Welcome to the M&G plc Full Year 2022 Results Presentation. We will now go live to Luca Gagliardi, Director of Investor Relations.
Hi there. Good morning, everyone. I'm Luca Gagliardi, Director of Investor Relations here at M&G. Welcome to our 2022 full year results. I'm joined today by Andrea Rossi, Group Chief Executive, and Kathryn McLeland, Group CFO. Today, we'll go through the presentation slides first, and after that, we'll have time for Q&A, both in the room and for those on the line, you can submit questions online. Without further ado, I'll hand it over to Andrea.
Thank you.
Andrea.
Thank you, Luca. Good morning and welcome to M&G's 2022 full year results. This is a special day for me, as this is my first investor presentation as Chief Executive. Let me say, I'm very pleased to be here addressing you today. I will start by giving you clarity on my long-term ambition for the firm, what we want to be, and how we're gonna get there. Kathryn will then take you through the financial results, which I'm pleased to say demonstrate once more the resilience of M&G in what has been an extremely tough trading environment. First, I'd like to restate the reasons why I was excited to join back in October 2022. When I looked at M&G, I saw strong foundations upon which I could build a compelling success story, delivering the step change in profitable growth that has been missing since listing.
In our differentiated business model, with the Asset Manager at the center, supported by heritage and wealth, we have an advantage envied by many. In PruFund, we have a generally unique proposition. We have an exceptional brand and investment capabilities. We have talented colleagues. We're financially strong, and we have long-term relationships with a wide range of clients. I'm also clear there are significant opportunities to do more and things we can do better. I have three priorities that I will keep returning to. First, financial strength, continuing to prove we are good stewards of shareholders' capital. Second, simplification to deliver a more efficient and accountable organization. Third, growth, targeted, profitable growth that leverages on our strengths. Our differentiating business model is the one main reason why I wanted to join M&G. It all starts with our clients, the only reason we exist.
We have three distinct yet balanced and complementary parts. We lead with the Asset Manager, the core of our business. It both serves and is supported by heritage and wealth. Working together all thrive. The Asset Manager provides strong investment expertise to all its clients. Our heritage business is the largest one of them, and with its permanent capital and long-term investment horizon, supports much of product innovation. The resilience of the cash flows from the back book is critical, but what is often overlooked is the extent to which the Asset Owner drives the Asset Manager to improve on innovation, on service, and more, which benefits everyone. Our wealth business enhances our reach through strong brand and intermediary relationships. With PruFund at its core, it is able to serve U.K. customers across the full distribution spectrum.
The outcome is a differentiated and balanced business model delivering strong shareholder returns. Our business model gives us a strong foundation that we will build on. In the Asset Manager, we have excellent investment capabilities. These attributes do not appear overnight. It takes time to get your offer right and hard work to remain relevant. We are still too U.K.-centric and lack scale in international markets. Our processes are too complex, which is not only expensive, but hinders growth and innovation. The simpler an organization is and the less layers it has, the closer it is to clients. For example, we made amazing progress in wholesale, simplifying our offering and improving performance. I know we can and must do better. Within return savings, we have two components. First, wealth. People ask me how we will compete in what is a crowded space.
Well, we have scale and a strong brand, but the real answer is PruFund. No one else can operate, and it is what we will lead with. However, it is too difficult for new clients to access. With the acquisitions we have already completed, we can deliver an end-to-end proposition that few others can match, but we are yet to fully integrate them into a seamless digital client journey. Our second component is heritage. Its resilient capital generation underpins the group's leverage and the dividend. Further, it reduces volatility in our earnings. Yet, while being reliant on the back book, we have failed to set a long-term vision for it. Ensuring this engine continues to run is critical to the success of the group.
To that end, we will be alert to opportunities to thoughtfully extend its life. Finally, we want to accelerate the rollout of PruFund across Europe, broadening our reach where we are already present, and finding new partners in new markets. We are a leading international savings and investment business, acting responsibly towards our many stakeholders. Guided by our purpose, what is my ambition? To deliver sustainable, profitable growth for our investors and leveraging our differentiated business combination. We will do this by prioritizing those areas that offer recurring and diversified earnings that are fee-based and capital light. How will we do this? By putting clients at the core of everything we do. We have to be nimble enough to anticipate and respond to their needs, always delivering great service and value.
We will lead with our Asset Manager, but continue to leverage the permanent capital of our heritage business and the increasing scale of our wealth distribution. To achieve our ambition, we need to win in our home markets. I'm clear on this. We are also an international business, and this must be a profitable growth engine for the group. This will generate long-term superior shareholder returns and drive growth. Allow me to restate our priorities. Financial strength, simplification, and growth. I have spoken about strong foundations. The greatest one of these is our financial strength, a rigorous approach to capital management that underpins attractive returns to shareholders. This is the discipline we need to maintain. There is no doubt that to achieve our ambition, we need to simplify and grow.
The centralized structure was necessary at the merger, but now that we are well established, it's a barrier to growth. We will empower our colleagues, moving operational accountability into the business lines, closer to clients. This will make decision-making more efficient and improve client outcomes. It will also enable our people to drive profitable growth, building on our strengths and our own compelling propositions. Let me now explore a little deeper into each one of these three priorities. Let's start with our first priority, financial strength. I restate our capital generation target of GBP 2.5 billion. We're one year in and on track to deliver. Over the coming years, we're not just looking to increase the quantum of capital generation, but also to improve its quality. Prioritizing growth in asset management and wealth, diversifying our sources of income, and reducing our reliance on management actions.
When we think about our financial strength, we use three key metrics: solvency ratio, leverage ratio, and HoldCo liquidity. Despite the ongoing market volatility, our solvency ratio remains very strong at 199%. At 35%, our leverage ratio is about where we would like it to be. We will reduce this to below 30% by 2025. At HoldCo level, we will maintain sufficient liquidity to cover any expected cash outflows. I'll now turn to capital management. Here, we want to prioritize debt reduction and thoughtful investments that align with our existing strength. This will minimize execution risk and create long-term sustainable value for shareholders. Delivering our growth agenda will add financial flexibility to the group. This will then enable us to further improve shareholder returns and fund incremental growth opportunities. Let me be clear.
Throughout this, we will maintain attractive dividends covered by ongoing capital generation. Let me move now to our second priority, simplification. Growing the top line is my primary objective, In order to achieve it, we need to be focused on the bottom line and simplify the way we work. I want us to act faster and more efficiently. To enable this, we launch a transformation program that will generate GBP 200 million of cost savings by 2025. This is ambitious but achievable. The savings we'll deliver will allow us to absorb current inflationary pressures and free up resources for growth. Our asset management cost-to-income ratio is too high. By 2025, we will reduce it to below 70%. This is not the destination. Our longer term objective is a ratio in the range of 66%-68%.
Since I joined, we have already made good progress on execution. We have hired a new strategy and transformation officer, Benoît Macé. We have launched a group transformation program, we have empowered the business unit CEOs, we have hired Joseph Pinto as our asset management CEO. Transforming our business, we will empower colleagues and improve accountability, making M&G a better place to work. We will be easier to do business with, deliver better client outcomes, and drive growth. At the same time, we will meet a GBP 200 million cost target by doing four things. Simplify our organization, removing layers and streamlining governance. Improve operational efficiency by optimizing spend and aligning teams to our growth priorities. Better leverage technology using digital and data to improve client service. We will review our approach to contractors and our location strategy.
To start progressing towards our targets, we are today announcing a voluntary redundancy program across the entire organization. To our third priority, growth. As I've seen throughout my career, delivering on simplification unlocks growth. Our aim is to materially grow our earnings by 2025. They will be more focused in the capitalized areas of asset management and wealth. Within asset management, the priority is to increase third-party money and revenue. This is what I was able to achieve in my time at AXA IM, where external funds almost tripled under my leadership and profit doubled. We have tailwinds in our favor. Wholesale investment performance has substantially improved and is now very strong. We also have deep expertise in parts of the market that are attractive today. First, public fixed income, where rates and spreads are significantly higher than in the recent past.
Secondly, in private asset, in private assets, where we see many of our European clients still being under-allocated. Finally, sustainability and thematic investing, where client demand continues to remain high. Turning to wealth, we have all the components we need to serve clients along the entire value chain. We have a clear focus on the mass affluent segment, a strong brand and scale. It is now all about execution. While growing capitalized areas, we also want to stabilize the run of our heritage business, removing a structural headwind from our earnings. We will do that by continuing to develop innovative risk and investment solutions to generate additional incremental flows into the back book. I will now deep dive into each business area to better articulate our strategy, and we will start with the Asset Manager. Let me take a drink first.
The Asset Manager already has a well-diversified set of capabilities with real scale in private assets. GBP 77 billion split across private fixed income, real estate and infrastructure. From this strong base, we need to push on and do better. We have a supportive internal clients alongside a very successful external franchise, not just on the institutional side, but also in wholesale, which over the course of the year outperformed peers in investment performance and flows, continuing the turnaround started in 2021. The U.K., our home market, is our largest. We have an established presence in Europe and Asia. It's a great base from which to build a profitable growth engine for the group. The numbers on this slide are clear evidence of us living our purpose of growing people's savings and investments.
