M&G PLC

LSE:MNG

Earnings Call Transcript 2022-Q2

[John Foley, executive]

Good morning. Welcome to M&G plc's Half Year Results. Over the past 6 months, we have successfully built on the positive momentum achieved in 2021. Despite the current macro uncertainties, the team has worked hard to strengthen our business and, as One M&G, we have achieved a number of important operational and financial milestones. We have leveraged our deep investment expertise to deliver strong investment performance to all our clients across Institutional, Wholesale and PruFund. A superior investment performance helped us to achieve net positive flows in Asset Management and increase sales in the Wealth franchise. We have improved net flows by GBP 3.2 billion year-on-year at a time of heightened volatility and uncertainty when many investors have reduced their exposure to markets. We are confident that the improvements in Asset Management and M&G Wealth are sustainable, and that we can make further progress on PruFund sales now that the proposition is live on the Ascentric platform and in Europe. Future+, our name for PruFund internationally, has been live in Italy since February, and will soon be launched in Ireland. At full year, we shared our new financial target with you, to generate GBP 2.5 billion of operating capital by 2024. I am pleased to say that we have made a strong start in achieving that goal. Finally, despite adverse markets, our Solvency II ratio continues to be very strong at 214%. Now this slide shows our financial highlights. The turnaround in flows builds on the progress we made in 2021. It is a crucial milestone and a lead indicator of the health of the overall business. In only 12 months, we have reversed our position from being GBP 2 billion in net outflows to achieving GBP 1.2 billion in net inflows. The most significant improvements came from the Wholesale Asset Management franchise, that returned to growth after 4 years, and from M&G Wealth, that recovered from its 2021 outflows, thanks to stronger sales and a broader proposition. Adjusted operating profits were influenced by 2 non-cash accounting one-offs, that do not affect capital generation and do not impact our ability to sustain the dividend. Kathryn will cover them in more detail later on. But excluding these one-offs, the adjusted operating profit was GBP 308 million. Operating capital generation for the period was GBP 433 million; roughly 40% up on half year 2021. This was achieved through a rise in the underlying contribution from our Wealth and Heritage operations. We expect this growth to be sustainable in the current interest rate environment. The 214% Solvency II ratio fully deducts the price paid to complete the acquisitions we talked about in March and the GBP 500 million buyback program. I mentioned the importance of strong investment performance and the role it played in supporting flows in a tough half year for our sector. On this slide, you can see how each of our 3 open lines of business delivered value to our clients. The Institutional franchise recorded another period of outperformance. We know many investors are risk-off at the moment because of the macro volatility, but we also know they will return as markets stabilize. And when they do, they will look for trusted partners to navigate uncertain times. We are confident our strong reputation and investment capabilities put us in absolutely the right place to benefit when that happens. The Wholesale franchise continues to evidence a strong turnaround. Whilst mutual fund performance can be volatile, we believe these improvements can be sustained over time, because they are a direct result of clear actions we implemented 18 months ago. The medicine we prescribed, the move to a more team-based approach; tighter performance monitoring; and fund-specific deep-dives, is working. In June, almost 40% of our mutual funds ranked in the top quartile for performance, and nearly 2/3 above median. Finally, the PruFund chart speaks for itself. We have delivered outstanding results in absolute terms, but even more so on a relative basis as other comparable propositions have shown negative returns over the first 6 months of the year. Now as we move from the financial highlights to the operational ones, I want to pause to reflect on our One M&G strategy and how it underpins the strong outcomes we deliver to shareholders. The Asset Owner is the single largest client of the Asset Manager and a critical strategic partner. It is a source of patient capital that gives us the opportunity to play across markets and asset classes. Annual revenues from the internal client have increased to over GBP 300 million, that is a resilient source of income that allows us to plan for the long-term as we build new investment capabilities. In the last 2 years, we have added teams in North America and Asia as part of our strategy to grow internationally. By doing that, we have been able to both repatriate large internal mandates and expand our offering to external clients. Going in the other direction, the expertise of the Asset Manager is crucial to the successful delivery of the asset trading activity of the Asset Owner. As you can see from this slide, this has provided a meaningful contribution to our capital generation over the recent past and will continue to do so over the coming years. But it is through trusted relationships and continued dialogue that the Asset Manager and Asset Owner deliver their best results. Their collaboration and complementary perspectives have underpinned our efforts on sustainability and created some of the most important propositions that M&G offers today, PruFund, PruFund Planet, PruFolio, Catalyst and, of course, our Institutional