M&G Regulatory News (MNG)

9 March 2023

M&G plc full year 2022 results

Positive net client flows in Asset Management and Wealth in a year of significant market uncertainty

Returned nearly £1 billion to shareholders through dividends and share buy-back

On track to achieve £2.5 billion operating capital generation target by 2024

Launched transformation programme to drive simplification, unlock growth and deliver £200 million cost savings

1 Includes ordinary dividends paid in the year and the total consideration for the share buy-back programme

Andrea Rossi, Group Chief Executive Officer, said:

"I am pleased with how M&G has performed in 2022. Through exceptional market volatility we have clearly demonstrated the diversification and resilience of our business model, which has enabled us to deliver consistently attractive returns for both our shareholders and for our clients.

"We achieved positive net client flows in Asset Management and Wealth for the second year in a row driven by the ongoing turnaround in Wholesale Asset Management and increased client inflows into PruFund. Adjusted operating profit has been impacted by market volatility but benefited from Wealth's contribution more than doubling, as we continue to invest in the propositions offered by this business. We have also made a solid start to the achievement of our operating capital generation target of £2.5 billion by the end of 2024.

"We now have a clear strategy to build on the inherent strengths of our differentiated business model. We will maintain our financial strength, simplify our business and deliver profitable growth. We are at the start of the next phase for M&G and I am encouraged by the progress we are already making.

"Looking ahead, despite the uncertainty of the external environment, our diversified business model and strong financial position will underpin our ability to invest in the growth of our business and continue to deliver attractive shareholder returns."

Strong capital position underpins resilient financial performance

Positive flows and improved investment performance despite adverse market conditions

2 Source M&G plc and Morningstar Inc.

Outlook

3 Leverage ratio is defined as nominal value of debt as a percentage of M&G plc's shareholder Solvency II own funds

4 Definitions of key performance measures are provided in the Supplementary information section of this preliminary announcement

Enquiries:

Notes to Editors

LEI: 254900TWUJUQ44TQJY84 Classification: 1.1 Annual Financial and Audit Reports

Group Chief Executive Officer's statement

Since joining M&G in October I have been getting to know the business, and meeting colleagues, clients and investors to understand their perspectives. By engaging with our stakeholders, I now know where our capabilities are strongest and how we can grow M&G in line with our values. Our differentiated business model is one of the main reasons I wanted to join M&G and our performance in 2022 has demonstrated the underlying strength and resilience of that business model in challenging markets. The war in Ukraine and inflationary environment have highlighted global vulnerability to supply shocks and the impact of these on social, economic and political resilience.

In difficult times like these, clients value our expertise and support to navigate financial uncertainty as evidenced by continued positive net client flows (excluding Heritage) of £0.3 billion in 2022, compared to £0.6 billion in 2021. Our adjusted operating profit before tax remained resilient at £529 million (2021: £721 million) and we are on track to achieve our £2.5 billion operating capital generation target. Over the course of the year, we also returned nearly £1 billion to shareholders.

This robust performance is testament to the hard work of our talented and dedicated colleagues, and long-term relationships we have built over time with our clients.

Our structure is our strategic advantage

Our differentiated business model, with three distinct, yet balanced and complementary parts, I believe gives us a strategic advantage and the right foundations to grow profitably and responsibly. We lead with the Asset Manager at the core of our business, with Heritage and Wealth supporting its growth and enabling it to prosper: together, all thrive.

We have a well-capitalised balance sheet and we have shown we have a resilient earnings profile. We have robust investment capabilities, a broad geographical reach, and strong relationships with a wide range of clients: individuals, financial institutions, wealth managers, financial advisers and other distribution partners.

Excellent investment capabilities

Our Asset Management business manages more than £300 billion in client assets around the world, including £150 billion for our Retail and Savings clients. Our investment expertise encompasses one of the largest private assets businesses in Europe and a broad public fixed income range, as well as sustainability-driven multi-assets and thematic equities products. We complement our Asset Management offering with PruFund. At over £58 billion in assets, PruFund is one of the largest multi-assets investment propositions in the UK and Europe.

I'd like to highlight the strong performance of Wholesale Asset Management, with net client flows improving by £4.3 billion compared to last year. We are delighted with this achievement, which is a result of the tremendous work by our colleagues over several years. The recovery in our UK business was demonstrated by our Wholesale net sales ranking returning to the top 10 in the final quarter of 2022. At the same time, Wealth net client flows increased by £1.6 billion compared to last year, due to improved flows into PruFund.

Over the course of 2022, our Institutional business experienced marginal net client outflows of £0.7 billion (2021: £5.8 billion net client inflows), with redemptions triggered by the mini-budget in the UK in September. The Institutional team delivered significant advised wins in public debt and real estate during the year, and retains a healthy pipeline of opportunities.

Our European franchise performed well, with strong flows in Italy, in part thanks to our Global Listed Infrastructure Fund.

In Asia, we have seen net client inflows from institutional clients in Japan, Hong Kong and Singapore, and wholesale clients in Taiwan across a range of asset classes. We were the third largest asset manager by net sales in the Asian cross-border wholesale market in 2022. We have hired a new Asia fixed income team, establishing a truly international capability in this important asset class.

Expanding our Retail and Savings products

Our Retail and Savings business is vital to the Group, providing resilient and predictable capital generation throughout the economic cycle. It also allows our investment teams to build new capabilities, which enhance financial returns to our clients, while providing the scale to take our innovative investment products to market.

Our Wealth business enhances our reach through strong brands and intermediary relationships in the UK. With PruFund at its core, it can address the needs of a broad range of individual clients in a large and growing market.

In 2022, we added PruFund Planet to our platform. This is the first time that PruFund has been offered on any investment platform in the UK. We have also made Future+ available to investors in Italy and Ireland. This adds a new growth driver to our international activities. Future+ is a new family of global multi-asset funds delivering smoothed outcomes, designed to replicate the success of our flagship PruFund range outside the UK.

Meeting rising demand from individual clients

We created M&G Wealth, our integrated wealth management business, to meet rising demand for easily accessible investment advice and wealth solutions. We now offer access to a broad and integrated range of savings and advice solutions for UK clients, through financial advisers, hybrid advice and direct digital channels, such as our new &me investing app. We are scaling our capabilities through organic growth and acquisitions and aim to complement our existing network of advisers with Continuum (Financial Services), a fast-growing provider of independent financial advice.

In Heritage, we have maintained our focus on improving the quality of client service and outcomes, and I am pleased that our client net promoter score, covering both Wealth and Heritage clients, has improved to 14 (2021: 9).

We are also exploring ways in which we can support selected defined benefit pension funds as their needs evolve, providing innovative insurance solutions by drawing on our investment expertise, financial scale and annuities experience.

A long-term, responsible investor

Over recent years we have seen a seismic shift in investing as institutions and individuals become more sustainability focused. We recognise the scale of change required to transition the global economy to mitigate the effects of climate change, and we believe that we can make a real impact from a societal and economic perspective. This brings both significant responsibility and opportunity to M&G as conviction-led, responsible investors and stewards of the long-term savings of millions of clients.

Although we are still at the start of our journey, we are focused on making progress towards our sustainability commitments on climate and diversity and inclusion. We continue to identify investment opportunities in climate solutions and those that support a just transition. We are embedding our Net Zero Investment Framework across our investment teams, and engaging with the companies in which we invest on their ESG policies including climate change.

We also continue to expand our sustainable investing expertise with the launch of new thematic funds, the acquisition of responsAbility and deploying the £5 billion With-Profits Fund Catalyst mandate to invest in innovative businesses working to create a more sustainable world.

Simplification and profitable growth

Our financial strength underpins attractive and dependable returns to shareholders, as does our rigorous approach to capital management. Now we need to build on these strengths, and ensure our strategy continues to anticipate and meet the needs of our clients. We are narrowing our focus to three priorities: maintaining financial strength, simplifying our business, and targeting profitable growth. We are investing in our digital capabilities to ensure we make financial advice more accessible in the UK market, and to deliver strong service to support all of our clients.

The simpler an organisation is, the closer it is to its clients, the better experience and service they will receive. This is a core part of our strategy to unlock growth and increase revenue, but we have to be equally focused on costs and simplify the way we work. I want us to act faster and more efficiently.

To enable this, we have launched a transformation programme targeting £200 million of cost savings gross of inflation by the end of 2025. By 2025, we also aim to reduce our Asset Manager cost/income ratio to below 70%, but this is not the destination: our longer-term ambition is a cost/income ratio in the range of 66% to 68%.