On both institutional and wholesale side of the business, the performance has been strong in 2022, despite the market volatility. The turnaround of our wholesale performance is a credit to the hard work of the team. That we have strong investment capabilities is self-evident. As I've said earlier, we must build our international distribution and through better operational efficiency, improve our cost-to-income ratio. We are present in all the major European markets, but in many we are below the size I would expect. In most European markets we operate in, we should manage GBP 10 billion of client assets or more. In Asia, Singapore aside, we are nowhere near the size we need to be. Across the region, we will focus on the countries where the regulatory environment is supportive of what we offer. Japan, South Korea, Taiwan. I know this market well from my past experience.
They can offer meaningful opportunities. We need to play a much bigger role there. The growth I'm targeting will not require major investments in infrastructure or systems, rather the selective strengthening of the local teams. We will absorb cost inflation and free up additional resources to invest. Over time, our cost-to-income ratio will reduce meaningfully as we identify and deliver efficiency measures. Joseph is the right person for the job. He was my chief operating officer at AXA IM. Together, we transformed that business, relentlessly driving third-party flows and operational efficiencies. What's our ambition? In asset management, we want to be the go-to manager for European investors and for those international investors seeking exposure to European assets. As you know, we have strong capabilities in private assets.
Public fixed income is a core strength. We have responded to strong client demand for high-quality, sustainable and thematic equity funds. Let me take you through each in more detail. Let's start with our private assets franchise. As you can see, we have consistently grown over time with third-party assets more than doubling since 2015. It's an impressive achievement. A trend we will continue with a target of 100 billion AUM by 2025. Why am I so confident? Because we have excellent capabilities, a strong track record, and favorable market trends. The market is forecast to grow materially over the medium term. The industry recognizes us as a leading player. A number of our European clients are under-allocated in this area and are looking to us to help them adjust their exposure to private markets.
To win, we need to make better use of our differentiated business combination, which is our competitive advantage. The Asset Owner provide us with the seed capital to fund innovation and scale propositions. We use this to attract new investment capabilities. We offer seeding and international distribution to those fund managers that are looking for new partners. For our parts, we attract rare talents and maximize the alignment of incentives. We have done it already. Over the past decade, we turned an internally focused real estate capability established to support internal clients into a global franchise, generating far stronger margins. We have achieved that by broadening our offering, internationalizing our footprint, and externalizing our capabilities, focusing on attracting third-party money. We have more than doubled the size of the book from GBP 16 billion to GBP 33 billion, more than tripling the external assets, where we earn materially higher margins.
This is the model we will look to follow in other areas. Let me now turn to public fixed income, the second area of focus. To put it simply, in the U.K., our reputation is second to none. We are clearly seen as the leaders across all the relevant subsectors of the market, and there is a very good reason for this. That is the strength of our team, one of the largest and most experienced in Europe with over 50 credit analysts. We have further expanded our capabilities, opening in North America in 2021 and in Asia in the middle of 2022. We now have a real global investment reach in this space. Again, the internal client has played a critical role in supporting the development of these capabilities. Build internally, then expand externally.
Let's now move to our third area of focus, sustainable and thematic equity funds. Like private assets, this is another segment of the market where we have deep investment expertise and where we expect to see strong growth. In both the private and public side, the market has been growing exponentially over the past few years, a trend expected to continue. As the graph on the right shows, even with all the macro uncertainty we've seen in 2022, sustainable funds have continued to gather positive net flows in Europe. Through Catalyst and responsAbility, we already are one of the leading European investors in sustainability. Again, as evidence of a key role played by the internal clients, Catalyst was set up with a GBP 5 billion commitment from the Asset Owner and will soon open to external clients. On the public side, we have transformed our mutual fund offering.
Just two years ago, only 14% of our funds were Article 8 and 9 compliant. Today, that stands at 74%. A great performance and further evidence of us living our purpose. We remain committed to broadening our offer as well as proactive engagement to effect positive change. Let me now turn to wealth. Let me restate our ambition. To be a leading, scaled, integrated provider of wealth solutions supporting U.K. mass affluent clients across a full range of needs. To achieve this, we have three linked priorities. Integrate and scale our capabilities to provide the end-to-end offer required to succeed. Drive flows into our own solutions and improve the lifetime value of clients through better margins and persistency. When I compare where we were in 2020 with today, the team has made good progress.
Facing a slowdown in DB to DC transfers, we have broadened our offering beyond PruFund , adding a tax wrapper and model portfolio capabilities. We also acquired a digital platform to make our products more accessible. We have strengthened our distribution model, doubling our advice business and launching hybrid and direct-to-consumer propositions. We have covered a lot of ground, we are only part of the way into the journey. Today, we play at scale across the value chain with GBP 83 billion of AUMA. Healthy growth has returned. PruFund sales are up 42% year-on-year, returning to net inflows for the first time since 2020. This confirms the strength of our diversified distribution model and the attractiveness of our proposition. As we continue our journey, we will grow further the number of our own advisors and their productivity.
We will launch all PruFun d solutions on platform and increase its adoption by more advisors. All this to drive in additional incremental flows into both PruFund and other M&G solutions. The primary objective for wealth is to serve clients their way, be that channel, wrapper, or advisor offer. This will drive flows into M&G solutions, which draw on our broad investment expertise. As we do so, we will attract more clients. They will stay with us for longer and trust us to look after the greatest share of their savings and investments. This will help us become more efficient and drive better returns. Lastly, I will turn to the part of the group which supports all of what we do, heritage. I'm gonna drink again. Fifth try. Our aim is to develop new innovative solutions that can drive flows to support our growth.
This will also extend our capital generation capacity that will continue to provide a resilient underpin for our cash flows. Over the past few years, we have delivered good capital generation. Where we need to achieve a step change in performance is in the distribution of Future+ in Europe. Our differentiated business model also means we are in a positioning to selectively play in the de-risking market, supporting DB pension schemes and longer investment journeys. Our in-force book continues to be a reliable source of capital generation and is funding many of our recent innovations. PruFund , Future+ , Catalyst, and much more. We expect this book to generate some GBP 12 billion over the long term. This is GBP 2 billion higher than the same forecast 12 months ago, mainly due to the increase in interest rates.
As I've said my first day at M&G, it is a key source of financial and strategic value to our shareholders. I also fully recognize the importance of M&G's responsibility to the millions of clients we have. Serving them better every day is a key priority for me and everyone at M&G. We will generate maximum value from this book, including through management actions, but we will also drive flows in to stabilize its natural run-off. There are two ways we will do this. Let's talk first about Future+ . We know it has taken time for us to launch in Europe. In 2021, we achieved regulatory approval, and in 2022, we began distribution in Italy and Ireland, seeing our first inflows of some GBP 150 million. The next two years will be very important. We need to add at least one other European market.
Germany, Belgium, and France are all attractive options, and we are already in discussions with potential partners there. We will also prepare for the end of our exclusivity period with Intesa Sanpaolo in Italy, aiming to add distribution agreements to scale our presence there. We will broaden the offer by launching a guaranteed version of Future+ backed by our with-profits capital. By 2025, this will be a multi-billion pan-European proposition. The second way we will stabilize the back book is by capitalizing on emerging opportunities within the DB market in the U.K. Rising interest rates and the LDI crisis last September accelerated the de-risking journey that pension schemes are on. We believe that demand will outstrip supply and present an opportunity for us to create value for our shareholders. Let me be clear, we will not be a volume player.
We will only consider those opportunities where client needs precisely match our capabilities. For instance, when a DB scheme is over-allocated to private assets, an area we know very well. To write business in this space, we expect to use small amounts of capital as we explore ways to leverage the with-profits funds or external capital partners. In this market, we can leverage the full breadth of our brand and differentiated business combination. The Asset Manager expertise in private assets and fixed income, our strong balance sheet, and the capital from the with-profits fund. When we are successful, all parts of our business benefits. Flows into the asset management, higher lifetime capital generation heritage, and value creation for with-profits clients. I hope this gives you clarity on the scale of our ambition and the priorities we have for the business.
It builds our financial strength, and in simplifying the way we work, we will deliver the profitable growth that has been missing since the merger. This business has strong foundations, and I'm excited by the scale of our potential. There are significant opportunities to do more and things we can do better. To achieve that, we will focus on execution and discipline. We have the right team in place, and I know that we will deliver. With that, I will now hand over to Kathryn, who will take you through our numbers in more detail. Kathryn.
Thank you, Andrea. Great. Thank you, Andrea, and good morning, everyone. I'm pleased to present what I believe is a robust set of numbers given the macro challenges faced throughout 2022. Specifically, our external net flows were positive. Our operating profitability remained resilient. We're on track to achieve our GBP 2.5 billion capital generation target, and we maintained a strong Solvency II ratio at 199% after returning GBP 1 billion to shareholders. Looking forward, as you just heard from Andrea, we've set clear cost targets for the organization with a renewed focus on cost discipline, efficiency, and execution. I'll now turn to the detail behind these highlights.
External net flows were positive at GBP 300 million. The ongoing turnaround in wholesale asset management and wealth more than offset the pressure seen in our institutional franchise due to the mini-budget in September. Adjusted operating profit of GBP 529 million held up well, given the external market environment, helped by the diversification of our business mix and supported, in particular, by strong with-profit shareholder transfers. Excluding the impact from mismatching and foreign exchange losses that do not affect our capital and cash result, AOP was GBP 701 million, only modestly down on last year. Operating capital generation of GBP 821 million represents a good start to our three-year, GBP 2.5 billion target. This was underpinned by a strong underlying capital generation result, up 30% year-on-year.