Asset Management operations. None of these would have been possible without us thinking, working and being One M&G. Turning now to the operational highlights. We are making good progress across all our franchises. We are building solid foundations to deliver long-term sustainable growth, capable of withstanding external headwinds and achieving our ambitious GBP 2.5 billion operating capital generation target. Within the Asset Manager, both the Institutional and Wholesale franchises have delivered positive net flows, a rare achievement in our industry over the past 6 months. Whilst these positive net flows are a continued trend for the Institutional team, they represent a crucial turning point for Wholesale, and are an important part of our strategy to unlock growth at M&G. Our continued push into Europe was a key enabler here, as it allows us to access markets where we have historically been underweight, broadening our reach and reducing our reliance on the UK. Within Retail & Savings, we have been busy building the foundations for growth, integrating new capabilities and bringing PruFund to Europe. The most important milestone for the Wealth business was the launch of PruFund Planet on the M&G Wealth platform in the UK last month. Combining PruFund's excellent track-record with a digital and efficient route to market will provide further impetus to our ambition to increase sales. And I will cover each of these areas more in detail in the coming slides. Starting with Institutional Asset Management, our largest open franchise, with GBP 102 billion under management. This team has delivered consistent growth period-on-period over the past 3 years. Whilst the first half flows were only marginally positive, we started the second half with a couple of large wins in July. I am proud of what we have achieved, continuing to build momentum despite the economic backdrop. Over the past 6 months, we have seen a number of clients delaying investment decisions due to macro uncertainties. As this trend reverses, our strong reputation means we are well positioned to capture any emerging demand. And our pipeline remains strong, with a number of advised wins that are yet to be funded, and a GBP 4.4 billion capital queue ready to be deployed in private assets. M&G's success in Institutional Asset Management is based on differentiated capabilities, excellent returns and product innovation. We are confident that these elements will continue to underpin our future growth. Our pre-eminent position and global platform as a Public Fixed Income manager is the ultimate door opener. As our credentials are established we introduce clients to higher-value private and alternative assets. With over GBP 75 billion of dedicated assets, we are a leading European player in private markets. These capabilities, combined with our strengthened equity proposition, drive value for both M&G and our clients. While the UK remains our core market, we have also targeted and achieved growth overseas. We have an established presence in Europe, in the Netherlands and in the Nordics in particular, and we have successfully pursued targeted opportunities in Asia. With GBP 51 billion of assets under management, Wholesale remains a key component of our Asset Management operations and an important contributor to M&G's long-term growth. The outflows we saw in 2019 and 2020 were a clear sign that we needed to take corrective action. So, we pursued a 4-pronged approach: starting with performance, but also improving the relevance of our offering, the effectiveness of our distribution, and client value for money. The leadership team was fully aligned on the need to revitalize our Wholesale business and, together, we have delivered great progress. Outflows reduced steadily over time and we have now achieved positive net flows of GBP 800 million in the first half of this year. It was the combination of multiple actions that enabled us to achieve our goal, but nonetheless, I want to highlight 2 examples that demonstrate the importance of continuous product innovation and client engagement. On product, we seeded Global Listed Infrastructure which has become one of our most successful mutual funds. It has grown from only GBP 550 million in December 2020 to GBP 3 billion at the end of June. And on the client front, we deepened our collaboration with key distributors, particularly in southern Europe, focusing on developing client-specific investment solutions. For one of these partners, we are now managing 9 sub-advised mandates with total assets under management of GBP 1.6 billion, up from 3 mandates and GBP 600 million just 18 months ago. Now, the challenges of the recent past mean we are far from complacent. We are acutely aware of the volatility and uncertainty in the market and remain focused on making sure this very encouraging progress is sustained into the future. Now moving on to Retail & Savings. We launched M&G Wealth only 12 months ago, bringing all our UK retail capabilities under 1 banner. We have made excellent progress since then. We have broadened our advice, added a digital platform and launched new investment solutions. Our objective is to build a wealth manager that supports a customer's lifetime needs, offering them a consistent experience and superior returns. We know we are not alone on this path, there are several players in the UK, each with their own different business model, all moving closer to the end client. But not one of them can offer PruFund, our GBP 51 billion multi-asset proposition with its unique smoothing mechanism. PruFund is the key differentiator. We will expand our offering around this anchor proposition to turn M&G Wealth into a primary distribution channel for the asset