In continuing to transform our business, we will empower colleagues and improve accountability, pushing operational accountability into the business areas that are close to our clients. This will make M&G a better place to work and we will also become easier to do business with, deliver better client outcomes and drive growth. To meet our £200 million cost savings target we will improve client journeys through digitalisation; remove management layers and streamline governance, enhancing our approach to shared services and outsourcing; and optimise our operating model.

We will focus the business on targeted opportunities where we believe our differentiated propositions and services give us a good starting point. By having this focus we expect to deliver increased adjusted operating profit from Asset Management and Wealth to more than 50% of the Group total by the end of 2025. Our targets are ambitious but achievable.

Empowering our teams

We want to create an exceptional place to work - a positive environment where colleagues can bring their true selves to work and are inspired to do their best for our clients. I'm committed to ensuring our colleagues continue to have the right support, advice and resources so they can continue to grow.

In 2022, we continued to evolve our well-being support, extending our families policy to include neonatal support. We also provided a one-off, non-pensionable payment to colleagues earning less than £50,000 to help alleviate the impact of the cost-of-living crisis. We are committed to creating both a diverse and inclusive workforce, and playing our part across the wider financial services industry.

We support industry-wide initiatives to develop diversity, and were one of the first companies in our sector to publish an ethnicity target in leadership and to voluntarily publish ethnicity pay gap data. Our mean gender pay gap for 2022 is stable at 29.2% (2021: 29.3%) and the mean ethnicity pay gap was 5.5% (2021: 5.7%). We are committed to having 40% women and 20% ethnic diversity in our senior leadership by 2025. At the end of 2022 we had made progress towards these commitments but there are still further improvements required, with 37% women and 12% ethnic diversity in our senior leadership.

Executive and leadership changes

We welcomed Kathryn McLeland as Group Chief Financial Officer in May. We have also added to our Executive team during the year, with Benoît Macé as Chief Strategy and Transformation Officer and Louise Shield as Corporate Affairs Director.

Jack Daniels, Chief Investment Officer and Managing Director of M&G Asset Management, will retire later in the year, after more than 20 years with M&G I would like to thank him for his contribution to the business and in particular the significant impact he made as Managing Director. Jack is being replaced by Joseph Pinto, who will join us later this month.

Priorities for 2023

Our operational environment remains challenging, but as we look to the next 12 months we are confident that we have the right strategy in place and that we are taking the right management actions to ensure our business continues to perform well, delivering superior returns through attractive dividends and earnings growth.

We are aiming to create a leading savings and investment business, leveraging our strengths to best address our clients' needs and delivering sustainable growth in markets with recurring, fee-based revenues: leading with the Asset manager, leveraging the Heritage balance sheet and Wealth distribution.

This isn't about being the biggest, it's about driving a step change in profitability.

Business and financial review

In 2022, a year of significant macroeconomic uncertainty, our financial performance has demonstrated the resilience of our business.

Wholesale Asset Management returned to net client inflows for the first time since 2018 of £0.5 billion (2021: £3.8 billion net client outflows), demonstrating the ongoing turnaround of the business. Our Institutional business saw net client outflows of £0.7 billion (2021: £5.8 billion net client inflows) with the domestic Institutional business impacted by the UK mini-budget crisis in the second half of the year.

We have returned to net client inflows in our Wealth business with a total of £0.2 billion, which compares to net client outflows of £1.4 billion in 2021. This turnaround in net client flows was driven mainly by strong performance in our PruFund offerings.

Total AUMA decreased to £342.0 billion (2021: £370.0 billion), predominantly driven by negative market movements from the volatility experienced in markets throughout a challenging year, partly offset by the inclusion of AUMA from the acquisitions made in the year.

Our IFRS result has been significantly impacted by the meaningful increase in yields over the year, with the unrealised fair value losses on the surplus assets in the annuity portfolio and the fair value losses on the interest rate hedging we have in place to protect our Solvency II capital position leading to a significant loss after tax attributable to equity holders for the year of £1,619 million (2021: £92 million profit). Importantly, our dividend payment capacity is linked to the value of available capital in our subsidiaries which is strong.

Adjusted operating profit before tax of £529 million (2021: £721 million) has been affected by the impact of rising yields on the annuity margin and a foreign exchange loss on our USD denominated subordinated debt. In M&G Wealth, adjusted operating profit more than doubled to £96 million, due to an increase in shareholder transfers from PruFund driven by strong investment returns for our clients.

Despite a reduction in total capital generation, which has fallen to £(397) million compared to £1,822 million at 31 December 2021 as a result of adverse market movements, our shareholder Solvency II coverage ratio remains strong at 199% (2021: 218%). The coverage ratio is calculated after dividends, cost of the share buy-back and the dilutive impact from the recognition of deferred tax assets due to mark to market losses on our assets.

We are on track to deliver our target of £2.5 billion of cumulative operating capital generation by 2024 with operating capital generation of £821 million in the year. We are also targeting £200 million cost savings across the Group, and a reduction in the core asset management cost/income ratio to below 70% by 2025. We also plan to take action to reduce our leverage ratio to below 30% by 2025.

As we focus the business on our strengths we are targeting adjusted operating profit from Asset Management and Wealth to be over 50% of the Group total by the end of 2025.

We paid an interim ordinary dividend of £154 million equal to 6.2 pence per share, in line with our policy of paying one-third of the previous year total dividend, on 29 September 2022. A second interim dividend of £310 million equal to 13.4 pence per share will be paid on 27 April 2023, which means 19.6 pence per share of total dividends were paid to shareholders in 2022, alongside the share buy-back.

In 2023 we will be publishing our IFRS 17 compliant results for the first time, marking the end of what has been significant implementation programme for our business and the insurance industry as a whole.

Adjusted operating profit before tax

The following table shows adjusted operating profit before tax split by segment and source of earnings:

Adjusted operating profit before tax was £529 million for the year ended 31 December 2022 (2021: £721 million).

In Asset Management, the reduction in adjusted operating profit to £264 million (2021: £315 million) is mainly driven by an increase in expenses as we continue building out the capability and operations of our international investment function. In addition, there has been an increase in the operational cost base linked to inflation.

Despite the challenging markets, which resulted in a decrease in investment return from £17 million to £(5) million, the income earned from performance fees and carried interest in the period has increased by £35 million to £56 million.

In Retail and Savings, the total with-profits shareholder transfer net of hedging and other gains/losses has increased by £86 million to £354 million, benefiting from the strong investment performance. However, this has been offset by a £142 million fall in the annuity margin driven by the upwards movement in yields and other one-off benefits from 2021 that did not repeat in 2022, including a prior year release of the annuity sales practices review provision of £31 million in 2021. This has led to a reduction in Retail and Savings adjusted operating profit to £572 million (2021: £660 million).

Corporate Centre costs have increased which is largely driven by adverse foreign exchange movements of £50 million (2021: £4 million) on the USD subordinated debt. Changes in executive leadership have resulted in additional remuneration and recruitment costs.

Adjusted operating profit before tax to IFRS (loss)/profit after tax

The following table shows a reconciliation of adjusted operating profit before tax to IFRS (loss)/profit after tax:

IFRS (loss)/profit after tax

IFRS result after tax attributable to equity holders is a £1,619 million loss compared with a £92 million profit in 2021. The loss is primarily reflective of a £2,484 million loss in the year (2021: £537 million loss) from short-term fluctuations in investment returns, offset in part by a tax credit of £499 million.

In Retail and Savings, market conditions have led to significant losses from short-term fluctuations in 2022. These losses primarily comprise a £1,301 million loss (2021: £99 million loss) from fair value movements on the surplus assets in the annuity portfolio and a £989 million loss (2021: £103 million loss) on interest rate swaps purchased to protect PAC's Solvency II capital position against falls in interest rates, both due to significant rising yields in the year. These are particularly impacted by longer-term yields which have increased by over 270 basis points, in some instances, over the course of the year.

These losses were partly offset by a positive movement on the hedging instruments held to protect the future shareholder transfers from falling equity markets which moved to a gain of £104 million (2021: £248 million loss) as a result of falls in the US and European equity stock markets.

The interest rate swaps and the equity hedges provide some protection to the Solvency II balance sheet but there is no corresponding item to protect on the IFRS balance sheet, and therefore when the fair value of the derivatives change as interest rates and equity markets move, there are no offsetting fair value movements on an IFRS basis leading to an overall loss in the current year.

