. I mean we do have a substantial workplace business. Master Trust would be a step when we're currently under review. Also, obviously, we're in conversation with the government around their proposed legislation. We actually think if we did do it, it would be a heavily With-Profit sponsored and finance initiatives because it has a long view. And in actual fact, the piece that's missing in the workplace market is a convincing transition to retirement and retirement journey for those organizations. There's been a lot of really good work in the U.K. around accumulation. Actually, some of those particularly post auto-enrollments are coming to try and use their pension, which is actually a different set of skills where we have the #1 drawdown product. We're entering into a guaranteed income, which is particularly relevant, and also how we have one of the largest advice businesses in the industry as well. I think that's all we'll say for now. So thank you for that.

So we've got Nasib and Andy.

It's Nasib Ahmed from UBS. Just two questions from me, both on Slide 9. You have a target of GBP 100 billion of private assets by the end of the year. I know rates have gone up. So what's that target looking like if you allow for higher rates? Are you tracking ahead of that target today on the GBP 77 billion already? Or do you still have a bit of catch-up to do? Second question on the same slide, the GBP 6.5 billion. Does that have anything for Dai-ichi in it? Or is that on top?

Okay. So I don't think we have a target of GBP 100 billion of private assets by the end of the year.

It was an ambition.

I think it was an ambition that we stated, but we don't have a strong target to it. I think what is important is you look at this slide and you look at the strength of our franchise. First of all, this is one of the largest private asset player in Europe. And both real estate, private and structured credit and infrastructure have been around for a very, very long time. We haven't just entered this. This was developed thanks to the support of the balance sheet. And we have -- when you look here, we have actually moved into, I would say, more yielding strategies by doing acquisitions where we believe that we can grow significantly the business. So when we did BauMont, the value-add real estate acquisition, this was to complement our already strong offering but, more importantly, also supported by the balance sheet. And I think that's the way we're going to grow. We're going to grow our existing franchises organically, and we might look at potential bolt-on acquisition in order to grow this business going forward. Same thing with P Capital Partners. We had a commitment of GBP 500 million for our balance sheet to grow that business. On the capital queue, no, there is no Dai-ichi Life in that capital queue. Capital queue is when you have won the business and obviously you need to deploy it. Maybe an important point on the capital queue because we're showing this for the first time, I think.

We used to 3, 4 years ago, but yes.

But what you just see on the capital queue is, of course, there will always be a capital queue. As a private asset manager, you always have a capital queue. Then what is important is that you need to make sure that, that capital queue comes in with new flows and you deploy it. What is the range? I would say the range is between [ GBP 5 billion to GBP 7 billion ]. And in this case, this increase of capital queue is because we have received new -- we have won new business, not because we have not been able to deploy. So I think that's the positive news also you should take from here. But no, Dai-ichi is not in there. I think I said it in the presentation. They're doing due diligence. We expect to get a mandate from them before the end of the year. And as you all know, they have a commitment of $6 billion, not sterling, over the first 5 years.

And bolt-ons on those verticals, where else would you think of adding capability?

I think one has to be careful. And we have done two small bolt-ons, and I think you need to see those develop. We have always had a way of saying, okay, we utilize part of our own balance sheet and then we grow them even further. But if I had to look, I would say, I would look at private and structured credit, which still is something which we will see Europe as being a very interesting. There are great opportunities. And I probably would also look potentially at some on the infrastructure side. But overall, we have what we need at the moment. I mean we want to grow organically, and we want to make sure that those two bolt-ons that we have been integrating, that they take off as well.

It's Andy Sinclair from Bank of America. First, just circling back to leverage. I get the point you made on leverage, that conservative methodology, et cetera. But you do have a target for under 30% leverage. We're at 33% now, I guess, that targets for the end of the year. Are we saying that this might take longer? Or what's the thoughts on that progress to under 30%? Second is on the annuity one-off. Sorry to come back to it, but I still don't understand it. This GBP 8 million payment. I get you're saying it's one-off. But why is this payment being made? And why should we have confidence that it is just a one-off and that there's no other schemes that is coming through for? And third was just on the FNZ platforms for PruFund. How many FNZ platforms have committed to offer PruFund so far?

Why don't I start with the end and then you can take the two first. So obviously, we're pleased to have done this agreement with FNZ. As you all know, FNZ roughly covers 40% of the platform markets. So we're talking GBP 280 billion of AUMA and roughly 50% of the flows. So we're talking GBP 35 billion per year here. So we're very pleased to have done this agreement. And we are in discussion with some of the platform utilizing that technology. I would say, we will probably -- it's for 2026, we will see something happening there. But obviously, we're very, very excited to get there because this will substantially increase volumes on PruFund. Okay?