manager capabilities, supporting its flows with long-term resilient business. We continue to deliver on our strategy to grow M&G Wealth, both organically and through acquisitions and partnerships, giving us access to large and fast-growing segments of the market. Just last week, we announced the acquisition of Continuum, a small high-quality IFA business that adds 60 advisers to our team. With Sandringham and Continuum, we have expanded our adviser base, strengthening controlled distribution. Working with Moneyfarm, we will soon launch a D2C offering, which will improve our reach to a younger demographic and give us the opportunity to acquire customers earlier in their lifecycle. We have integrated Ascentric into our broader IT infrastructure, which means we can now bring PruFund to more advisers and more customers, more efficiently. Through TCF, we can now operate in the model portfolio and discretionary fund management space. All of these are important components of the vision for M&G Wealth that we are building day after day. To achieve this vision, we have deployed capital in a targeted and disciplined way, opening up opportunities in attractive and growing markets that are supported by favorable dynamics. Now, talking about attractive markets, I could not end this business review without mentioning Future+. We launched in Italy only a few months ago and, in July, we signed a distribution agreement in Ireland. The opportunity is huge. PruFund is a real success story in the UK and we have the same expectation for Europe. Our strategy is to focus on delivering successful pilots in these first 2 European markets to prove the strength of the proposition. That will put us in a much stronger commercial position when we discuss future distribution agreements. And to be clear, as you can see from our own history in the UK, PruFund sales can grow exponentially in a short space of time. But we have learnt to be patient, we will use the pilot program to make sure we get operational delivery right, as advisers become more familiar with the proposition and its compelling features. So, as we look ahead to the coming months, we have clear priorities that we are already addressing. In Institutional Asset Management, we are expanding our international footprint both to increase private asset origination capacity and broaden client reach. In Wholesale, we need to keep up the good work completed so far: relentlessly focusing on performance, driving product innovation and deepening client relationships. Driving sales will be the main focus for M&G Wealth, both with PruFund, now available on platform, and across our broader proposition, including newly launched model portfolios. For Future+, it is all about delivering a convincing proof of concept, building momentum and demonstrating the validity of our multi-country strategy. Finally, we know that external headwinds might further worsen if the current inflationary environment persists. Driving efficiencies across the business is a key priority for me and for all the members of the executive team. We have proven repeatedly over time that we can deliver strong, reliable capital generation to underpin our attractive dividend and enable the deployment of excess capital in our growing businesses. After achieving our demerger commitments 1 year ahead of schedule, we announced a new GBP 2.5 billion operating capital generation target for the coming 3 years, comfortably covering prospective dividend costs. We have already made a strong start towards meeting this goal. Thanks to the strength of our capital position, we are pursuing a balanced approach to capital management with financial flexibility remaining our key priority. In March, we ringfenced GBP 300 million to manage M&G's leverage position, and we are closely monitoring rates and spread movements, evaluating market opportunities. In the meantime, we continue to deliver on our dividend policy, declaring today an interim dividend of GBP 0.062 per share, a 2% increase on last year. Through dividends alone, we have now returned over GBP 1.5 billion to shareholders, and in addition we are executing a GBP 0.5 billion buyback program, having deployed almost GBP 150 million to-date. And of course, we continue to assess investment opportunities that can accelerate our corporate strategy. So, consistently strong capital generation has allowed M&G to pay attractive dividends and to start its first buyback program. As you know, since listing in 2019, we have returned GBP 2 billion to our shareholders, equating to roughly 35% of M&G's market capitalization at demerger. Our dividend per share has grown every year since 2019, and it is set to increase further as we maintain our absolute dividend cost flat, while we reduce the total share count through the buyback. To wrap up then. At the start of the year, I was quietly confident that this would be a good period for the firm, but even I was impressed by how we performed given the challenging external environment. This result is entirely down to the hard work and dedication of the great team we have at M&G, and I thank them for their efforts. The shift from net outflows to net inflows is a key moment for us, and I am confident that over the coming period we will build on this. The progress made in M&G Wealth in a little more than a year is encouraging. It has all the building blocks it now needs to become a major player in the UK market. We recognize the importance of reliable and increasing shareholder returns, even more so in these volatile times. We have made a solid start to our GBP 2.5 billion capital generation target, and with a strong Solvency II ratio can continue to deliver superior returns. I'll now hand you over to Kathryn.