Amortisation and impairment of intangible assets includes a £25 million (2021: £nil) impairment of goodwill in relation to the M&G Wealth Platform business related to the uncertainty around long-term market growth in the current macroeconomic environment.

Restructuring and other costs of £147 million (2021: £146 million) relate to £56 million (2021: £35 million) in relation to the transformation of the business, £17 million (2021: £48 million) in respect of our future ways of working and associated changes to our office spaces and £32 million (2021: £45 million) in relation to the development of the M&G Wealth platform business. A significant part of our transformation programme is the on-going project to migrate our multiple policy administrative systems to one single system.

We have incurred costs of £11 million (2021: £6 million) in relation to this programme in 2022 and expect to complete this programme over the next two to three years.

The equity holders' effective tax rate for the year ended 31 December 2022 was 23.6% (2021: (13.6%)). Excluding non-recurring items, the equity holders' effective tax rate was 18.1% (2021: 9.9%). The equity holders' effective tax rate of 23.6% was higher than the UK statutory rate of 19% (2021: 19%). This reflects a favourable position (higher tax benefit on the pre-tax loss position) and is primarily due to the beneficial impact of recognising deferred tax assets on current period tax losses, for which the majority have been measured at the new UK corporation tax rate of 25% that is effective from 1 April 2023. This benefit was partially offset by the adverse impact of deductions not allowable for tax purposes.

Further information on tax is provided in Note 6 of the consolidated financial statements.

Capital generation

The following table shows an analysis of total capital generation:

Total capital generation for 2022 is negative £397 million, compared to positive £1,822 million in 2021. Capital generation has been adversely affected by significant market volatility and a lower benefit from management actions. However, underlying capital generation, which represents the capital generated by the performance of the business, has increased to £628 million from £484 million.

Asset management underlying capital generation has fallen to £246 million (2021: £313 million) driven by the fall in adjusted operating profit and an increase in risk capital held in respect of credit and market risk, due to increased foreign exchange stresses and seeding activities.

Corporate Centre underlying capital generation has improved by £29 million to negative £259 million due to a fall in capital requirements of £8 million (2021: £8 million increase) and higher investment income received on assets held, which more than offset an increase in head office costs.

Other operating capital generation has fallen by £440 million to £193 million largely as a result of one-off benefits in 2021 not being repeated in 2022. These include the benefit from the Major Model Change, the release of £150 million of counterparty risk capital in respect of the transfer of annuity business to Rothesay Life plc and a larger benefit compared to 2022 in respect of asset trading in the annuity portfolio, particularly in relation to property sales. 

Market movements over 2022 have resulted in a negative impact of £1,225 million (31 December 2021: £917 million positive impact) following a fall in US and Asian equity markets, the widening of credit spreads, and a substantial increase in interest rates. The main impact is as a result of losses on the value of surplus annuity assets of £1,602 million (31 December 2021: £64 million loss). On a Solvency II basis there are more surplus assets in the annuity book than on an IFRS basis, as the measurement basis for Solvency II liabilities does not include an allowance for prudence and therefore the total fair value of the assets used to back them is lower than on an IFRS basis.

Other impacts include losses on interest rate swaps of £989 million (31 December 2021: £103 million), as the swaps are designed to protect the fund in a falling interest rate environment, a reduction in the benefit from the present value of shareholder transfers less equity hedges to £454 million (31 December 2021: £653 million), and a reduction in capital requirements of £1,034 million.

Restructuring and other costs of £166 million reflects the impact on the capital position of transformation costs outlined in the discussion on IFRS results, and additionally includes the impact of moving to the Investment Firms Prudential Regime, the new regulatory regime for investment firms.

Capital position

The shareholder Solvency II ratio remains strong at 199% (2021: 218%). However, M&G plc's Solvency II surplus fell to £4.6 billion as at 31 December 2022 (2021: £6.2 billion), predominantly impacted by lower own funds but market movements have also reduced the solvency capital requirement. Own Funds has reduced by £2.1 billion, driven by negative total capital generation of £397 million (2021: positive £1,822 million) combined with a deduction of £465 million (2021: £466 million) from dividends paid to shareholders in the year, a reduction of £503 million as a result of the share buy-back, and a reduction of c.£200 million (2021: £32 million) from other capital movements, (primarily the acquisitions of Sandringham, TCF and responsAbility).

Our With-Profits Fund continues to have a strong Solvency II coverage ratio of 362%. This is higher than the 302% reported at 31 December 2021; the distribution of excess surplus to policyholders of £1.5 billion, coupled with market movements contributed to a reduction in surplus over the period, however, both of these items also reduced the solvency capital requirements.

In particular, the sharp increase in yields and fall in equity assets reduced exposure to market risks - and thus reduced the amount of capital that needs to be held against these risks - resulting in an overall increase in the with-profits solvency ratio despite the fall in surplus as a result of market movements. The run-off of capital requirements also contributed to the increase in this ratio. 

The regulatory Solvency II coverage ratio of M&G plc as at 31 December 2022 was 164% (2021: 168%). This view of solvency combines the shareholder position and the With-Profits Fund but excludes all surplus within the With-Profits Fund.

The shareholder, With-Profits Fund, and regulatory views of the Solvency II position presented here assume transitional measures on technical provisions that have been recalculated using management's estimate of the impact of operating and market conditions at the valuation date.

Financing and liquidity

The following table shows key financing and liquidity information:

The main metric we use to manage our debt is the leverage ratio, defined as nominal value of debt as a percentage of M&G plc's shareholder Solvency II own funds. Our leverage ratio of 35% at 31 December 2022 has increased from 28% at 31 December 2021, as a result of the fall in Solvency II Own Funds in the year due to the impact of market movements as set out earlier under Capital position.

The following table shows the movement in cash and liquid assets held by the Parent Company during the period:

i Closing cash and liquid assets at 31 December 2022 included a £793 million (2021: £1,651 million) inter-company loan asset with Prudential Capital plc, which acts as the Group's treasury function.

Movements in cash and liquid assets held by the Parent Company for the year ended 31 December 2022 represent the dividends and payments that arise in the normal course of business. Total cash and liquid assets have decreased with dividend payments to equity holders of £465 million (2021: £466 million), interest paid on structural borrowings of £190 million (2021: £186 million) and £503 million in respect of the share buy-back scheme completed in the year.

This has been partly offset by cash dividends of £391 million (2021: £1,458 million) received from our subsidiaries. As part of our cash management processes, £185 million of dividends from PAC and M&G Group Limited in the year have been retained in lower level holding companies to fund the acquisitions of Sandringham and TCF, and our partnership with Moneyfarm and therefore cash dividends from subsidiaries are not comparable year on year. Also, a large dividend was received from PAC via the intermediate holding company in 2021, in line with our capital management framework.

Dividends

We paid a dividend of 12.2 pence per share, equal to £311 million, on 28 April 2022. In addition, we paid an interim ordinary dividend of 6.2 pence per share, equal to £154 million, in line with our policy of paying one-third of the previous year total dividend, on 29 September 2022. A second interim dividend of 13.4 pence per share, equal to roughly £310 million, will be paid on 27 April 2023.

Asset Management

The ongoing turnaround in our Wholesale Asset Management business is demonstrated by net client inflows in the year. However, the challenging market conditions in the UK led to net client outflows in Institutional Asset Management.

Assets under management and administration and net client flows

i £12.7 billion of total asset management AUMA relates to assets under advice (2021: £7.9 billion).

Our Asset Management business saw net client outflows of £0.2 billion, against the backdrop of extremely volatile markets, compared with net client inflows of £2.0 billion in 2021.

Following the change in operating segmentation of our business in 2021, we have renamed Retail Asset Management to Wholesale Asset Management to better reflect the nature of the business. Wholesale Asset Management returned to a net client inflow position of £0.5 billion (2021: £3.8 billion net client outflow) for the first time since 2018 following actions taken to improve investment performance and reposition the business. Although a reduction on the £0.8 billion net client inflows reported at 30 June 2022, this reflects the elevated economic volatility experienced in the second half of the year. Performance has improved markedly with 68%5 of Wholesale funds now in the upper two performance quartiles over one year (31 December 2021: 45%). Our partnerships with European distributors have enabled us to deliver strong inflows into our investment solutions channel, which accounted for £1.9 billion of net client inflows in the year.