We finished the year with a solvency ratio of 199%, a strong position given where we are in the economic cycle, and the GBP 1 billion we returned to shareholders by dividends and the buyback. Turning now to assets under management and flows. Adverse market movements of GBP 30 billion were the main driver behind closing AUMA of GBP 342 billion. The 8% reduction represents an outperformance compared to the broader market decline. Our open business was in net inflows for the second consecutive year, despite a tough external environment. In particular, I'd like to call out the strong performance in wholesale, where flows improved by GBP 4.3 billion year-on-year, supported by strong investment performance. This gives us confidence in the sustainability of the turnaround in our wholesale franchise.
Wealth flows improved by GBP 1.9 billion thanks to healthy PruF und sales of GBP 5.4 billion. We note that these favorable trends in both wealth and wholesale have continued into this year. I'd like to now turn to our institutional business, which was impacted last year by the LDI crisis. Over 2022, we experienced GBP 0.7 billion of net outflows from our institutional franchise. As the chart on the left demonstrates, our institutional gross outflows tend to be relatively stable, averaging around GBP 5 billion for every six months. In the second half of last year, outflows jumped to almost GBP 9 billion, triggered by the mini-budget and the subsequent volatility we saw across U.K. markets. Of the GBP 7.3 billion of exceptional client redemption requests, which were concentrated in September and October, nearly GBP 4 billion were executed before year-end.
This explains the abnormal outflows seen in the second half of last year. The remaining GBP 3.4 billion is expected to emerge over 2023, with the majority falling in the first half. This long tail comprises private assets which have longer redemption notice periods. Despite these outflows, we're confident in our ability to win new business overall. In particular, we believe that our business mix positions us well, given the broader trends we're seeing in the markets. As you heard from Andrea, we are focused on growth opportunities in international markets, and we expect to benefit from market-wide higher flows into fixed income, given our strong performance and leading market position. This is particularly true in the U.K., where clients are looking for partners to continue on their de-risking journeys.
We have a good pipeline of new business and private assets with a capital queue of over GBP 6 billion, including, for example, the EUR 578 million we have just raised for our European property fund. Having covered flows, I'll now move on to adjusted operating profit, which you can see on slide 42. I'd like to start on the last line in the table. Here you can see that when you adjust for the accounting one-offs, the GBP 701 million AOP result was only modestly down on last year, despite the market volatility. The key AOP messages for me are firstly, the Asset Manager showed great resilience in its performance in a very tough trading environment, thanks also to the consolidation of our South Africa JV and the acquisition of responsAbility.
Secondly, wealth earnings more than doubled year-on-year to GBP 96 million as this franchise grows into an ever more important component of our business. Thirdly, and importantly, Heritage continues to provide a very meaningful and consistent underpin to group earnings as shareholder transfers from traditional with-profits policies of GBP 300 million were up 20% year-on-year. Corporate center costs are broadly in line with the previous year, once netting off the one-off foreign exchange loss. Let's now consider the asset management result in a little bit more detail. As we've highlighted today, we are encouraged by the resilience showed by external flows and revenues, which were up 4% year-on-year. You can see on this slide the strong outcome of performance fees, which more than doubled to GBP 56 million.
While the 2022 achievement was particularly positive and is unlikely to be quite so high in the short term. We nevertheless expect performance fees to play an important role in the future as we grow our private assets business and as fee structures increasingly include variable components. I'd like to spend a moment now on the increase in our cost-to-income ratio over the year. As you heard from Andrea, we have a new target of less than 70% by 2025. Looking at absolute costs, roughly half of last year's increase to GBP 763 million was due to the consolidation of the South Africa JV and responsAbility, which also, of course, benefited the top line. The rest of the increase can be explained in equal parts by the addition of new capabilities and inflationary pressures.
We are focused on controlling absolute costs and on delivering positive jaws in our asset management business. On this next slide, we show our asset management results by both client type and, for the first time, by public versus private assets. We hope this extra granularity will help you better understand the underlying mix of the business and why we are excited about the potential of our private assets franchise. On the client side, there haven't been any material changes year-on-year, but I would highlight our continued efforts to grow our institutional franchise despite the headwinds seen in the U.K. and pivot it towards higher value, higher margin solutions. In wholesale, as many of you will be aware, we completed the repricing of our book in 2021, so our margins there are now more resilient.
Turning to the analysis by asset class, you can see that private assets, while being only 25% of AUMA, deliver over 40% of our revenues, supported by growing margins. Looking at margins, it is worth remembering that these are a blend of internal and external mandates, with the latter typically being higher value. Our renewed focus on strengthening the partnership between the Asset Owner and Asset Manager will also help generate higher third-party flows. As in previous years, we have grown the size of private assets and remain confident of our ability to continue to do so. This is a key part of our growth strategy. I've mentioned a doubling of the wealth AOP, which was driven by PruFund, and this improvement came from two key developments.
A 27% increase in the shareholder transfer to GBP 146 million, driven by strong investment returns for our clients, as you can see from the top right-hand chart, and reduced costs and higher sales, which avoided the repeat of the expense overrun we saw in 2021 and allowed us to release a GBP 50 million provision. The returns from PruFund continue to be very positive, particularly on a relative basis. We keep delivering for our clients, which is one of the primary drivers behind the improvement in flows. With gross inflows of GBP 5.4 billion over the year, of which almost GBP 3 billion was in the second half, sales were up by over 40%, leading to our first positive net flow since before the COVID pandemic.
PruFund underpins our confidence in the future financial performance of Wealth, where, as you heard from Andrea, we aim to be a leading, scaled, integrated provider. Higher volumes on platform will generate sales of both PruFund and other M&G solutions, driving flows into the Asset Manager. Turning now to Heritage. Traditional with-profits continues to underpin the overall retail and savings AOP, with shareholder transfers up 20%, thanks to the same strong with-profits fund performance that lifted the PruFund result. The with-profits fund is not only a great asset to have when developing new products such as PruFund and Future+ , it's also the foundation underpinning our financial performance, delivering strong and dependable earnings and capital generation year in and year out. Looking now at shareholder annuities AOP, which totaled GBP 363 million, stripping out the mismatching losses.
Returns on excess assets and asset churning have been stable year-over-year. We expect this to continue into the future. Longevity was particularly strong last year, of course, this won't reoccur in 2023 due to the adoption of IFRS 17. As you know, this accounting standard will smooth any favorable impact on longevity over multiple years. Other is where most of the earnings volatility is coming from. In 2021, we had a number of positive one-offs, improvement in expense assumptions, favorable short-term mortality experience, and the release of legacy provisions. This year, we have the GBP 122 million mismatching losses already mentioned. As a reminder, these are non-cash losses that do not affect our capital generation as they have been triggered by rising rates.
To conclude on our group earnings, we are pleased to have delivered a resilient result with AOP of GBP 701 million, only modestly down on 2021, once reflecting the non-cash items of FX and mismatching. I'd like to turn now to capital generation. Underlying capital generation of GBP 628 million is up 30% on the prior year, driven by items in retail and savings. Higher interest rates which lifted the annuities result, a higher opening present value of future shareholder transfers from the with-profits fund, and a change in the ongoing accounting treatment for equity hedges. This last element, while improving the underlying result by approximately GBP 90 million per annum, reduced by an equal equivalent amount other operating capital generation, where we now include the negative impact from hedges that are running off.
When we think about 2023, we would expect a similarly strong underlying capital generation result from retail and savings, given the starting position of the PVST and annuities yields. Looking at the Asset Manager result, one thing to call out is the GBP 22 million increase in capital requirements that's unlikely to occur in 2023. I'll now move from underlying to operating capital generation. As you know, management actions were particularly strong in 2021 due to a large number of one-offs. The most material being some sizable real estate transactions in the annuity book, the completion of the Part VII transfer to Rossi, and a major model change. In 2022, we returned to a more typical level of activity. The work on improving our approach to longevity data and modeling resulted in a material capital release of GBP 230 million.
While adverse expense experience, together with changes to long-term assumptions, represented a small headwind. The most significant factors affecting expenses were IFRS 17 project spend and long-term assumptions on inflation. Overall, our GBP 821 million of operating capital generation is on track to achieve our GBP two and a half billion 2022 to 2024 target. Having covered the operating result, I'll now work through the other elements of the Solvency II surplus and the coverage ratio. Market movements, which were -GBP 500 million at the half year, deteriorated by a further GBP 700 million in the second half. Here, lower real estate valuations offset tailwinds from interest rates and equities, with equities and real estate performing in line with our sensitivities.
Extreme market volatility prompted us to adopt a more conservative stance on a range of economic assumptions, including property growth rates and credit, which reduced the surplus by some GBP 300 million. This same volatility also affected our solvency models, increasing the likelihood of extreme stress scenarios and reducing the surplus by another GBP 300 million in the second half. The final GBP 100 million is explained by a combination of smaller impacts, primarily relating to changes in the shape of the yield curve and some nonlinear effects of market movements. In 2022, we saw a counterintuitive impact from tax, improving the surplus but reducing the solvency ratio, which we expect to unwind gradually over time. The large 2022 IFRS losses created a deferred tax asset that increased own funds by GBP 700 million and the solvency capital requirement by GBP 500 million.