[Kathryn McLeland, executive]

Thanks, John. I'm delighted to be here today, 3 months after joining M&G, to go through the financial details of our first half results. During the first 6 months of the year, our performance demonstrated the benefits of our diversified business mix, with our One M&G strategy capable of withstanding macro headwinds, as we made a solid start on our journey to generate GBP 2.5 billion of operating capital over the next 3 years. External net flows were positive at GBP 1.2 billion, as we turned around Wholesale Asset Management, added another period of growth in Institutional, and reversed flows in M&G Wealth. Total AUMA, at GBP 349 billion, was impacted by GBP 25 billion of negative market movements. Adjusted operating profit of GBP 182 million included 2 non-cash one-offs; the first triggered by the duration mismatch of the asset and liabilities in the annuity portfolio, the second by the exposure to the US dollar in our holdco debt. Excluding these items, AOP was GBP 308 million, more in line with the first half of last year. As these items are non-cash accounting adjustments, they do not affect our ability to generate capital or fund the dividend. Operating capital generation increased to GBP 433 million, up GBP 124 million year-on-year, underpinned by a strong growth in underlying capital generation. Total capital generation was GBP 24 million, as those strong operating results and the benefit from rising interest rates were largely offset by weak equity markets and widening credit spreads. At 214%, our Solvency II ratio is modestly down on the 218% from the full year, despite the payment of the final dividend in April, the acquisitions of Sandringham and responsAbility, as well as the investments in TCF and Moneyfarm. The ratio also now fully deducts the GBP 500 million share buyback we announced in March. Taking a closer look now at assets under management and administration. These were GBP 349 billion at the end of June, 6% lower than the GBP 370 billion recorded at year end. I'll cover external net flows in a moment. It is first worth noting that our open business was in net inflows over the period, continuing the positive trend from the second half of last year. As expected, net outflows from the Heritage book remained stable, and in line with recent experience. The GBP 25 billion negative impact from market movements is a pleasing result given the simultaneous contraction in equity and fixed income markets which we have witnessed over the past 6 months. A strong relative investment performance, diversified exposure by asset class and geography, and a weak pound, all helped to support M&G's assets. Finally, the completion of the acquisitions of Sandringham and responsAbility added GBP 2.4 billion and GBP 2.9 billion respectively to our asset base. At the end of the first half, net flows from external clients in our open franchises were GBP 1.2 billion positive, GBP 3.2 billion better than the first half of 2021, with both Institutional and Wholesale Asset Management being in net positive territory. Our Institutional business continued to extend its growth track record with net flows in the period of GBP 300 million. The figure is lower than we have seen recently, but we are confident about how the business is positioned and its future prospects. As you know, new business flows can be lumpy and, as John said, we've made a good start to H2, winning some large mandates in July. We have a healthy pipeline with over GBP 4 billion in the capital queue and a further GBP 2 billion of advised wins. While investors retained a prudent stance in the first half of the year, we remain a trusted partner for them, and they continue to look to us for help in navigating these volatile markets. The turnaround in Wholesale is evident in the first positive inflows since June of 2018 at GBP 800 million, GBP 4.2 billion better than H1 '21. This steady improvement is not the outcome of a temporary value rotation, as less than 15% of our wholesale assets are in equity value funds. Rather, the improvement is the result of a number of deliberate actions, which we have talked with you about over the past few years. These actions have delivered improved investment performance, a more relevant proposition and better value for money. Our expansion in Europe and the deepening of local partnerships were key factors helping to drive flows. Although the progress is encouraging, we of course remain focused on building further on this momentum. Finally, Wealth flows improved by almost GBP 1 billion year-on-year, continuing the trend seen in the second half of last year. The differentiated proposition of PruFund, which has maintained its strong investment track record, together with improved service levels and increased digitization, supported flows over the first half. As we look forward, we expect the launch of PruFund on our UK platform and the roll-out in Europe to contribute to our growth. As you know, we are also broadening our Wealth proposition to increase non-PruFund business, and earlier this year we added model portfolios to our offering. Turning now to our H1 adjusted operating profit, which you can see on Slide 23. The first half AOP was GBP 182 million, with the year-on-year reduction mostly driven by annuity mismatching and FX movements. Ignoring these purely