5 Source M&G plc and Morningstar Inc.

This was partly offset by net client outflows experienced in the other parts of our wholesale business of £1.4 billion, driven by economic uncertainty and heightened market volatility. Despite this £1.4 billion net client outflow, we have seen the success of our newer propositions in the year such as the Global Listed Infrastructure Fund, investing in sustainable infrastructure companies and investment trusts. This fund delivered £1.5 billion of net client inflows predominantly into our International Wholesale business in the year.

Wholesale Asset Management AUMA increased £1.2 billion to £53.9 billion with negative market movements of £1.5 billion in the year, more than offset by positive other movements of £2.2 billion.

Net client outflows of £0.7 billion (2021: £5.8 billion net client inflows) in our Institutional Asset Management business reflect the significant market volatility experienced in the year. This was particularly evident in our UK Institutional business with net client outflows of £2.3 billion, with a notable spike in outflows following September's mini-budget. In contrast, our International Institutional business continued to deliver strong net client inflows of £1.6 billion. The net outflows are a combination of the gross outflows, particularly in the second half of the year of £8.9 billion (H2 2021: £5.3 billion) driven by the mini-budget, and the reduced gross inflows of £3.1 billion to £13.1 billion (2021: £16.2 billion) reflecting changing client behaviour when markets are volatile.

Institutional Asset Management AUMA decreased by £3.9 billion to £99.2 billion mainly driven by negative market movements from the public debt channel, partly offset by £2.9 billion additional AUMA from the acquisition of responsAbility.

Our expertise in private assets, which offers private fixed income, alternatives, real estate and infrastructure equity offerings, is a key component of our institutional investment capability, and represents a resilient, high-margin source of revenues. Our private assets under management increased 6% to £76.6 billion of AUMA as at 31 December 2022 (2021: £72.6 billion).

Adjusted operating profit before tax

The following table shows an analysis of adjusted operating profit before tax:

i £306 million of the fee-based revenue is in respect of assets managed on behalf of Retail and Savings (2021: £303 million).

Adjusted operating profit before tax from our Asset Management business has decreased 16% to £264 million in the year ended 31 December 2022 (2021: £315 million) primarily driven by increased expenses.

Following the acquisition of a controlling interest in MandG Investments Southern Africa Pty (Limited) (MGSA) (formerly PPMSA) in July 2021, the presentation of revenues and costs in relation to MGSA are now fully represented within fee-based revenues and operating expenses respectively. Pre-acquisition the profit on MGSA was represented by the share of profit on joint ventures and associates, therefore the impact on the revenue and expenses is not directly comparable year-on-year.

Revenue earned by Institutional Asset Management has increased to £598 million (2021: £539 million) which includes an additional £17 million of revenue recognised from MGSA and £23 million of revenue from responsAbility, which was acquired in May 2022. This was marginally offset by lower Wholesale Asset Management fee-based revenues of £397 million (2021: £414 million) as we continue to experience the remaining impact from the lower pricing structure applied to our UK OEICs in February 2021 and the impact of market volatility in the year. In addition, income earned from performance fees and carried interest in the year has increased by £33 million to £56 million.

The Asset Management average fee margin of 32bps was in line with 31 December 2021. Average fee margins in the Institutional Asset Management business increased to 29bps (2021: 27bps) driven by the inclusion of responsAbility, while the Wholesale Asset Management fee margins decreased to 38bps (2021: 39bps).

Adjusted operating expenses have increased by £91 million to £763 million (2021: £672 million) with an additional £20 million of costs recognised relating to MGSA and £22 million in relation to responsAblity. In addition, we have incurred increased costs relating to the further development of our capabilities and operations across our international investment function of £20 million and a further £21 million increase as a result of the impact of inflation on our cost base. The cost/income ratio for the Asset Management business increased to 77% (31 December 2021: 70%) reflective of the rising operating expenses of the business and the impact of inflation in the year.

Other shareholder (loss)/profit primarily relates to investment return on seed investments and units held to hedge management incentive schemes which has fallen by £22 million compared with the prior year reflecting the falls in equity markets in the year.

Capital generation

The following table shows an analysis of operating capital generation:

Operating capital generated by Asset Management decreased to £213 million (2021: £328 million), driven by a decrease in underlying capital generation due to the fall in adjusted operating profit, and an increase in risk capital held in respect of credit and market risk. The fall in other operating capital generation is attributable to an increased allocation of operational risk capital (offset elsewhere in the Group), and lower investment return.

On 1 January 2022, M&G Investments adopted the new Investment Firms Prudential Regime (IFPR). The impact of the change in capital regime was a decrease in capital of £35 million primarily in relation to deferred tax assets that could no longer be recognised. This one-off impact is not included in determining operating capital generation but included in total capital generation as restructuring and other. 

Retail and Savings

We are seeing continued growth of our Wealth business and a strong performance from our with-profits business. However, the current economic conditions have resulted in an overall decline in adjusted operating profit and a significant IFRS loss after tax.

Assets under management and administration and net client flows

i £149.9 billion of AUMA is managed internally by the Group's Asset Management business (2021: £168.6 billion).

Wealth net client inflows increased to £0.2 billion compared with net client outflows of £1.4 billion in 2021. This turnaround in net client flows was driven mainly by inflows into PruFund following strong investment performance and improved service levels. The trends underscore the importance of broadening the proposition offered in our Wealth business.

Retail and Savings AUMA decreased to £186.4 billion driven by a fall in Heritage AUMA due to adverse market movements of £17.7 billion and net client outflows of £6.0 billion (2021: £6.9 billion).

Wealth AUMA decreased to £83.4 billion primarily due to adverse market movements of £3.4 million, partly offset by a £2.4 billion increase in AUMA from the completion of the Sandringham acquisition.

The acquisition of Sandringham has provided our clients with access to whole of market advice, and our partnership with Moneyfarm has provided direct investment services to our UK clients. To complete our offering, we have also acquired TCF Fund Managers LLP, a provider of model portfolio services. TCF has since been renamed M&G Wealth Investments.

Other Retail and Savings AUMA decreased to £8.9 billion, as a result of market movements despite positive net client inflows of £0.3 billion.

Overall Retail and Savings (excluding Heritage) experienced net client inflows of £0.5 billion. PruFund is an investment solution offered to clients of both Wealth and Other Retail and Savings. PruFund experienced net client inflows of £0.8 billion in 2022 (2021: £1.4 billion net outflows) across both business lines. This was partly offset by outflows of £0.3 billion, from other Retail and Savings business in the year.

Adjusted operating profit before tax

The following table shows an analysis of adjusted operating profit before tax:

Adjusted operating profit before tax from our Retail and Savings business reduced to £572 million (2021: £660 million) primarily driven by a decrease of £142 million in the annuity margin, partly offset by an increase in fee-based revenues of £17 million, and an increase in the result from the with-profits business of £86 million.

Fee-based revenues increased by £17 million to £295 million and includes an additional £27 million primarily due to the recognition of revenue from Sandringham for the first time.

The decrease in annuity margin is primarily driven by rising yields in the period due to differences in the duration of the long-term annuity liabilities and the assets held to back them. The duration mismatch between these assets and liabilities resulted in a loss of £122 million in the period (2021: £6 million).

The with-profits shareholder transfer net of hedging and other gains/losses increased to £354 million (2021: £268 million). The gross with-profits shareholder transfer increased to £446 million (2021: £366 million) primarily as a result of strong investment performance in 2021 and 2022. The result also benefited from the release of the provision for expense overruns of £15 million which had been established on new business written in the With-Profits Fund due to lower sales volumes in 2021. This was partly offset by fair value losses of £102 million (2021: £60 million) on the derivative instruments used to mitigate equity risk in respect of shareholder transfers.

Adjusted operating expenses are broadly stable year-on-year.

Other shareholder (loss)/profit is down on 2021 with 2022 impacted by the recognition of a £35 million insurance reserve in relation to initial expenses on the Future+ business and also includes a number of insurance reserve movements in relation to legacy remediation programmes and other provisions.

Adjusted operating profit before tax sources of earnings

The following table shows adjusted operating profit before tax split by source of earnings:

Adjusted operating profit before tax from our Wealth business increased to £96 million (2021: £41 million) driven by an improvement in the net result from PruFund business to £128 million (2021: £63 million). The gross with-profits shareholder transfer of £146 million (2021: £115 million) and the release of £15 million (2021: £33 million loss) expense overruns previously recognised, as noted above, are partly offset by fair value losses on hedges of £33 million (2021: £19 million).