While the net impact was positive for the surplus, coming in at a ratio of 140%, it was dilutive for the solvency ratio by about 10 percentage points. Of course, finally, as you know, over 2022, we returned almost GBP 1 billion to our shareholders after deploying just under GBP 300 million for acquisitions. This led to a strong year-end Solvency II coverage ratio of 199%. Looking at the total quantum and composition of own funds and the SCR that underpins our solvency ratio, I wanted to call out two things. Firstly, that the reduction in own funds was mostly driven by market movements and the GBP 1 billion for shareholder returns.
Secondly, that the present value of the shareholder transfer from the with-profits fund has increased to GBP 4 billion, representing a higher proportion of total own funds. This higher PVST represents a significant increase in economic value and indicates the higher cash flows that will come in the future years from the with-profits fund, which is very encouraging. We've a great track record in capital generation, and we're also now exploring ways to increase the fungibility. An obvious consequence of the reduction in own funds was the increase in our leverage ratio to 35%. The key point to emphasize here is that despite the move in the ratio, there's been no material increase in the quantum of the debt nor in the servicing costs. We therefore have no concern regarding the sustainability of this debt over the medium to long term.
Having said that, we recognize that at 35%, leverage is above where we want it to be. As Andrea has already said, we'll take action to bring it below 30% by 2025. Assuming no moves in markets, to achieve this, we would need to go further than the bond we have callable in 2024. Of course, this would require approval from our regulator. Staying with our balance sheet, I'd like to spend a moment on the credit quality of our annuities book. Despite being at a tough moment in the economic cycle, the strength of our book remains high by all key metrics. Less than 2% of assets rank below investment grade, with the vast majority being either secured or risk-free. Over the last 12 months, downgrades were in line with historic averages, and we experienced no defaults.
Before wrapping up, I want to touch briefly on our capital management framework, which as Andrea mentioned, we remain committed to. We know we need to take action on leverage, and we will. At the same time, as CFO, it's my job to ensure that any investment in the business is done with strong financial criteria and discipline to allow us to return strong returns to shareholders supported by sustainable earnings. We recommit today to our dividend policy of paying a stable or increasing dividend per share, noting the 7% increase year-on-year, thanks to successful completion of the buyback program. To summarize, in 2022, we delivered positive external net flows in extremely challenging markets. We achieved resilient earnings, demonstrating the strength of our diversified business model.
Underlying capital generation improved by 30%, and we are on track to achieve our GBP 2.5 billion target. We end the period with a strong Solvency II ratio, having returned almost GBP 1 billion to shareholders, and we support our clear growth ambitions with a renewed focus on cost discipline. With that, I'll hand back to Andrea to conclude. Oops.
Are you gonna stay there?
I'm just gonna stay.
Okay. Well, we're gonna conclude, and we're gonna have Q&A. I'm very pleased with what we have achieved in 2022. Once again, we demonstrated that our differentiating business model is working. Three distinctive, balanced, and complementary components delivering an encouraging performance through exceptional volatility. The Asset Manager performance was resilient despite challenging markets. Earnings from wealth more than doubled year-on-year to GBP 96 million. Heritage continued to provide a solid underpin to our capital generation. Let's not forget that we recorded positive net external flows for the second year in a row. You have heard us talk today about our strategy and ambition for the business. We will get there by relentlessly focusing on three priorities. First, financial strength, continuing to prove we are good stewards of shareholders' capital. Second, simplification to deliver a more efficient and accountable organization. Third, growth.
Targeted, profitable growth that leverages on our strengths. We will achieve our GBP 2.5 billion operating capital targets, and by 2025, we will bring our leverage ratio to below 30%, deliver GBP 200 million of cost savings, reduce the asset management cost-to-income ratio to below 70%, and grow our earnings from asset management and wealth to more than 50% of the group's total. Rest assured, my focus is not just on the quantum of earnings, but the quality as well. This is not about being the biggest. It is about achieving a step change in profitability that has been missing since the merger. We will maintain our financial strength, we will simplify, and we will grow. Of that, I am sure. Thank you. With that, Kathryn McLeland and I will take questions. We're just gonna move both your things.
Thank you.
You can stand here.
Right.
Opposite me.
Okay.
I'll take that. I'll take mine, so I can take notes.
We can get a little bit closer. Okay. Oops.
Whoa! A lot of questions.
Sorry.
Oh.
Okay, there are definitely a lot of questions, which is a good thing. I haven't literally seen who was the fastest one raising it. Dom, let's start from you, and then, do you mind if I start from the front and move it back? There's no particular order, but we'll get to all of you, I promise.
Okay, thank you. Dominic O'Mahony.
Mm-hmm.
BNP Paribas Exane . Andrea, thank you so much for outlining the strategic vision for the company. It's really interesting to hear your thoughts. I thought I'd give a couple of questions on that. First on asset management internationalization, I think clearly big opportunity. I just want to understand a bit more about why you're, why you're optimistic and convinced that M&G has the opportunity to compete well in those markets. It sounds like you've, you see particular opportunities. You mentioned Japan earlier. What is it about those markets, maybe the regulatory environment, that means that European real assets are a thing that they need, that your positioned to deliver?
Second on wealth and guarantees in Europe, do you think you can go toe-to-toe with participating products in Europe, both in terms of return to customers and of the tax treatments? What's gonna be your positioning relative to the existing product landscape? Thirdly, on annuities and pension risk transfer, really interested to hear that you're open to the opportunity there. I wonder if you might give us a little bit more of a peek into how you might use the profits fund to support that. Thank you.
Well, okay, three questions. Let's start with the asset management one. You asked about why I was confident on the internationalization and more focused on that. Let's go back to, first of all, what are our strength, our internal capabilities. I mean, when you go and look, we're strong on private assets in Europe, we're strong on investment income globally, and we have, I would say, very relevant strength in thematic and sustainability equity and good investment performance there also. When you go and look, and I think it's important because, when you look at an Asset Manager, there are three things really you need to look at. You have your investment capabilities, you need to run operations well, and you need to have good distribution segmented focus.
We have investment capabilities. I think, you know, when you look at where we are within the markets, we're well-placed there. Why would we do well internationally? Well, first of all, as you've seen, it's very selective. You took Asia. You asked about Asia. There are five markets we're looking at. In particular, we're looking at Japan and Korea. Japan and Korea, it's very simple. Why do we have the right to win in Japan and Korea? Well, first of all, because they are implementing the Solvency II framework in the coming years. We are very well-placed to be a partner there with several of those life insurers. Actually, we're already in discussion with some of them. I think that will very much help us to grow in those markets.
That's Korea and Japan. Clearly, when I look at our wholesale investment performance, Taiwan is a market where we can do much more in. I believe that we will grow there, thanks to the really great improvements in terms of investment performance. When you go look more towards Europe, there are markets there where I think given where we are in terms of the macro environment and our strength in terms of investment capabilities on the institutional side, I see France being a market I know well, and Joseph also by the way, as a great opportunity for us to grow. Also in Germany, I think institutionally we should do well. Overall, I see with some of our global financial distributors, we will see more momentum given.
We see it already, but we'll see even more momentum given where we are in terms of improvement on investment performance. I mean, the focus of growth on the asset management is more on execution, both operationally to make sure we serve our clients better, but more importantly, making sure we have the right focus, the right people on the ground. Which is actually easier than rebuilding your investment capabilities. You can do it in relatively shorter time. That's why I'm confident that we will be able to deliver that growth. Please remember, cost-to-income ratio is a combination of both. Obviously, you need to grow the revenues, but we're also looking at the expenses. That's on asset management. On wealth, you're talking about Europe.
In particular, the guarantees and high yield.
The guarantee, yes, exactly. Future+ . Well, interesting enough, I always say this, when I look at retail savers, the U.K. versus European ones, the European ones are much more risk-averse, but much, much more risk-averse. That's why they keep their money in the bank accounts. Don't get any returns, by the way. They're starting getting returns now. Having something like Future+ with such great track record, but more importantly, having the allocation, part of the allocation into private assets, I think is very important. You're here talking about also the what I call the democratization of private assets for the man and the woman in the street, and not only, you know, 'cause realistically, private assets, if you're a high, high net worth, well, then you can have, you can take, and you can take the liquidity.
You don't need to have daily liquidity. For someone who needs to invest EUR 50,000, they might need that money back, so they need to have daily liquidity. Well, with, I think with Future+, we can give that. And clearly, when you look at the returns we have been delivering in the last years with this strategy, it is much, much more interesting than keeping your money in the accounts. When you compare it to the in France or in Italy, they still deliver only 2%-2.5%. I believe that we can do more there. Now, why do we need to have a guarantee? Because it's a risk averseness of the clients. Here in the U.K., you don't need that.
You don't need to have a capital guarantee. It's a different, it's a different market. I mean, for Europeans, that's very, very, very much important. I think putting that, we will be able to deliver significant more growth and make it more interesting for European clients. It also mean we need to have also the right partner. As we know, in Italy, we have a good partner. I want to say, I mean, I gave the number GBP 150 million, and maybe some of you say, "Well, that's not much." It took us three years in the U.K. to get to GBP 150 million when we launched PruFund . In Italy and Ireland, we've done GBP 150 million in one year. It's actually pretty good.
It's a, I would say, a good performance. Clearly, we want to achieve, as I said, a multi-billion by 2025 on this. I think we have what it takes. Third question on annuities, right?
Yeah.