accounting losses, which have no impact on capital generation, the first half AOP was GBP 308 million. Mismatching losses, which are in Heritage, relate to the different duration profiles of our annuity liabilities and the assets backing them. Although these are matched on a cash and capital basis, annuity assets have a longer duration than liabilities under IFRS standards. This means that in IFRS accounting, but not capital, rising rates lead to a faster reduction in asset values than in liabilities. The difference between the opening and the closing balance sheet needs to be bridged through the P&L, this time with a loss. The size of recent Sterling swap rate increases drove the GBP 78 million negative impact in the first half. A similar effect occurs in the Corporate Centre, where we record FX gains and losses. As one tranche of our debt is US dollar denominated, we are required to mark it to market at each period end. The 11% strengthening of the dollar in H1 restated the IFRS balance sheet of this tranche of debt at the end of June. The resulting GBP 48 million difference in value was once again bridged through a non-cash accounting loss. Stripping out these 2 negative impacts, the first half adjusted operating profit is GBP 308 million, significantly closer to the result of the first half of last year. We were encouraged by the businesses' underlying AOP results, with Wealth profits up by GBP 60 million driven by strong PruFund transfers and asset management delivering a relatively robust performance, but with negative investment income impacting profitability in the period. I'll dive into asset management now in some more detail. We've already covered the net positive flows in both Wholesale and Institutional, as well as the overall asset base which remained broadly stable despite volatile markets. Looking at the P&L, you can see that revenues held up extremely well, reaching GBP 492 million, a 7% increase compared to the first half of 2021. The consolidation of our South Africa JV, which occurred in July last year, contributed to the improvement, together with our underlying operations. In particular, the Institutional franchise continued to show strong momentum, while the Wholesale franchise, now back to net inflows, can return to being an important contributor to our overall business growth. The increase in costs to GBP 367 million similarly reflected the consolidation of the South Africa JV as well as our ongoing efforts to set up the business for sustainable growth, plus some inflationary impacts. It's important to state that we are of course acutely aware of the inflationary pressures, and we will continue to be disciplined on costs and focused on driving efficiencies to free up resources and redeploy them in attractive opportunities. We are however encouraged by our positive flow and revenue performance to continue with our asset management strategy and invest thoughtfully for growth. This strategy is working. Since last year we strengthened our Equity, Sustainability, and European Distribution teams. These investments increased our cost base, but they have also been instrumental to the growth we have seen in the first half. Our Equity strategies attracted almost GBP 2.9 billion in net inflows, with the vast majority coming from European clients. Moreover, we continue to invest in private asset capabilities; and with over GBP 75 billion of assets under management, we are one of the leading players in Europe. Over the medium-term, we expect asset management revenues growth to outpace cost pressures, and the cost-income ratio to reduce gradually. Performance fees were higher than 2021, although as you know we expect the bulk of these fees to be earned in the second half. Investment income reflects losses triggered by recent market volatility, but we would expect these to reverse as markets normalize. As you can see on the chart on the right, Institutional and internal margins have remained broadly stable. The small compression in Wholesale was expected and reflects the tail-end of the fee review implemented in February of 2021. We do not foresee further action on Wholesale fees and expect margins there to remain roughly stable over the short to medium-term. Turning now to our Retail & Savings business, which you can see on Slide 25, and starting with the Wealth segment, where we focus on its largest contributor to earnings, PruFund in the UK. Adjusted operating profit increased to GBP 74 million, underpinned by a [ GBP 22 million ] higher shareholder transfers that benefited from the positive unit price adjustments that took place in 2021. The higher transfers more than offset the change in the hedge result that was triggered by a bigger tranche of equity hedges running off this year. Finally, thanks to decisive action on costs, the expense overrun we experienced in 2021 did not reoccur, allowing us to release GBP 15 million of a provision we had set aside. This is a positive one-off that won't repeat in H2. The shareholder transfer is a function of gross outflows and investment returns. As outflows marginally reduced, strong investment returns were the primary driver of the improved transfer, together with the excess surplus distribution announced in February. As you can see from the chart on the right, PruFund's performance continues to be outstanding, having triggered