The loss from Wealth's platform and advice business increased to £24 million (2021: £4 million loss) driven by an increase in expenses as we modernise the business, including the digitalisation of the platform. This is key to our strategy for delivering profitable growth.

Heritage adjusted operating profit decreased 25% to £466 million (2021: £620 million) largely driven by the reduction in the annuity margin, which is analysed further below.

Traditional with-profits business net result increased in the year to £226 million (2021: £205 million) as a result of strong investment performance in 2021 and 2022.

Other Retail and Savings is up £11 million, primarily driven by an increase in profits from the business written in Poland, alongside a benefit from extending the term of the agreement to reimburse the With-Profits Fund for its contribution to the costs for growing the business in Poland, offset in part by the recognition of an insurance reserve for initial expenses on the Future+ business.

The following table provides further analysis of the annuity margin:

Recurring sources of earnings from the annuity book are primarily the return on assets held to back capital requirements and the release of the margins held in respect of credit risk, mortality and expenses. These recurring sources of earnings decreased by 5% to £163 million (2021: £172 million) mainly driven by a lower benefit in the year from the release of credit default allowances.

During 2022, we earned £35 million from asset trading and portfolio management actions, compared with £10 million in 2021 which was impacted by losses on property disposals due to the impact on the valuation of annuity liabilities.

The benefit from longevity assumption changes has increased by £68 million to £193 million mainly due to lower expected future improvements in mortality rates (see Note 11.1.3 for more detail on the Group's longevity assumptions).

The annuity liabilities and the assets that back them are well matched on an IFRS basis but small differences in durations exist. With annuity liabilities' durations being overall shorter than the backing assets, losses occur in a rising rate environment. As a result there was a £116 million increase in duration mismatching losses within Other. Additionally, the Other annuity margin has decreased as a result of one-off benefits from 2021 that did not repeat in 2022 including a £31 million benefit from the release of the Thematic Review of Annuity Sales Practices (TRASP) provision in the year.

Credit quality of fixed income assets in the annuity portfolio remained strong in 2022. 98% (2021: 98%) of the debt securities held by the shareholder annuity portfolio are investment grade and only 20% (2021: 18%) are BBB. Downgrades experienced in the year have been relatively moderate, with 5% (2021: 3%) of bonds in the shareholder annuity portfolio subject to a downgrade.

Adjusted operating profit excludes the impact of £2,484 million (2021: £542 million) short-term fluctuations in investment return in the Retail and Savings segment as market conditions have led to unrealised losses on surplus assets in the annuities portfolio and derivative contracts held to protect the Solvency II balance sheet, leading to an overall IFRS loss in the year.

Capital generation

The following table shows an analysis of operating capital generation:

During the year we have revised our capital generation methodology to reallocate realised gains and losses on hedges to protect future shareholder transfers from falling equity markets, from underlying capital generation to other operating capital generation (management actions and other). We have not restated comparatives. The value of realised losses on the equity hedges was £33 million (31 December 2021: £94 million). There was no impact on overall operating capital generation.

In Wealth, the contribution to underlying capital generation from in-force with-profits business increased to £216 million (2021: £112 million), an increase of £56m after allowing for the methodology change to reallocate £48 million of realised losses on equity hedges for 2021 to other operating capital generation. Underlying capital generation for with-profits business relates to the expected return on the present value of shareholder transfers adjusted for movements in the capital held against these transfers. The increase is primarily as a result of a reduction in the solvency capital requirement.

Despite higher new business sales, new business strain reduced to £36 million (31 December 2021: £52 million), since the higher sales avoided the repeat of the expense overrun we experienced in 2021 and allowed us to release a £15m provision.

Underlying capital generation across the remainder of Wealth fell marginally over the period reflecting losses in respect of the Platform and Advice business.

Underlying capital generation from Heritage increased £125 million to £503 million. The traditional with-profits business in Heritage generated underlying capital of £192 million during the year to 31 December 2022 (2021: £142 million). This is comparable with the previous year after allowing for the change in methodology to reallocate the equity hedge impact to other operating.

There also continued to be significant underlying capital generation from the shareholder annuity and other business, contributing £311 million (2021: £236 million). The increase in underlying capital generation for the annuity business is driven by an increase in the expected return on surplus assets in the annuity portfolio as a result of substantial rises in yields over 2022.

Underlying capital generation for other Retail and Savings business reduced due to the requirement to hold capital in respect of anticipated new business in 2023 which is linked to our strategic priorities.

Other operating capital generation decreased to £194 million (2021: £621 million), largely as a result of one-off benefits in 2021 that have not been repeated. This includes a decrease in model improvements of £113 million to negative £17 million largely attributable to the one-off benefit from the major model change in 2021 that updated the modelling methodology for credit assets. The benefit from management actions and other also decreased by £434 million to £53 million with 2021 benefiting by £150 million from the release of counterparty risk in respect of the transfer of annuity business to Rothesay Life plc and higher operating capital generation from asset trading in the annuity portfolio of £140 million, following sizable property sales. These decreases were partially offset by an increase in the benefit from longevity assumption changes.

Consolidated Financial Statements

Consolidated income statement

Consolidated statement of comprehensive income

Consolidated statement of financial position

Consolidated statement of changes in equity

Consolidated statement of cash flows

Basis of preparation and significant accounting policies

1.1 Basis of preparation

The consolidated results in this preliminary announcement have been taken from the M&G plc Group's 2022 Annual Report and Accounts which will be made available on the Company's website on 23 March 2023.

The consolidated financial statements for the year ended 31 December 2022 comprise the financial statements of M&G plc ("the Company") and its subsidiaries (together referred to as ''the Group''). The consolidated financial statements have been prepared in accordance with UK-adopted international accounting standards (IAS). The consolidated financial statements have been prepared under the historical cost basis except for investment property measured at fair value, certain financial assets and financial liabilities (including derivative instruments) that are measured at fair value through profit and loss (FVTPL), insurance contract liabilities that are measured in accordance with the requirements of IFRS 4: Insurance contracts, and defined benefit assets and liabilities, measured at the fair value of plan assets less the present value of the defined benefit obligations. Assets and disposal groups held for sale are stated at the lower of the previous carrying amount and fair value less costs to sell.

The basis of preparation and significant accounting policies applicable to the consolidated financial statements can be found in the basis of preparation and significant accounting policies section of the 2022 Annual Report and Accounts.

The preliminary announcement for the year ended 31 December 2022 does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. The statutory results under UK-adopted international accounting standards for full-year 2022 have been audited by PricewaterhouseCoopers LLP (PwC) and for 2021 were audited by KPMG LLP (KPMG). PwC have reported on the 2022 consolidated financial statements and their audit report is unqualified and does not contain a statement under section 498 (2) or (3) of the Companies Act 2006. The Group's 2021 Annual Report and Accounts have been filed with the Registrar of Companies.

Unless otherwise noted, the consolidated financial statements are presented in million pounds sterling (£m), the Group's functional and presentation currency.

Restatement of prior period information

The comparative consolidated statement of financial position as at 31 December 2021 has been restated following a presentational change in tax-related balances arising in certain consolidated property funds which were disclosed incorrectly in the prior period. The tax balances have been reallocated from Accruals, deferred income and other liabilities to Current tax liabilities and other taxes and Deferred tax liabilities.

The comparative consolidated income statement for the year ended 31 December 2021 has also been restated to reallocate tax expense from Administrative and other expenses to Tax charge attributable to policyholders' returns, to reflect this presentational change. As a result, Profit before tax for the year ended 31 December 2021 has been restated.

The restatement has had no impact on profit for the year ended 31 December 2021 or total equity attributable to shareholders as at 31 December 2021.

The impact of the restatement on the consolidated statement of financial position and consolidated income statement is set out in the tables below:

In the consolidated statement of cash flows, £81m has been reallocated from Profit before tax and split between Other liabilities of £67m, Other non-cash items of £3m and Tax paid of £17m, to reflect the change in presentation. The reallocation from Profit before tax relates to policyholder tax and does not impact Profit before tax attributable to equity holders. Comparatives in the impacted notes to the consolidated financial statements have also been restated.

Going concern

The Directors have reasonable expectation that the Group as a whole has adequate resources to continue in operational existence over a period of at least 12 months from the date of approval of the consolidated financial statements.

To satisfy themselves of the appropriateness of the use of the going concern assumption in relation to the consolidated financial statements, the Directors have considered the liquidity projections of the Group, including the impact of applying specific liquidity stresses. The Directors also considered the ability of the Group to access external funding sources, including access to the £1.5bn revolving credit facility and the management actions that could be used to manage liquidity.

