M&G reported assets under administration of £346bn at the end of the first half, up from £333bn a year ago. Positive market movements offset £1.5bn of net outflows. Within net flows, wholesale asset management was flat, with institutional asset management and wealth seeing net outflows of £0.5bn and £0.9bn respectively.
Underlying operating profit fell 4% to £375mn, but that was better than expected . The contractual service margin (store of future profit from insurance) rose 5% to £5.8bn. Operating capital generation of £486mn was 29% higher than expected, but down from £505mn last year.
The Shareholder Solvency II coverage ratio, a measure of balance sheet strength, rose from 203% to 210% over the half. A dividend of 6.6p was announced.
Guidance has been improved, with 2022-2024 cumulative operating capital generation now expected to be around £2.7bn (up from £2.5bn).
The shares fell 2.7% following the announcement.
Our view
M&G’s got off to a decent start over the first half. Flows remain a challenge that need to move in the right direction sooner rather than later. But aside from that, performance was good and capital generation targets got an uplift as a result.
M&G is an asset manager at its core, with retail and savings products (life insurance, wealth management etc) supporting the main event. The transformation programme continues, with a renewed focus on increasing the weighting of the Asset Management and Wealth businesses up to 50% of profits (currently 42%). We're supportive of the narrowed focus, and momentum looks to be building in those two areas. That's good news as net inflows have been hard to come by in recent years.
Part of the strategy is to wind down what M&G calls the Heritage book, which includes legacy products and an annuity portfolio that's been closed since 2016. It's this part of the business that drove profit growth over the first half. The annuity portfolio benefits in a higher rate environment, and that's precisely why M&G is now back in the market for new annuity business.
The bulk purchase annuity market is heating up. This is essentially where an insurer/asset manager receives a lump sum to cover a company's future pension liabilities. The lump sum can be invested and hopefully generates a higher return than the pension payments it funds. This business takes some time to yield results, but is highly cash generative over the long term.
With assets under management of c.£340bn, M&G is big, but not a giant in asset management terms. The PruFund line of with-profits funds have been selling well, and its diversification benefits are being seen more favourably given current market conditions. But the product isn't the easiest for everyday investors to understand due to its complex structure.
The revamped M&G Wealth platform looks to offer advisers an all-in-one platform, funnelling assets from customers into M&G or PruFund products. Progress is good and if it continues, PruFund solutions will be more accessible helping to flow growth for years to come.
Capital levels look good and there are targets in place to reduce relative debt levels and cut costs. All of this leaves us relatively confident that the 9.4% forward yield is achievable. M&G's defied the bears since spinning off from Prudential in 2019, growing its dividend every year. Of course, nothing is guaranteed and yields are variable.
There are positive signs for the latest phase of M&G under new stewardship and the yield is certainly attractive. But we'd like to see proof of more consistent flow growth, and further progress on cost cuts before getting too excited.
Environmental, social and governance risk
The financials sector is medium-risk in terms of ESG. Product governance is the largest risk for most companies, especially those in the US and Europe with enhanced regulatory scrutiny. Data privacy and security are also increasingly important risks for banks and diversified financial firms. Business ethics, ESG integration and labour relations also contribute to the industry’s ESG risk profile.
According to Sustainalytics, M&G’s overall management of material ESG issues is strong.
Executive compensation is tied to ESG performance targets, and M&G has assigned responsibility for overseeing ESG issues to the board. The responsible investment policy in place includes commitments to engage with investees on ESG issues. There’s a strong whistleblower programme and above average management of data privacy and cybersecurity risks.
M&G key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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