It's more on why are we looking at this. Now, let me be very clear. When I think about growth, I want the growth in our capital-light businesses. It's asset management and wealth management. The reason why we're looking at the Heritage business is the market has changed. You know, the market has become much, much larger in the U.K. Therefore, there is an opportunity for us to play here. I insist in a selective way, utilizing our strengths, utilizing what we can give that maybe others cannot. It's looking back at what our business combination is. For example, if a DB scheme have private assets, well, that's something where we can make a difference. It's really utilizing, I would say, our strength on co-combination.
Investment capabilities, clearly operations and size of the balance sheets of the heritage book, but also potentially with-profits funds. I mean, That is an opportunity. I really insist we're gonna do this selectively. We're gonna do it selectively. The real growth opportunities for us are in asset management and in wealth management.
Thank you very much, Andrea. Starting from the front, let's do Andy and then Ashik.
Thanks. Andrew Sinclair from Bank of America. Three for me, please. First time actually gonna ask a question on results. Just looking at results at slide 74, remittances to the holding company are a bit lower than I'd probably expected and lower than the prior year capital generation. Just looking for a little bit more color on that.
Mm-hmm.
Secondly, was just going back to international distribution for asset management. How much of that will be partnerships versus doing it yourself? I think you used partnerships quite a lot at AXA IM.
Mm-hmm.
Just interested in that. Then third, was just interested in the cost of delivering some of the targets that you've set out today in terms of, cost savings, pacing of those, and also building out that international distribution. How should I think about cost of that? Thank you very much.
Okay. Given that I have a CFO, talking about results, I think that.
Yeah.
... you can probably touch on that and also probably the cost savings. Then I'll take the question you had on it, on internationalization and partnership.
The first question was regarding the movements that we saw at the holding company in terms of their cash position. We finished last year with GBP 817 million sitting at the HoldCo. I think one important slide I'd like you to refer back to maybe after the event is that increase in the in-force book from GBP 10 billion-GBP 12 billion that we've seen, which will generate strong capital and cash generation. The HoldCo cash essentially last year was impacted by a number of one-offs, which you will know about. We obviously had the dividend and the buyback, and quite importantly, I think something we've talked to you about before, some of the acquisitions we did also were paid for essentially by the subsidiaries.
Remittances last year were GBP 391 million because some of that consideration for acquisitions came from the subsidiaries. When you look at the overall strength of the group, when you look at the financial metrics that Andrea talked about, we remain, going back to the GBP 12 billion, a very strong cash and capital generative business. Importantly, we have made the decision to target this reduction in leverage by 2025. That will reduce the leverage ratio from the 35% that you saw at the end of the year down to below 30% by 2025. I think last year was more of a one-off.
When we look at the position that we start 2023 in and the confidence around the balance sheet and the underlying capital generation, we feel very confident about the trajectory, both in terms of earnings, capital generation, and supported by strong levels still of HoldCo liquidity of GBP 817 million. Costs. The simplification priority really is key to the future success of M&G, as you heard Andrea say. This will help us to unlock growth. What we've announced today is a GBP 200 million savings on the managed cost base, which is roughly GBP 1.4 billion-1.5 billion. You can see the detailed numbers here. Andrea has taken you through the four levers that we've identified to make M&G much more efficient. You will get further updates on this, obviously, as we go through this transformation journey.
You clearly see the asset management cost base of GBP 763 million, and you see also the head office costs. This is a group-wide transformation program. We start today with four clear levers. We've announced the voluntary redundancy program today that you've heard about. Very importantly also, we are going to be tracking the cost-to-income ratio in asset management, looking at both absolute costs. Obviously, we've got some confidence around the top line, given some of the investments we're making, the strength of the franchise, but really also keeping a very tight discipline on absolute cost. We want to see positive jaws in asset management over time.
When we think about the success of the cost transformation program, you will see us absorb inflation, create capacity through the savings, and invest for growth, making M&G much more efficient and set up for the scalable growth that Andrea talked to.
Sorry, just to, just to follow up on that.
Yep.
I'm saying absorb inflation, does that mean that the GBP 200 million is a net target?
It's a growth target, so we put on the slide. There's a slide that was in Andrea's section. Obviously we have a planning assumption around inflation, and depending on obviously if inflation is less than expected, we'll still bring down costs by GBP 200 million.
Right.
It's very important for us that we have a more streamlined, more efficient organization with stronger controls set up to deliver better customer outcomes and more profitable growth.
Yeah.
Let me be very clear, I mean, on the cost, this is a byproduct of simplification. I mean, we want to grow this business in a profitable way, to do so, we need to be fit for purpose. That's why we need to look at how we are organized ourselves, how we work together, and ultimately, we need to improve the client outcome. We need to serve our clients better. We need to be better in innovating quicker. The savings is a by-product. We insist on that. I mean, what really is important is making sure we transform this business so we can support the growth, the ambitious growth we want to deliver. Okay? To your question on inter-
Yeah, partnership.
Partnership. When you mean partnership, it's not joint venture. Is that what you meant? No, it's not joint ventures, right? Because, you know, this is organic. We are not looking at joint venture. Having said this, clearly, when you look at partnership, and I told you about Future+ , we are going to need strong partners if you want to grow this in Europe. There are already some, I would say, discussions with some European partners to do so. You know, I told you about the key markets for us looking forward. Clearly, Italy remains a key market. Germany and France are the other ones, and we're looking at Belgium also. Clearly, that will go through partnerships.
When I look elsewhere, we are looking at Asia, we have been looking also at how we're gonna grow in the Middle East. It's more about partnering up with institutions. It could be club deals, it could be co-invest, and that's the way forward for us, and particularly when we think about private assets. As you know, we're strong on the private assets franchise, and we see significant interest from, in particular, Middle Eastern and Asian investors to sort of enter into the US, European space, and we are a good partner to do so with them.
Thank you, Andrea.
Okay.
Ashik, point them to you.
Thank you. This is Ashik Musaddi from Morgan Stanley. Two, three questions. First of all, on your capital generation now, clearly the GBP 10 billion undiscounted cash flow is now GBP 12 billion.
Mm-hmm.
Which should naturally imply that underlying capital generation is going up 20%. On top of that, I mean, interest rates are higher, so that should be a bit more benefit on that, and then you will de-lever. That should help a bit of underlying capital generation as well. These are couple of levers, you haven't upgraded the GBP 2.5 billion OCG guidance. How should we read that? Does it mean that there will be less management action that what you thought, or is it just that you're not willing to depend on that, but it can still come through and we might get a surprise on that? That's the first question.
Second thing is, I guess your messaging is a bit clear on different, sustainable, and most likely growing, but what needs to happen for that different cost to grow? Because your long-term cash generation numbers are going up, so how do we think about that rather than just thinking about the DPS? Third question is, how do you think about this Heritage runoff? Clearly, it's the first time when you have discussed that you're looking to offset the runoff of Heritage business. I agree it's too early, but can you give us any timeline? Like, okay, by next five years, you think that this runoff could be offset by Wealth, by Future+ , by your capital like Wealth, Annuities, et cetera. Is there any timeline you can help us with?
I can appreciate that it could be a bit early on. Thank you.
Okay. Well, listen, I mean, I can start with the last one, and then...
Yeah.
I'll let you go through.
Okay.
You saw that we are committing rather ambitious targets until 2025 and clearly one of them, which I call is on growth, is to see that our capital like businesses contributes more than 50% of our earnings by 2025. Asset management and wealth management. This is not to say that the Heritage book is going... The pie is bigger. I'm not sure you can show the slide. So I mean, that's as much as I can, I can give in terms of, of going forward. I don't know. Claire, you have a view on the, on the Heritage. You wanna say something or add?
The thing...
Just stand up so they can see you.
Good point. In terms of, in terms of what we're looking to do, what we're looking to do is leverage the investment capability, particularly on the institutional and private assets, but also the fact that we've got an existing book of BPAs. Those two together will enable us actually to then grow that book, as Andrea says, in a very selective way, but also then leveraging some of the capital light options in terms of what we could do with the profit funds with some market guarantees. In terms of, in terms of volumes, I think if you take both the Wealth book and the Heritage book together, I think what we're looking to do is basically optimize the scale and the play in terms of where we're going. I'm not.
I wouldn't expect it to shift a lot in the short term, but certainly over a period of time, you'd start to to get that more even, if that makes sense, Ashik.
Good. Thank you, Claire.
I think you challenged us on why are we not giving a more optimistic capital generation target. I think we clearly have our target of GBP 2.5 billion that we are on track for. Yes, we now have an in-force book that's grown, helped a bit by rates, but from GBP 10 billion-GBP 12 billion, but that gives us a lot of confidence around the future trajectory. In terms of the market movement, as you've seen in the results, I guess, last year, there have certainly been benefits as you would have expected from sensitivities. There were some other elements also, some additional prudence that we took, for example, around our assumptions on credit risk and on property growth rates. I think we finished last year in a pretty good position.
Certainly when you think about the underlying capital generation, which you asked about, you've seen that the expected return on annuity surplus assets doubled from 1.1 to 2.2 at the beginning of last year. We obviously have confidence that the expected return will be higher this year, obviously on a book that is declining, the annuities book. We also really importantly, have also got the additional contribution coming through, which gives us confidence on that GBP 641 million retail and savings number. That higher PVST of GBP 4 billion also underpins the underlying capital generation. Really importantly, and that actually goes to the next question as well, we are gonna grow asset management earnings.