In addition, the Directors also gave particular attention to the solvency and liquidity projections of the Group under various stressed scenarios which consider various assumptions around inflation and actions by central banks resulting from the current macroeconomic environment and uncertain geo-political situation which affect supply chains and consumer behaviours.

The impact of the following individual stresses on solvency were considered as part of the assessment:

We also assessed the resilience of our financial position in a high inflationary environment scenario and the economic implications resulting from it.

The results of the assessment demonstrated the ability of the Group to meet all obligations, including payments to shareholders and debt holders, and future business requirements for the foreseeable future, considering relevant management actions are taken as necessary. In addition, the assessment demonstrated that the Group was able to remain above its regulatory solvency requirements in a stressed scenario.

For this reason, the Directors continue to adopt the going concern basis in preparing the consolidated and Company financial statements.

1.2 New accounting pronouncements

1.2.1 New accounting pronouncements adopted by the Group

In preparing these consolidated financial statements the Group has adopted the following standards, interpretations and amendments that became effective during the year:

None of the above interpretations and amendments to standards are considered to have a material effect on these consolidated financial statements

1.2.2 New accounting pronouncements not yet effective

The following standards, interpretations and amendments have been issued but are not yet effective for the Group. This is not intended to be a complete list as only those standards, interpretations and amendments that could have an impact upon the consolidated financial statements are discussed.

1.2.2.1 IFRS 9: Financial Instruments

In July 2014, the International Accounting Standards Board (IASB) published IFRS 9: Financial Instruments (IFRS 9) which is effective for annual periods beginning on or after 1 January 2018, except as described below, with early application permitted.

IFRS 9 replaces the existing standard, IAS 39: Financial Instruments-Recognition and Measurement. The standard provides new principles for determining classification and measurement of financial instruments, introduces a new forward-looking impairment model based on expected losses (replacing the existing incurred loss model) and provides new guidance on application of hedge accounting.

In September 2016, the IASB published amendments to IFRS 4, "Applying IFRS 9 Financial Instruments with IFRS 4: Insurance Contracts" to address the temporary consequences of the different effective dates of IFRS 9 and IFRS 17: Insurance Contracts. The amendments include an optional temporary exemption from applying IFRS 9 and the associated amendments until IFRS 17 comes into effect. This temporary exemption is available to companies whose predominant activity is to issue insurance contracts based on meeting the eligibility criteria as at 31 December 2015 as set out in the amendments. In June 2020, the IASB amended IFRS 17 so that the revised effective date of the standard is for periods beginning on or after 1 January 2023. The IASB also confirmed through this amendment that IFRS 9 could be delayed for insurers to keep the effective dates of IFRS 9 and IFRS 17 aligned.

As the Group met the required eligibility criteria for temporary exemption, the adoption of IFRS 9 has been deferred to coincide with the adoption of IFRS 17 on 1 January 2023. The comparative period will be restated for IFRS 9 and the Group will apply the classification overlay in IFRS 17 to financial assets derecognised in 2022 and present these assets as if classification and measurement of IFRS 9 have been applied.

Classification and Measurement

Under IFRS 9 financial assets are classified into three categories: fair value through profit or loss, fair value through other comprehensive income or amortised cost. The classification is based on the business model on which the financial assets are managed and the contractual cash flows of these assets. IFRS 9 largely retains the requirements of IAS 39 in respect of the classification and measurement of financial liabilities.

IFRS 9 will affect the classification and measurement of financial instruments held at 1 January 2023 as follows:

i Except Deferred consideration which is classified as FVTPL designated under IAS 39 and IFRS 9.

The majority of the Group's financial instruments are measured at fair value both before and after transition to IFRS 9. The impact to Group total equity from reclassifying loans from amortised cost to fair value is a decrease of £0.1bn at 1 January 2023 and an increase of £0.1bn at 1 January 2022.

Impairment

A new impairment model will apply to the Group's financial assets measured at amortised cost. The Group estimate that due to the size and nature of the assets that will be held at amortised cost following the application of the IFRS 9, there will be no material change to the impairment recognised.

Hedge accounting

The Group does not currently apply hedge accounting.

The assessment above is preliminary and is subject to change as the Group continue to refine the new accounting policies, assumptions, judgements and estimates in respect of IFRS 9.

Presented below are disclosures required by the amendments to IFRS 4 for entities deferring the adoption of IFRS 9. These are provided to enable users to compare results with those entities that have adopted IFRS 9. As required by the amendment, the table shows the fair value of the Group's directly held financial assets at 31 December 2022, distinguishing those financial assets which have contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) as defined by IFRS 9.

i Loans have been restated for 31 December 2021 from "Financial assets that pass the SPPI test" to "All other financial assets net of derivative liabilities" following business model assessment carried out in 2022.

1.2.2.2 IFRS 17: Insurance Contracts

IFRS 17: Insurance Contracts (IFRS 17), effective from 1 January 2023, has been published by the IASB, and endorsed without amendment for application by UK listed groups by the UK Endorsement Board. IFRS 17 replaces the existing interim standard, IFRS 4: Insurance Contracts. The Group intends to adopt the new standard on its mandatory effective date, alongside the adoption of IFRS 9: Financial Instruments.

A key principle of IFRS 17 is that the profit from insurance contracts (and investment contracts with discretionary participation features) is recognised over the period over which service is provided to policyholders. In addition, while expected profits are deferred, expected losses are recognised immediately and, as a consequence, the accounting result depends on the level of aggregation at which the contracts are measured. Given this, IFRS 17 specifies how the insurance contracts should be divided into groups for the purpose of recognition and measurement.

Status of implementation project

The implementation of IFRS 17 continues to be a key priority for the Group and involves significant change to systems and processes. Key components of the programme include a large number of methodology and implementation judgements, delivery of new systems and controls and the production of comparative results. To deliver a programme of this size, a large number of resources, incorporating a wide range of skills and expertise, are required. 

Project progress is tracked against key milestones and reported through internal governance, including to the Group Audit Committee, on an ongoing basis. Due to the complexity of the with-profits business and scale of change involved, delivery remains challenging but the programme has met key milestones and is preparing to report in accordance with the new standard in 2023. The focus over 2023 is the completion of the production of restated comparatives and ensuring the business is ready to migrate to the new systems, processes and internal controls in the timescales available.

Overview of IFRS 17

Contracts within the scope of IFRS 17

An entity must apply IFRS 17 to determine the requirements for recognition, measurement, presentation and disclosure of:

The definitions of insurance risk and discretionary participation features under IFRS 17 are unchanged from IFRS 4. Therefore the Group's judgements as to what constitutes significant insurance risk and significant discretionary participation features when determining whether contracts are within the scope of IFRS 17 are unchanged from the judgements that the Group made for IFRS 4.

Identifying contracts

The requirements for identifying contracts within the scope of IFRS 17 is not limited to determining only whether a contract falls into one of the three categories above but also requires the entity to assess whether contracts within the scope of IFRS 17 contain embedded derivatives, distinct investment components or obligations to provide distinct goods or services other than insurance contract services that must be separated out and accounted for under a different standard (with the remaining components accounted for under IFRS 17).

Level of aggregation

IFRS 17 requires contracts to be aggregated together into groups for measurement purposes. Contracts are grouped together:

There are similar grouping requirements applied to reinsurance contracts held although, rather than being assessed by profitability, reinsurance contracts held are assessed according to whether at initial recognition their value to the Group is a net gain, a net loss with no significant possibility that the value becomes a net gain subsequently, or neither of these.

Upon transition the Group expects to aggregate the in-force contracts into about 70 groups.

Measurement - Overview

The carrying amount of a group of insurance contracts is the sum of the liability for incurred claims and the liability for remaining coverage. The liability for incurred claims contains fulfilment cash flows for incurred claims that have not yet been paid to policyholders and other relevant cash flows.

The liability for remaining coverage is the sum of:

Measurement - future cash flows

Underlying items

IFRS 17 includes the concept of "underlying items", which are assets that determine some of the amounts payable to policyholders. Underlying items form part of the assessment of "direct participation features", which determines which CSM measurement model must be used and how the CSM is re-measured under the Variable Fee Approach (see section on CSM measurement below). Underlying items are also included in the assessment of whether there is mutualisation (see below) between groups of contracts.