several upward unit price adjustments over the past 2 years. Net flows broke even in H1, driven by a GBP 600 million improvement in sales, which helps to underpin the value we expect to generate from PruFund over the coming years. This slide looks at our Heritage business and its 2 components: Traditional With-Profits and Shareholder Annuities. Traditional With-Profits continued to deliver a solid underpin to our earnings, with adjusted operating profit of GBP 121 million. Here again, the shareholder transfers benefited from the strong returns credited to customers, and from the GBP 1.5 billion excess surplus distribution from the With-Profits Fund. This distribution will continue to feed through shareholder transfers as customers withdraw their money. Looking at Shareholder Annuities AOP on the right hand side, you can see that the deterioration in the return on excess assets was more than offset by an improvement in the asset trading result. The line that showed the biggest variability year-on-year within the Other line, where we experienced the GBP 78 million negative impact from mismatching. In addition to this, in the prior period, we had a number of positive one-offs such as provision releases that did not reoccur. The Other line comprises a large number of moving parts, and we would typically expect it to be marginally positive over the medium-term, although it can of course be volatile over the short-term. As usual, we will implement new mortality tables in the second half, calibrating CMI20 to our own experience. Staying with shareholder annuities, I want to provide an update on the credit quality of the assets backing our annuity book. As you can see, we remain conservatively positioned with only 19% of our assets rated BBB and just 2% below investment grade. This asset quality compares favorably with peers, as we didn't re-risk our portfolio over recent years. Year-to-date, we've not experienced any defaults, and downgrades have been minimal, well below the 2021 levels and within our long-term expectations. Our balance sheet is also protected from inflationary pressures, with inflation-linked annuity liabilities well matched with inflation-linked assets. Given the strength and credit quality of our assets, we remain comfortable with the shape of our balance sheet despite the recent market volatility, although of course we are vigilant about inflationary risks and the broader macroeconomic environment. You can find the main sensitivities of our balance sheet in the Appendix of this presentation. Turning now to capital generation on the next slide and starting with the operating result. We were pleased with the GBP 170 million increase in underlying capital generation year-on-year to GBP 386 million, primarily driven by a higher contribution from Retail & Savings. Within it, PruFund and Traditional With-Profits benefited from 2 factors: the removal of the expense overrun on new business, and improved policy values at the beginning of the year. On the former, eliminating the expense overrun triggered the provision release we talked about earlier and reduced the capital drag of new business. On the latter, the continued strong investment performance we deliver to customers has increased the present value of shareholder transfers and the returns we realize on it. Sticking with With-Profits, we have also changed the classification of our equity hedges. As you are aware, our rolling hedging program reduces capital requirements triggered by the PVST. Each year, a tranche of the hedges expires and we replace it with a new one. While in the past we recognized the negative impact on capital from the expiring hedges in the underlying result, we now classify it as other capital generation. This is now aligned with how we treat the positive impact from any new tranche of equity hedging we put in place. Finally, within the annuity book, higher interest rates led to a GBP 17 million improvement in expected returns on excess assets. As you are aware, return assumptions are locked at the start of the year, and determine the underlying capital generation of the book for the following 12 months. You can therefore expect this increase to persist in the second half. At GBP 47 million, management actions were lower than last year primarily due to the reclassification of these equity hedges. While management actions can be lumpy in nature, we have a clear pipeline of initiatives that we continue to work on, and that will contribute to capital generation in the coming years without impacting the level of prudence in our balance sheet. In January, we started the 3-year journey to achieve our new GBP 2.5 billion operating capital generation target. The GBP 433 million achieved in H1 is a very solid start. We remain focused on driving strong underlying capital generation, while creating additional value through management actions. Today's results should provide comfort around our ability to sustain our dividend through market cycles. As you can see, in only 6 months, we generated nearly enough capital to cover the entirety of the GBP 465 million in yearly dividend costs. When we look at the total capital generated over the first 6 months, you can see the impact of economic variances. The scale of movements seen across equity and fixed income markets led to a reduction in surplus of almost GBP 