Over the next few years, as the shape of the group evolves meaningfully towards more in asset management and wealth, but capital like businesses, that's what's also gonna support not just the strong dividend we're paying now, but the potential to grow the DPS over time, which obviously increased by 7% last year to GBP 19.6, driven clearly by the buyback program. I think for now, we see really strong underlying capital generation coming into 2023. We do expect management actions to be back in the GBP 100 million-GBP 200 million range, probably for 2023. Normalizing back down. The longevity release of GBP 230 million was quite large last year, and we don't expect a meaningful increase.
Really importantly, and you've heard management say before, but really emphasized today with the strategic refresh, we are very focused on growing underlying capital generation. You've got the strong base coming through from retail and savings, and now supported by growth coming in asset management and the capital light wealth business.
Thank you.
Ashik, very small point on that slide. That slide is based on economics as of first of January.
Yeah.
It's not there has been a significant movement in the economics environment since the first of January. That's quite up-to-date, so to speak. Alan, and then James.
Many questions.
Thank you very much. Alan Devlin from Goldman Sachs. A couple of questions. First of all, on the PruFund, obviously performance has been exceptional. When you did your strategic review, did you consider whether the wealth business was actually holding back the success of the wealth of PruFund in terms of distribution? That actually, if you opened up the distribution, you could drive much faster sales. I know obviously, yielding pricing and the smooth fund, there's some more kind of technicalities, but could you have accelerated the PruFund success by opening up to other participants in the market? Secondly, on the BPA opportunity, I think you mentioned kind of your particularly focusing on pension funds with higher allocation to private assets.
Is that because obviously the challenge that the big pension funds have is with too much private assets that are non-Solvency II friendly. You know, the U.K. Insurers don't wanna touch them. Does that help? Is that gonna be an area where you could focus given your the PruFund and your asset management business, you can actually take these assets easier than a some of your competitors might take?
Yes. You answered the second question by yourself. There's not much I can say there. I think realistically, when I look at our capability on private assets and I look around, I think we're much better placed on that. That's very bold. Second to none there. On what you said in term on PruFund, I mean, first of all, this 2022, we're very pleased with how volumes went. GBP 5.4 billion gross, positive net. Clearly, as you said, investment performance has been stellar. Actually, every person here in the U.K. should have PruFund. If it was for me, I would be out there selling to them personally, but I can't. It needs to be sold by an advisor. We need to make sure it works better, and that's why we're putting it...
We put PruFund Planet, but that's not PruFund Growth. We put it on the digital platform. We are committed to put all the PruFund strategies now on the platform, that will help. In the good time, we used to do GBP 10 billion, that was when in the U.K., gross. That was when significant transfer was from DB to DC, so probably 30% of that should have been discounted. GBP 7 billion is probably where you want to be. It's GBP 5.4, I mean, you can make the maths by yourself. Should you open it up on other platforms? I don't know, Claire, do you have a view on that? It is.
It's one of the main drivers to why we bought the Ascentric platform in terms of what we've done. I think, to Andrea's point, we'll have PruFund Growth on there during this year in terms of that solution. I don't think we're not open to the idea of it being on other platforms, but what we wanna make sure of is firstly that the full value chain, and that's one of the backgrounds to why we've built the wealth business as it is, we wanna make sure that we optimize that in terms of where you go. We are a massive chunk of the with-profits market in the U.K., and so almost what you wanna do is increase the market, and you would do it in terms of that piece.
I think for the right distributor, we'd definitely be open to the conversation. Right now, we've now got all the building blocks in terms of what we need.
Thank you very much. James, and then Mandeep.
Hey, guys. James Pearse, Jefferies. Thanks a lot for taking my questions, congratulations on the results this morning. First one's on DB de-risking again. Just wondering how long it would take for you to kind of get yourselves in a position where you can essentially declare yourselves open for business. Do you already have the resources in place to do that? If you wanted to, you could actually launch very quickly. Second question. You've indicated that you may need to do further liability management to get to your leverage target by 2025. Just wondering why you didn't buy back the debt towards the end of last year when actually the bonds were quite a bit cheaper.
Okay. I can pass you on the second question. You say how long. We think we will do some transaction this year in a very selective manner. We have been building up our capabilities since we have seen the market really build up. Let's not forget, we already had capabilities in place also. We will do selective few transactions this year. I want to insist, we don't wanna. We're not a private. There are several other players. We're not gonna compete on price. We will compete where we see where we have specific capabilities in order to add value. There will be something during the year, some transactions, but very, very selective ones. On the, yeah, on the, I'll let-
I remember the half-time results last year also, when the market widened, getting asked around liability management exercises. I think the reason why we haven't gone before is obviously with a new CEO coming in, reassessing the strategy. You've heard today how we're so excited about the next few years. This is regulatory capital. It is important, it's complex, it's something we need to approach the regulator for if we want to think about calling or liability management. We wanted to be very thoughtful. We wanted to put together a very credible strategy with very clear targets. If you heard Andrea say, stretching targets.
We are looking at leverage, whilst we've got a tremendous amount, GBP 12 billion of the in-force book, which we've got huge confidence around the cash and capital generation, we do think 30% is the right number to be at. The obvious means of making a reduction in the ratio is the GBP 300 million bond we've got callable in 2024. If you can easily, I'm sure, do the math, were we to do that and assuming no change in own funds or markets, we would need to go beyond the GBP 300 million. The key thing is, and the bonds are still trading below par, some of them. We're not in a rush at all. This is something we are gonna be very thoughtful about. This is an important metric for us to reduce our leverage.
We've got the callable bond next year. Over time, if there is no change in own funds, we would need to go beyond the GBP 300 million. That you've heard this is our primary capital management target for the group in the near term, but we're not in a rush. It's by 2025.
Cool. Mandeep, then Andrew.
Hi, good morning. Good afternoon. Mandeep Jagpal, RBC Capital Markets. Two questions on asset management, please. Kathryn McLeland mentioned there's a GBP 6 billion capital queue for alternatives.
Mm-hmm.
I was just wondering over what time period you expect this to be deployed, and do you charge fees on AUM committed or just?
Mm-hmm.
-once it's actually being deployed? Then another one on asset management, the cost-to-income ratio target of less than 70% by 2025. Clearly, these are dependent on AUM levels too, then. I'm wondering if you could help us by letting us know what kind of market return assumptions you assume setting that target.
Yep.
Ivan? Okay. On this 6.2 capital queue that we show to you, and that gives us, I would say, cautiously optimistic, view on where we're gonna see flows on the institutional side, because you should not forget also, after the LDI crisis, we showed you a number also. Clearly, there is a part of that GBP 7.3 billion which are coming out, in particular in the 1st half year. On the capital queue, we believe it will deploy, not all of it during the year, it's gonna be impossible, but part of it.
I mean, it's difficult for me to be able to give exact indication on it, but it is part of, let's say, my cautiously optimistic view that we will deploy part of it during the year. I insist once again that that's a good element when you look at our institutional side business. There are other elements that will also give us flows. In particular, we see great interest in our fixed income franchise from several institutions. As I said before, there are a couple of particularly on what we do on infra equity, we have launched a fund which will take fund forward by the summer. That's relevant size. I don't know if I'm allowed to say the size, but...
We'll wait. We'll raise the money.
Yeah. Exactly. So there are several things that are in the pipeline. Okay.
Maybe the only thing to add on the capital queue to your question, that capital queue is committed wins, so we don't need to go out and fetch them.
Yeah.
It's not pipeline, it's committed.
Yes.
It's in, it's not product, it's other private assets where we earn the fees only when we deploy that asset.
Yeah.
We have given the number quite consistently. Every period, we draw down an element of the capital queue, but it's also important to top it up with new wins, right? Ideally, you almost would want to have the capital queue always there at the same level because it gives you comfort and confidence around the future, but you keep drawing it for the right opportunity at the right time.
The second question was on the assumptions underpinning the 70% cost-to-income ratio. I would just reiterate, with a longer-term ambition beyond 2025 for 66%-68%. When you rightly asked a very important question, 'cause obviously there's a lot of focus on flows. We're really pleased with the position we finished last year in, and we're confident we've said around what we're seeing so far in terms of flows. Yes, that underlying market assumption is important for the revenue line. I'd say that we've got a cautious market assumption in our planning. We've seen also, obviously, what peers have said in terms of their assumptions and obviously market moves year to date that we've seen.
It really is with a conservative planning assumption, and then obviously the strategy you've heard around where we're looking to grow internationally in private assets. It is, you know, it's a thoughtful, disciplined capital plan. We've quite, you know, we've really checked the underlying market assumption.
Andrew?
It's Andrew Crean with Autonomous Research. A couple of three questions. Cost savings. You had a cost target, running since 2017, which finishes 2022.
Yeah.
I haven't got a clue what happened to that. Did you actually make it, and could you prove that?
Mm-hmm.
Your next cost target, I think if you've got 5% inflation, that'll wipe it out and a bit more, in terms of net. Is that right? That's the first thing. Secondly, could you tell us a bit about the margins on PruFund in Europe?
Mm-hmm.
'Cause as I understand it's a very, very different product and has very different profitability profiles to PruFund in the U.K. Then thirdly, in terms of your capital spending power, which is obviously the dividend comes first.
Yeah.
What about debt reductions, M&A? Do you need more money for M&A? You spent quite a lot of on wealth. Does that do those sort of have priority over any future buybacks?