Underlying items of the with-profits groups of insurance contracts

The underlying items are the assets backing the asset shares (which are the accumulated value of all items of income and outgo for with-profits policies) plus, where applicable, the assets backing enhancements that are expected to be added to asset shares in the future, such as profit from some of the non-profit business written in the With-Profits Fund.

Other underlying items in the With-Profits Fund

The With-Profits Fund includes assets that are expected to be utilised to pay amounts to current or future policyholders in addition to the provisions held in the groups of insurance contracts. The underlying items for these additional amounts are defined as:

Mutualisation

In general, IFRS 17 only requires a liability to be held for the current policyholders at each valuation. However, in addition, IFRS 17 acknowledges the "mutualisation" feature of with-profits funds whereby the cash flows of some contracts may affect or be affected by the cash flows of other contracts. In recognition of this feature, IFRS 17 also permits a liability to be held that represents the share of the surplus assets in the With-Profits Fund attributable to current or future policyholders.

Future cash flows of the with-profits groups of insurance contracts - impact of mutualisation

Surpluses may arise from some with-profits contracts, for example if the amounts charged to policies exceed the costs they are intended to cover. These surpluses accrue to the With-Profits Fund and may be utilised to meet deficits arising on other with-profits contracts or to enhance the benefits payable to current or future policyholders. In order to recognise this feature of the With-Profits Fund, the liabilities for each with-profits group of insurance contracts includes the policyholders' share of the expected future surpluses/deficits, where the expected future surpluses/deficits are given by:

Future cash flows - additional amounts payable to current or future policyholders

The liability for the additional amounts payable to current or future policyholders will be a key judgement and is expected to be equal to around 90% of the fair value of the other underlying items in the With-Profits Fund. The fair value of these underlying items includes the fair value of the non-profit contracts in the With-Profits Fund.

Discount rates

The Group will determine the adjustment for illiquidity using either a top-down or a bottom-up approach. Under the top-down approach a yield curve that reflects the current market rates of return implicit in a fair value measurement of a reference portfolio of assets is adjusted to eliminate any factors that are not relevant to the insurance contracts, such as cash flow mismatching and credit risk. However, it is not required to adjust the yield curve for differences in the liquidity characteristics of the insurance contracts and the reference portfolio.

Judgement is required to choose an appropriate reference portfolio and to determine the element of the yield on the portfolio that is attributable to factors not relevant to the insurance contracts.

Under the bottom-up approach a liquid risk-free yield curve is increased to reflect the differences between the liquidity characteristics of the financial instruments that underlie the risk-free rates observed in the market and the liquidity characteristics of the insurance contracts. Judgement is required to determine the illiquidity premium.

The Group intends to apply the top-down approach for annuities contracts and the bottom-up approach for all other contracts, including with-profits.

Measurement - risk adjustment for non-financial risk

Different approaches are expected to be used within the industry to estimate the risk adjustment for non-financial risk, including a confidence level technique or a cost of capital technique.

For all lines of business, the Group will use a confidence level technique under which a probability distribution of the expected present value of future cash flows from the contracts is estimated and the risk adjustment for non-financial risk is calculated as the excess of the value at risk at the target confidence level over the expected present value of the future cash flows.

The Group has set the compensation it requires for uncertainty arising from non-financial risk over the period of coverage equivalent to the 75th percentile over a 1-year time horizon. This is a key judgement.

The risk adjustment will reflect the impact of diversification of non-financial risks within each entity in the Group but not diversification of risks between entities.

Measurement - CSM

The CSM is subject to different measurement requirements depending on whether it relates to groups of contracts that are classified as being with or without direct participation features. Insurance and investment contracts with direct participation features are contracts for which the entity expects to pay the policyholder a substantial share of the returns on the underlying items.

For the Group's business all contracts that are in the scope of IFRS 17 and that are without direct participation features will apply the General Measurement Model (GMM). These primarily consist of the non-profit annuity and non-profit protection lines of business.

The contracts with direct participation features will use the Variable Fee Approach (VFA). These are expected to comprise the with-profits business, including PruFund, and unit-linked business.

A key difference between the GMM and VFA measurement models is that adjustments to the VFA CSM reflect prevailing market conditions, giving some alignment between the movements in asset and liability values. In contrast, adjustments to the GMM CSM are determined using prospective financial assumptions and discount rates that are fixed ("locked-in") at initial recognition.

Under the General Measurement Model the carrying amount of CSM is adjusted to reflect the following changes:

Under the Variable Fee Approach the CSM is adjusted to reflect the following changes:

Some of the adjustments to the CSM for the Variable Fee Approach listed above are determined by reference to changes in the "variable fee", which represents the value of the entity's interest in the contracts. For with-profits business, the variable fee is determined as the discounted value of future shareholder transfers, gross of tax, plus the shareholders' share of the expected future surpluses/deficits, where the expected future surpluses/deficits are given by:

The shareholders' share is expected to be around 10%, mirroring the key judgement that the policyholders' share is expected to be around 90%.

Insurance revenue for services provided in the year is recognised by reference to "coverage units", which represent the quantity of services provided. For non-profit annuities that are already in payment the coverage units are determined as the annual annuity benefit payable. This is consistent with the conclusion published on this topic by the IASB's Interpretation Committee (IFRIC) in 2022. For the majority of the with-profits contracts the coverage units are defined as the maximum of the benefit payable on death and the asset share, as this best represents the insurance and investment service being provided. The exception is with-profits annuity contracts in payment, for which the coverage units are defined as the annual annuity benefit payable.

For a profitable group of contracts the value of the CSM at inception equals the present value of the expected net inflow. This results in no income or expenses being recognised for the group of contracts at their initial recognition. Conversely, for a group of contracts that is loss making (or "onerous") at inception, the CSM is set to zero and the expected net outflow is immediately recognised as a loss. A loss component is established with value equal to the net outflow.

Transition to IFRS 17

IFRS 17 requires that the changes in accounting policies arising from adopting the new standard, at 1 January 2022, must be applied using a fully retrospective approach unless it is not practicable to do so. Under the fully retrospective approach the Group will:

Where it is impracticable to apply a fully retrospective approach to a group of contracts, then the Group will, as permitted under IFRS 17, use either the modified retrospective approach or the fair value approach.

The Group expects to apply the following approaches to valuing the CSM on transition to IFRS 17i:

i The approach to be used for PruProtect business is still to be confirmed. As this business is fully reinsured, the impact of PruProtect contracts on shareholder equity at transition to IFRS 17 is not significant.

ii The Rothesay Part VII transfer in December 2021 and consequential update to the reinsurance treaty for the retained annuity business is deemed to constitute a derecognition event. Therefore, for IFRS 17 purposes, the inception date of the reinsurance contract is 15 December 2021 and so is transitioned under the Fully Retrospective Approach.

The reasons why the Group considers the fully retrospective approach to be impracticable for some contracts include:

Modified retrospective approach

The objective of the modified retrospective approach is to achieve the closest outcome to retrospective application possible using reasonable and supportable information available without undue cost or effort. The Group will apply each of the following modifications only to the extent that it does not have reasonable and supportable information to apply IFRS 17 retrospectively.

Assessments at inception or on initial recognition

The Group will determine the identification of groups of contracts and classification of contracts using information available at contract inception where reasonable and supportable information is available. Where the Group does not have reasonable and supportable information this will be assessed based on information at 1 January 2022. 

Groups of contracts valued under the modified retrospective approach will contain contracts issued more than one year apart.

90:10 with-profits business written 2004-2019

For groups of with-profits contracts issued between 2004 and 2019 transitioning under the modified retrospective approach, the Group will determine the CSM at 1 January 2022 by calculating a proxy (as permitted in IFRS 17) for the total CSM for all services to be provided from inception as the fair value of the underlying items at 1 January 2022 minus the fulfilment cash flows at 1 January 2022, adjusted for:

If the calculation results in a CSM, the Group will measure the CSM at 1 January 2022 by deducting the CSM related to services provided before 1 January 2022. The CSM related to services provided before 1 January 2022 will be determined by comparing the remaining coverage units at 1 January 2022 with coverage units prior to 1 January 2022.

If the calculation results in a loss component then the Group will adjust the loss component to nil and increase the liability for remaining coverage excluding the loss component by the same amount.