500 million. At period end, the Surplus and Solvency II ratio included a number of other meaningful movements. The final dividend paid in April, the inorganic investments in wealth and private assets and the full quantum of the buyback program. These items totaled roughly GBP 1 billion and accounted for a 20 percentage point reduction in the coverage ratio. The final Solvency position, at 214%, continues to be very strong and is, of course, above the top end of our 160% to 190% range. We follow the capital management framework we published in March, and of course assess opportunities to deploy or return excess capital. While investing in the business remains our priority, we will always take a very disciplined approach to capital management focused on improving shareholder value. We also remain vigilant as to possible opportunities to act on leverage. At the end of June, the Solvency II coverage ratio was 214%, and the leverage ratio 31% on a pro-forma basis, up from 28% at the end of last year. We calculate the pro-forma leverage by netting off from both Own Funds and the nominal value of outstanding debt, the GBP 300 million we earmarked back in March. As we said at the time, we value the optionality this gives us, to deploy depending on market and interest rate developments, which have obviously been quite significant over the past few months. While the leverage ratio increased to 31%, we remain comfortable with the temporary move above our preferred 30% threshold. This is because the increase is not driven by an increase in total debt, but by a market-led reduction in Own Funds. These economic variances do not impact our ability to service the debt, and we continue to remain very comfortable with its quantum, given our resilient cash generation and strong capital position. Before wrapping up, I want to share the usual indications of how we expect the business to develop in the near future. In asset management, the operating environment continues to be challenging with volatile equity and bond markets. Nonetheless, we are encouraged by our performance this year. As a reminder, from the 1st of July, we will consolidate the responsAbility results in our financials, leading to an estimated increase in revenues and costs of GBP 50 million and GBP 45 million respectively, on a yearly basis. Within Retail & Savings, we aim to continue improving PruFund flows and build scale in non-PruFund propositions. While adding PruFund to the UK digital platform is an important step, we expect the impact on flows to build gradually over time. In Heritage, the Traditional With-Profits should continue to deliver steady earnings, and we have the same expectations for the Annuity book, albeit noting that returns on excess assets will gradually decline over time. Future+, our version of PruFund in Europe, offers a compelling growth opportunity. But as John mentioned, the priority for this pilot phase is to deliver a successful proof of concept with strong investment returns and smooth operational delivery. Our guidance for the Corporate Centre remains unchanged, of course please do continue to track the impact of moves in the Sterling exchange rate on our US dollar subordinated debt. Finally, while we do not underestimate the threats from inflation, we believe the balance sheet is well positioned, and we are committed to continue driving efficiencies to keep our cost base under control. To wrap up, I'd like to reiterate the key messages from today's results. The performance from the first 6 months of 2022 has demonstrated the benefits of our diversified business mix. In particular, the Asset Owner and Asset Manager combination, at the heart of our One M&G strategy, has enabled the Group to withstand macro headwinds and make a strong start towards achieving the GBP 2.5 billion operating capital target for our shareholders. Despite volatile markets, we continue to be in a very strong capital position with a Solvency II ratio of 214%. The Heritage operations provide a strong and resilient underpin to our business, while Asset Management is back into net inflows, offering high recurring revenues and capital-light growth opportunities. Through M&G Wealth, we can tap into a large and expanding market to drive long-term value creation. And of course, given the inflationary and broader macroeconomic headwinds, we will continue to be disciplined on our cost spend and capital deployment. Importantly, I would like to conclude by thanking all our colleagues for their hard work and dedication over the past 6 months. Thank you.

[John Foley, executive]

At the full year, I said that the business had reached an inflection point. Another encouraging set of results is further evidence of that statement. Our momentum is increasing and we are well set to take advantage of market opportunities. We have delivered a strong and improving investment performance, set against what has been a tough period for our sector. Buttressed by Wholesale, we have made excellent progress on flows, moving from net outflow to net inflow, a crucial milestone. And we have made good progress on our Wealth strategy too. Capital generation is strong, which will allow us to both invest in the future of the business and, as the latest increase in the dividend per share demonstrates, deliver compelling shareholder returns. Thank you for watching.