Okay. let me take the third question.
Yeah.
... I think the first two questions, Kathryn, I think I have to delegate to you.
Okay.
We have a very strong capital management framework in place, as you know. The four components, I don't know if you want to show them again. Clearly we're sticking to that. The plan that we're presenting, it's an organic plan. You know, we really think we can deliver this in an organic way. I mean, it's very clear we want to go for operational efficiency through simplification, we have what it takes to grow the business going forward, both in asset management and in wealth management, and selectively have a say on the Heritage business. That's organic. Clearly, when you look at this capital framework, we are committed first to our financial strength and flexibility.
There we have been giving very clear targets of getting to the leverage ratio below 30% by 2025. Second priority is to make sure we have stable or increasing dividends going forward. Then there's a third point. We are going to have to do some investments in order to support, clearly, the transformation, but also potentially to support, I would say, some of our distribution efforts. But these are, I mean, these are part, I would say, of, of just normal investments. But we are not looking, clearly we're not looking for anything in terms of M&A. I mean, this is organic. I really think when you look at our, all our capabilities, and in particular the combination of the business model, we have all it takes in order to deliver it.
I think the results in 2022, the resilience of the result actually is a good example of it.
On the prior cost program, which you rightly said was launched several years ago, I think that did actually outperform. I think it was GBP 145 million savings, and I think they did GBP 167, and also.
That's it.
Claire is nodding.
That's it.
Completed, I think, a year early.
None of us did.
That concluded, and that was exactly what was needed at the time of the de-merger, merger, and listing, and it had several different elements in terms of what it was focused on. What we have now is the next chapter in M&G and really looking at these four levers to really strengthen the business, streamline it, improve controls, automate processes, explore our location strategy more, reduce consulting spend. We've got the voluntary redundancy you've heard Andrea talk about today. And it's led by Benoît, who's just recently joined. It's focused on some different elements, but the organization has already delivered a prior transformation program. This is what we now need to unlock the growth. And also you'll be able to clearly track progress when you look at asset management costs.
We'll clearly keep the market updated and informed in terms of how we are delivering those savings. On inflation, I'm not sure where in our materials the 5% target, the 5% assumption is. We do have an assumption over the plan that's around about that number, but every year, so not falling back to any sort of pre-normalized 2%-3%. We are focused on bringing down BAU operating costs. Having any out through a higher inflation number is not what we wanna do. We just need to be mindful that there certainly is a lot of discussion around extended higher inflation in the U.S. The U.K. might be a different picture. We will, we are motivated to bring down the BAU operating costs of the group, and you will be able to track that.
Yeah. If inflation ends up being less, we will bring down costs. I think the last question was about Future+ in Europe, was it?
Yeah. Margins.
Yeah.
Margins.
Margins.
The proper signature.
Yeah. I think this is an institutional product.
Yeah.
It re-
That's.
It's about scale.
Yeah. Let's.
Yeah.
Let's ask Claire.
Institutional product, Andrew, it's just something I've said beforehand. Think about the price as being at that sort of level. It is, as Kathryn was just about to say, it is about scale in terms of how we get to that level. You'll have seen the expense reserve that we had to put up in terms of because we're not yet at scale in terms of the product. Absolutely, to Andrea's point, in terms of the opportunity across Europe is extensive in terms of that opportunity.
I don't know what the institutional fees are.
So we show you the margin in our asset management business broken down by client type, and we've got internal, external, and external institutional, and also split. You can see that what type of margin we make on institutional mandate. We're not telling you that it's exactly that level, but that's the type of ballpark that you can think of. Also, the other thing that we've always called out in the past is that the profit signature is fundamentally different, where PruFund, you get a bullet payment at the end. This is more like taking an asset management product with a yearly ongoing recurring fees. There is no reference to 5% inflation in the material, I've checked that. Well, the ladies first. I'll come to you, but we've got Larissa and Rhea.
I mean, first, you have been waiting too long, and you've been very patient, so thank you very much. Rhea?
Thanks, Luca. two questions from me, Rhea Shah , Deutsche Bank. In terms of going back to the BPA deals and selective opportunities that you're looking for, what kind of size deals are you thinking about for this year or for next year? How much capital would you look to set aside for this? Then secondly, on looking at the pie and how it's growing and your ambitions for 2025, for wealth specifically, is most of the growth going to come from PruFund, or are you looking to significantly grow the rest of the wealth parts of the business as well?
Kathryn, do you want to take that?
Yeah.
In terms of size of deals, I think we've been clear that this is going to be really modest, very selective, suiting our capabilities and our strengths, which we have. We think we've got a lot of these solutions that these pension funds want, that's why it's a compelling opportunity for us. It is really gonna be very selective and with real discipline in terms of the criteria for us. In terms of the capital impact, if there was any meaningful impact in 2023, when, as Andrea Rossi said, we'd certainly be hoping to do one, we would have guided to it. It's modest, and as Claire said, there are also capital-light options that we can think about external providers or, of course, the with-profits funds.
I wouldn't guide to any meaningful capital impact in terms of 2023 numbers.
The other question was where the growth is gonna come from.
Okay.
Whether it's more PruFund, balance, different components.
Do you want me to do that?
You can ask Claire.
For us, the PruFund is obviously fundamental in terms of the strength, and it always will be. One of the things that we've been looking to do is basically broaden that. If you look at the platform, that is predominantly non-PruFund business. As Andrea said, we will put PruFund Growth and, in fact, the full PruFund range onto the platform. Absolutely, what we want to do is then build out, for example, the Model Portfolio Services. PruFolio, we've just gone through a reprice of that to put it much more into where the market is. Ultimately, where we'd like to do is get to a much more even balance between PruFund and non-PruFund, recognizing the margins on PruFund are much stronger than on a non-PruFund proposition.
Thank you very much. Larissa ?
Thank you. Larissa Van Deventer from Barclays. Just three quick ones, I think. On the redundancy program, recognizing it's within the GBP 200 million cost savings, can you give an indication of how many people or how much of the GBP 200 million will come from redundancy and by when you hope to conclude that program? The second one, on the longevity assumptions, you mentioned that it was 230, and you're not expecting a meaningful increase. Does that mean that we can expect a repeat of the longevity? The third question is, back to bulks. Do you have a target asset mix on private versus public funds, and how does that impact your bulk annuity offering?
Okay. Let me take the first one, and we'll see how we... We launched voluntary redundancy, and I insist it's voluntary. Today, when you look at our simplification program, there are four levers, and we can show again the slide that we're trying to achieve. One is linked to the what we want to do in terms of organization. It's looking mainly at layers, and span of control. That's something that we have now launched in terms of transformation program. It's work in progress. I mean, I think it's way too early to start thinking about, you know, the target in terms of what's gonna come from the voluntary program we just launched today. Once again, it's voluntary.
It's people have to come forward. But, I believe, you know, I've done these in the past. There are always some that, you know, don't want to be part of the journey going forward. We will see how that goes. Clearly, we will update you in due time. Clearly, you know, this is about people and we want our people to be in a good place and work within a great environment. We will update you in due course where we are on that. Overall, when you look at the GBP 200 million savings and you look also at where our costs are, 50%, more than 50% of our costs are people.
That doesn't mean that, you know, you have to input that number now, but that just give you some sort of guidance.
Kathryn, do you want to take the question on longevity going forward?
Yeah. Obviously, it would only come through on capital, not under IFRS 17. You may not have had a chance, because I know it's been a very busy morning for you. In the prelims, there's a little bit more detail around what we did in 2022 on longevity. We did a more comprehensive assessment of our population against the broader population and the trends. We used an expert panel, an external panel. That was really spending much more time looking at our data, looking at the modeling, and it does not reflect COVID data like peers, I think. No COVID data with zero weight to the COVID experience. We'll just have to see, and I think there's still quite a bit of uncertainty in terms of trends.
We wouldn't want to guide to another meaningful increase. We will just look at the data, we'll look at the new tables. We're still using CMI 2020. We don't want you to think about another meaningful capital release like we saw last year.
On the final question on bulks, I think it is a little bit too early to give you an idea of what asset mix we'll be looking at. I said, given that we'll be looking at a situation where we can add value, where someone might be over-allocated to private assets, you know, each deal will be, I guess, a little bit its own and will depend on circumstances and being thoughtful and, you know, taking it slowly time after time, you know, that might vary. Probably giving you a number now would not be appropriate. Coming back towards the front, then we'll get to the back, Nasib and Andrew.
Hi. Thanks. Nasib Ahmed from UBS. First question, Andrea, you said that PruFund Europe or Future+ democratizes private assets. Do you think tokenization is an opportunity here, and are you investing in that space? Secondly, on the greater than 50% asset management or wealth management target on earnings, does that translate into OCG as well, given that insurance earnings are gonna change with IFRS 17? Sorry to come back on the OCG GBP 2.5 billion spend. If I take the 8 to 1 and times it by 3, I'm already at GBP 2.5 billion, and you've got the tailwinds from markets, PVST being higher as well. It seems like you're gonna beat that target. Anything I'm missing there?
Okay. I think you can take even the one on OCG before, but let me be clear. I mean, we cannot do everything, okay? We have to be focused. When I look already that we want to grow internationally some of our capabilities, and Future+ is an interesting one. We need to focus on that and make sure that, you know, this becomes a multi-billion opportunity by 2025. That comes down to having the right partners, opening, entering into new markets this year. Yes, a lot of Asset Managers talk about tokenization. I know that. At the end of the day, it comes down to resources and focus. When I've listed all the different opportunities we have in terms of growth, I think it's focus.