So if I take leverage, perhaps, yes, we are not at 30%. But we also know that, as you said, we have got the most conservative. We'd be at 27%, I think, on an IFRS equity basis and 22% on using some of the approaches by some of our peers. And we obviously want to get there through own funds growth because, as I said, the holdco debt, we're comfortable with. We also think, I mean, it's good quality, very long term and cheap capital and funding. So we have got a call of the dollar bond in 2028. But we do still -- we have no concerns on that, but we're very comfortable with it and we get no feedback either from shareholders. So we know that we are conservative. So we will get there, but we will get there through own funds growth. But obviously, we don't think we'll get there by the end of -- we can do the math in terms of what's needed.

I was just going to say with bond yields going higher, I guess, that target gets a little bit harder. Is that still under 30% though?

So absolutely. So in the first question around rates and, obviously, one of the things we saw when we did have movements in rates is we get a benefit on the PVST, which is very good. But there can be an impact, a negative impact on own funds. So that's why the key thing for us is delivering the own funds generation through consistent earnings growth and to be able to withstand market volatility. But yes, you're right. The increase in rates would impact own funds as well. But I go back to just very comfortable in the leverage ratio, in the stock of holdco debt. And we've got another exit -- well, we've got this opportunity in 2028, which we're mindful of. And as I said, we're very, very conservative compared to peers. Now we have very unusually had a one-off payment to a very, very old contract that we've remedied, had zero impact on policyholders and we've got no concerns. It's just a one-off. You answered FNZ?

Yes.

Okay. So any -- I think we have taken all the questions from the analysts in the room. So with that, let's say, thank you very much for being with us today. Yes, sorry, apologies. We received -- so let me read, Tom from Mediobanca. He would like to know if you could elaborate on why the cost of capital is lower for With-Profits customer when writing With-Profit BPAs. So that's his first question. And then on the proof on FNZ, he's asking whether it's going to come through next year, which I think we answered. And what -- we talked about next year and the impact. So maybe without taking that question on the cost of capital with profit fund, I don't know if, Clive, you want to say two words on the With-Profit Fund and the cost of capital in the With-Profit Fund as opposed to what other peers would have in the market.

It's a question of different regulations and governance and environment. So on a strict level, With-Profit Fund doesn't actually have to make a profit because it's written in the context of the trust. However, it does have an expectation not to write to loss. So therefore, there would be a level of margin creation above 0. Without going into too much of the numbers, that means that there would be a lower return on capital in order to make sure in most cases, the fund isn't writing with the expectation of a loss, but it would be nowhere near the level that a shareholder-based capital provision would be of double digits, 14%, or certainly lower than a [ PAE-backed ] organization be looking to return there. So that gives you a different quality of capital. Also, it has no dividends to pay. So it's length -- it can deploy that capital before it needs to cycle back to the owner, which in this instance, the with-profit estate is much longer than you might see in a normal shareholder-based organization. So I hope that gives you a feel of how the different dynamics work in the With-Profit Fund balance sheet deployed compared to the shareholder balance sheet.

Very helpful. And Farooq from JPMorgan, he asked whether we are still expecting to write GBP 3 billion to GBP 4 billion in this market in BPA, which I think we did address. And we are still committed to that because of the diversified proposition that we aim to launch. Update on the 75% cost-to-income ratio and ambition, which we said we remain committed to 70% is the right number, not by the end of the year. And thirdly, well, this one, we haven't explicitly tackled. So if we can talk a little bit more about 60% of our AUM being international, and that's the AUM side. But what's the contribution to revenue and profits? And I think very briefly, let's say that it's probably -- it's all external money. So while in the U.K., we've got a very big internal client that tends to have a lower fee margin attached to it, so it would be less profitable, ceteris paribus. So you'd expect this international business to be slightly more profitable, both from a revenue and bottom line perspective than what you would have in the U.K. So it is good quality growth. And I think someone earlier had asked, what are the margins on this business that we're winning, is it similar or not to what we already have? And I think you say it's brought in line with what we have. It's not money market, it's not passive. As Andrea said, there's a lot of interest in equities and structured credit, real estate debt. So the margins that we're winning on this business are comparable to the stock of existing institutional business. And Tom submitted another one, from Mediobanca, so he's following us live. That's good. So almost why do we set the leverage target at 30% under our own calculations given that it's so much more conservative vis-a-vis peers? I don't know, Kathryn, if you want to...

We have -- we did set that target on a Solvency II basis. We evaluate what rating agencies use, what our peers use. We have to have the right one that we think is relevant for us and our business mix. But we get feedback. We always reevaluate if a metric is the right one. It was set quite some time ago. So that's not to say we'll never reconsider it, but it is the one for now, but we also obviously look at other methodologies as well.

Perfect. So I think that now we are through all the questions. So thank you very much. Thank you very for joining.

Thank you.

Thank you very much.