Fair value approach

Under the fair value approach, the CSM (or the loss component) at 1 January 2022 will be determined as the difference between the fair value of a group of contracts at that date and the fulfilment cash flows at that date. The Group will measure the fair value of the contracts as the sum of:

The key judgements are in the assumptions used to set the best estimate of the liability, such as longevity assumptions, assumed asset mix for annuities, and discount rates, and the compensation a market participant would require for taking on the obligation, in particular the level of capital assumed to be held, the assumed cost of holding the capital, and the level of compensation required to reflect the risk in relation to future shareholder transfers.

The fair value will be calibrated based on analysis of the Group's own data and market data including public information on recent transactions (to the extent relevant and available).

The Group will determine the identification of groups of contracts and classification of contracts using information available at 1 January 2022. Groups of policies valued under the fair value approach will contain contracts issued more than one year apart. For GMM under the fair value approach, locked-in discount rates and financial assumptions, as applied after transition, will be determined at 1 January 2022.

Comparison with IFRS 4

The timing of profit recognition will change significantly under IFRS 17. Under IFRS 4 profits are recognised as follows:

In contrast, IFRS 17 does not allow upfront profit recognition for profitable contracts but rather requires that profit is recognised as services are provided to the policyholders.

Other differences in the measurement of the liabilities include:

Overall quantitative impact on the Group

The Group will apply IFRS 17 for the first time at 1 January 2023. As a result of the requirement to restate comparative information presented, the date of transition to IFRS 17 for the Group is 1 January 2022. The standard will, as detailed above, bring significant changes to the accounting for insurance and reinsurance contracts and is expected to have a material impact on the Group's consolidated financial statements in the period of initial application.

The Group has estimated the impact that the initial application of IFRS 17 will have on the consolidated financial statements at 31 December 2021/1 January 2022. The quantitative assessment is preliminary as not all of the IFRS 17 transition work is finalised, and the application of some elements of IFRS 17 to the Group's open with-profits business is complex. The final impact of adopting IFRS 17 may change as:

Although the quantitative assessment is preliminary, it may be reasonably estimated that on transition to IFRS 17 equity will increase by at least £1.5bn at 1 January 2022, from £5.3bn to £6.8bn.

Shareholder equity is expected to increase as the reduction in equity driven by the CSM established to defer previously recognised profits on the annuity portfolio is more than offset by the recognition as equity of part of the surplus assets in the With-Profits Fund. The equity in the With-Profits Fund represents the shareholders' assumed share of the surplus assets in the fund in accordance with the requirements of IFRS 17 and is not immediately available for distribution to shareholders. Transfers from the With-Profits Fund to shareholders will continue to be derived from the cost of bonuses (or equivalent) added to with-profits contracts.

The Group is currently unable to set an upper limit for the impact on equity at 1 January 2022 as there is insufficient certainty in the outcome of the judgements that remain, for with-profits business in particular.

Adjusted operating profit will continue to be the Group's non-GAAP alternative performance measure. The definition of adjusted operating profit is currently being refined for IFRS 17, to ensure that it continues to provide an accurate reflection of the Group's underlying business performance. 

The Group will publish restated comparative information on adoption of IFRS 17 in the 2023 interim financial statements.

1.2.2.3 Other

In addition to the above, the following new accounting pronouncements have also been issued but are not yet effective or have not yet been adopted for use in the UK:

The Group has assessed the impact of these pronouncements on the consolidated financial statements, none of which are expected to have material impact on the Group.

2 Group structure and products

2.1 Corporate transactions

2.1.1 Sandringham Financial Partners acquisition

On 6 January 2022, the Group, via M&G Group Regulated Entity Holding Company Limited (M&G REH), acquired a 100% holding in Clear View Assured Limited, the holding company for Sandringham Financial Partners Limited (Sandringham) for a purchase consideration of £73m.

Sandringham is part of M&G Wealth within our Retail and Savings segment and at acquisition brought to M&G a well-established national financial services advisory business with around 180 advisory partners working on behalf of over 10,000 clients and more than £2.4bn of assets under advice to complement our existing advisory business, The Advice Partnership.

There is a further deferred amount payable to former shareholders who are in the employment of Sandringham of £8.6m over 2 years from the date of acquisition provided the shareholders remain in service. This does not form part of the purchase consideration and will be accounted for as employment costs over the service period.

As at the acquisition date the consideration, net assets and intangible assets acquired and resulting goodwill were as follows:

The goodwill of £55m represents the synergies to be achieved through the creation of a fully integrated M&G Wealth business to complement the Group's well established asset management offering.

The Sandringham trade name was recognised on acquisition at fair value of £6.7m. The valuation was based on the relief from royalty rates method and the key assumptions used in measuring the fair value were discount rate and royalty rate.

A customer-related intangible was also recognised at fair value of £14.6m. The valuation was based on the multi-period excess earning method and the key assumptions used in measuring the fair value were discount rate and net attrition.

Sandringham was acquired at the start of the reporting period. The revenue and loss before tax included in the consolidated income statement in respect of Sandringham was £26.7m and £9.9m respectively. The loss before tax includes the impact of deferred consideration accounted for as employment costs.

2.1.2 responsAbility acquisition

On 3 May 2022, the Group, via M&G FA Limited, acquired a 94.8% holding in responsAbility Investments AG (responsAbility).

responsAbility is a Swiss private asset manager which is a leader in impact investing focused on private debt and private equity across emerging markets, with £2.9bn of assets under management. Following completion of the acquisition responsAbility's 200 employees joined M&G, the business will remain headquartered in Zurich creating a new investment hub for M&G Investments. responsAbility will sit within the Asset Management segment of the business.

The purchase consideration was subject to an adjustment for net assets between the date of the Share Purchase Agreement and the acquisition date. The Group retained call options and the seller retained put options over the remaining holding where the exercise price was fixed at inception. For accounting purposes, at the balance sheet date, the Group has accounted for the transaction on the basis it controls 100% of responsAbility. A liability has been recognised in respect of the Group's obligation under the call option arrangement. The Group acquired the remaining shares in February 2023.

As at the acquisition date the consideration, net assets and intangible assets acquired and resulting goodwill were as follows:

The goodwill of £79m represents the benefits of the acquisition which introduces various revenue synergies including leveraging from the Group's capabilities to grow responsAbility's UK institutional presence and the EU bank distribution relationships outside Switzerland. Additionally, the acquisition includes revenue benefits from launching new thematic products from an ESG perspective.

The responsAbility trade name was recognised on acquisition at fair value of £9.3m. The valuation was based on the relief from royalty rates method and the key assumptions used in measuring the fair value were discount rate and royalty rate.

A customer-related intangible was also recognised at fair value of £36.3m. The valuation was based on the multi-period excess earning method and the key assumptions used in measuring the fair value were discount rate and net attrition.

The revenue and profit before tax included in the consolidated statement of comprehensive income since the date of acquisition was £22.7m and £0.4m respectively. The revenue and profit before tax for the year ended 31 December 2022 for responsAbility was £35.6m and £2.3m respectively.

2.1.3 TCF Fund Managers LLP acquisition

On 17 February 2022, the Group acquired the total membership interest of TCF Fund Managers LLP (TCF), a provider of model portfolio services for a purchase consideration of £17m. The acquisition of TCF, has enabled us to launch an M&G Wealth branded range of model portfolios in April 2022. From 5 September 2022 TCF has been renamed M&G Wealth Investments LLP.

The acquisition was structured as follows:

The purchase consideration comprised of £15m of cash consideration paid at completion and a deferred consideration of £2m paid on 7 November 2022 on the satisfactory completion of various activities linked to transition by the previous owners. The purpose of the deferred consideration was to ensure a smooth transition to M&G operations and not to retain services of the existing members over a longer duration.

The acquisition has been accounted for using the acquisition method. On acquisition goodwill of £16m and a customer-related intangible asset of £1m was recognised.

2.2 Insurance and investment products written by the Group's insurance entities

A description of the main insurance and investment contracts written by the Group's insurance entities is provided below.

The Group's with-profits contracts are written in the With-Profits Fund in which policyholders share in the profit of the fund. Up until 1 April 2021 there were three with-profits sub-funds: the With-Profits Sub-Fund (WPSF), the Defined Charge Participating Sub-Fund (DCPSF) and the Scottish Amicable Insurance Fund (SAIF). On 1 April 2021 SAIF merged with WPSF and the assets and liabilities of SAIF were combined with those of the WPSF.

Shareholder-backed business represents all insurance and investment contracts in the Group other than contracts written in the With-Profits Fund. The profit on these contracts accrues directly to the Group's shareholders.

2.2.1 With-profits contracts