Now it's a question about executing and delivering on it. I'm sure that's what you want me and my team to do. Tokenization, yes, we will see, but I mean, it's not, it's not really something at the moment we are foreseeing. You, Kathryn.
I think I missed one of your-
Yeah.
later questions.
There was-
One was on the operating capital target.
Yeah.
And the second-
The other one was on the mix of the earnings.
On the mix.
you know.
Yeah.
This slide, the question is, this slide talks about earnings. Does it look significantly different?
I've got it.
A capital perspective.
Yeah.
Given, you know, IFRS 17 and everything else going on?
Yeah, thanks for reminding me. I'll cover that one first. We obviously, in terms of IFRS 17, you've seen the broad guidance we gave with the December update. In the prelims, there's the day one shareholder equity impact, which is an increase of GBP 1.5 billion. That is good for us. It's consistent with the guidance we put out in December, we've obviously not yet given indications regarding the earnings details, you obviously know the profiles of how they change across the business. Clearly, you've got, as we've said, good confidence around the underlying capital generation coming through, and really importantly, which will obviously support earnings under the new IFRS 17 asset management earnings meaningfully growing. That and non-PruFund wealth growth will support that change in mix.
We are very pleased to have a diversified group, with the earnings and capital generation, but we want it to become more diversified and even more resilient with the growth in asset management. That's really valuable to us over the next few years. Yes, so in terms of the difference between IFRS 17 and cap gen, it really will be driven by that asset management growth. On the ambition, I think someone already asked us about why we haven't upgraded our OCG target, and we are confident in the underlying capital generation. We've got good visibility around this year. I think we have said that management actions should normalize back down. Well, I've just gave an answer around the longevity benefit, which we don't expect to reoccur to any significant extent like we've seen before.
We really, you know, we've got a strong plan. We've got clear targets. We're focused on execution. You know, over the next year or two, we obviously reassess whether or not we need to extend that target beyond 2024. I think you've seen us expand our targets today, building on that one we had before with the very clear cost targets for GBP 200, the asset management getting below 70%, and the GBP 200 million for the simplification program, and obviously the earnings mix.
Thanks. Basically, let us deliver the target, and then we talk about it. Andrew?
Great. This is Andrew Baker, Citi. Just two questions, please. On the international expansion slide, just curious why South Africa wasn't included given your JV there. Is there anything to read into that? Secondly, on the PruFund performance, I think it's slide 30. Can you just help me understand the outperformance? My understanding was that PruFund returns ultimately are tied to the underlying asset returns, and this sort of smoothing mechanism just changes the path to get there. Is it just a case that the benchmark that you're using is just a different set of underlying assets, or is there something else going on there? Thank you.
Okay. Let me take the South African one, and then I'll pass over to Claire. Okay?
Yeah. Oh.
Okay.
Well, I'll give you the details.
Okay. Now, you're right. I didn't mention South Africa in the international expansion. Realistically, clearly, you know, we have an Asset Manager there. We are in the top 10, and we believe we can grow the business over there also because there is interest now in actually investing in international assets from South African investors. It's something that clearly we want to see. More interesting enough is that we have some rather strong investment capabilities in South Africa. In particular, for example, I didn't know this, but we're one of. Actually, I think we're the number one in African equities in terms of investment performance. Indeed, there is some interest from some of the institutional clients into this.
Now, I don't know how scalable it is because clearly at a certain point, you know, you have, you have to look at it. So it's part of the internationalization, and actually I'm due to go to South Africa by the end of the month. So it's good that you ask the question because they are, they are part of the international opportunity and expansion. More importantly, you know, when we look at, for example, Africa and emerging markets, as you know, we have, we have acquired a business called responsAbility. And this very much follows the philosophy of we're acquiring it, and then we see whether we can launch new strategies together with the Asset Owner if it is within the strategic asset location.
Africa is one of the regions we're looking to see if we can also do something on the emerging debt or emerging equity in order to support either sustainable food or inclusive finance or climate finance, which we have done, of course, in Latin America and in Asia.
On the PruFund. The benchmark that we have here is the one that we always use. We always use this too. For PruFund, we've got PruFund Growth, You've got the strategic asset allocation in the appendix, slide 65, shows you that it's probably, roughly speaking, 45% equities. It falls quite neatly in the middle of that 20%-60% shares index that we have then. I mean, no benchmark is perfect. In terms of the outperformance, I think there are many elements to that, very good investment performance, very broad in strategic asset allocation and allocation to private assets that no other mutual fund can really match. That's part, if you want, of the secret sauce of PruFund.
Obviously don't forget the smoothing mechanism, which allows the underlying price to move up and down around the smoothed line. There might have been a situation in which the unsmoothed price was above the smoothed price, then some market movement have taken some of that away, and it is now below, but the smoothed line continues to run in the middle, right? There is obviously volatility and variance around that green solid line, but it's all well within the smoothing corridors, which are ± 10%. Welcome back. Long time no see.
You cannot ask the question.
Press the hard the button gear .
Thank you for that. It's Abid Hussain from Panmure. Two questions if I can, please. Apologies for coming back on bulk annuities. I'm still wondering why you're only reentering the bulk annuity space selectively. I appreciate the capital intensity point, but in terms of demand, the demand versus supply is clearly dislocating. The demand is very strong. I can think of a number of schemes which have a large portion of private assets that might come to market. I suppose if they do come knocking, will you write the volume? You know, would you write GBP 5 billion in a year, or are you thinking much lower than that? That's the first question.
Secondly, on private assets, clearly a high margin business, what sort of hurdles might you face in ramping up that business?
Okay. Listen, on the first question, and I want to be very clear on this. We want to grow in capital light businesses. Clearly my focus and the team's focus is on asset management and wealth management. As you said, demand outstrips supply now in the BPA markets, and that's why we're looking at it. If the market would have been 1 year ago, we would not even have taken a look at it because there are players out there, established players, let them do it. Now, the market is different, it's larger, and we think we can make a difference looking at our strengths, which I'm not gonna go through them again. It has to be selective. It has to be selective.
I mean, you said number of GBP 5 billion. I mean, that's. No, that's not selective. Selective is different. I don't give any number. Don't worry.
Good. He, he's learning.
Not here. We're gonna. I hope that responds to you. The second question was.
On private assets.
On private assets.
In terms of hurdles, what do you mean in terms of hurdles?
Yeah.
Like can we win, win business? Do we win through... Do we need to add more sourcing capabilities?
No, no, no. listen, I mean, and Claire has built up the capability. It's not that we decided to do it now. We are building it up. We have what it takes. there will be a couple of people to hire.
Private assets.
Oh, sorry. Private assets. Okay. I thought it was okay. Okay. Listen, on private assets, let me be very clear. When I look at our private assets franchise, and I look at it today, it's a very strong franchise. I, in my view, when I look at the numbers and I look at where we were, and you notice that we are committing to grow this business by 2025 to GBP 100 billion from GBP 77 billion, I mean, that's really ambitious. It has scope to go even beyond that without having to add capabilities. You could, and given our model of having this vicinity between Asset Owner and Asset Manager, we could utilize which is, I will say, our strength.
We could attract, for example, teams in particular strategies in continental Europe, to attract them with seed money and global distribution. Once again, that's the opportunity for us to... You can look at, it could be a team who wants to launch a half a billion green infrastructure, whatever, mids equity or in continental Europe, and we can seed that potentially. That's the way we can then create momentum from an external perspective through our distribution. I mean, today, it's more for us about making sure we are in the right markets where there is interest for our strategy. In particular, for example, Japan, Korea, there is allocation to European private assets there. And I think we can play very well with what we have.
It's more of scaling up what we already have.
I think we have managed to cover all questions in the room. Thank you very much for that. I'm wondering, do you want to.
Listen, I mean, they've been in so many meetings, but I can just very quickly. I mean, I think there are three things, three takeaway messages. The first one is 2022 results are good results. I think, you know, we, when we look at them, we should be pleased because we delivered those results in a rather difficult market environment. I would focus on two. I'm very pleased, of course, about the flows, the net flows, positive net flows, second year. Again, I think that's important, shows the resilience of the model. Of course, also on the capital generation, because when you look what we deliver, 800.
821.
2021. You know it better than me. That's part of getting that route to the GBP 2.5 billion we want to achieve in 2024. Overall, going forward, I think we have worked on clear strategic priorities. I'm not gonna go through them again. You see them. Those clear strategic priorities has also made sure that we have clear targets going forward. I think the ones that are relevant clearly are on the financial strength ones where we are pushing for having a leverage ratio which is below 30% by 2025. More importantly, on the simplification, the GBP 200 million cost savings and the cost equivalent ratio below 70% by 2025. More importantly, I think that's the key one.
More importantly, by 2025, we want to achieve growth on the capital-light businesses in order to have those businesses contribute more than 50% of the total earnings of the group. What is important here, it's the execution, it's the discipline. To do so, you need to have a team, and I have the right team. I have the right team in place, and I have also the alignment of all the senior leaders. We will maintain our financial strength, we will simplify, and more importantly, we will grow. Of that, I'm totally sure. Thank you.
Thank you very much.