Prudential plans to merge UK businesses prompt sale speculation

Prudential is to combine its two big UK operations into a single entity in a move that will increase speculation that the life insurance group is preparing the merged business for an eventual sale or spin-off.

Until now Prudential has had two separate businesses in its domestic market — a life insurance business and M&G, an asset manager.

On Thursday the company said that it would merge the two to create “a leading savings and investments business”. The combination will also generate £145m per year of cost savings.

There has long been speculation about whether Prudential, which has big US and Asian operations as well as the UK business, will break itself up. Investors say that management has been more open to discussing the possibility in recent months.

Mike Wells, Prudential chief executive, would not comment on whether the decision to merge the two businesses was the precursor to an eventual sale or spin-off of the UK operation. However he added: “Any time you improve efficiency and effectiveness, that increases value and increases optionality.”

Jason Hollands of Tilney Investment Management said the move was the latest evidence that “the tectonic plates are shifting in UK financial services” following the mergers of Standard Life with Aberdeen Asset Management and Janus with Henderson.

“The market is developing towards the creation of a small cluster of super-groups that have both broad manufacturing capabilities across asset classes and significant distribution,” he added.

Eamonn Flanagan, analyst at Shore Capital, said that the merger “makes enormous sense to us, enabling the group to drive out costs and to deliver a unified proposition to the market. In so doing, Pru has now three fully formed, unified, distinct and financially robust divisions across Asia, the US and the UK.”

The life insurance business, Prudential UK & Europe, was long at the heart of the group. And although it has had some successes recently, notably the PruFund range of investment funds, analysts and investors see it as the most mature part of the group. It is no longer selling any new annuities, for example.

M&G, which Prudential bought in 1999, is known for its expertise in fixed income investments, but performance has stuttered in recent years. Last year the company recruited Anne Richards from Aberdeen Asset Management to lead a turnround following the retirement of long-term chief executive Michael McLintock.

Together, the two businesses produced profits of £728m in the first half of the year, out of a group total of £2.4bn.

Mr Wells said that the rationale for combining the two was to create a business better suited to meeting customer needs: “We see a tremendous opportunity, and challenges that we can help with.” One of the big targets for the combined business will be investors with big sums in cash ISAs, who are saving for retirement.

“There is £252bn sitting in ISAs. People are grossly undersaved and grossly underinvested. That money has to be invested in the real economy,” he added. “We’ll be able to use the benefits of scale and strength to develop new products.”

The combined business will be led by John Foley, who has been head of the UK life insurance business since last year.

Mr Wells also confirmed that the company was looking at the options for a chunk of its £45bn annuities back book. Those options could involve an outright sale, but could also include other ways to cut the amount of capital consumed by the back book, such as reinsurance deals.

Prudential also reported its results for the first half of the year on Thursday. Operating profits rose 5 per cent to £2.4bn, while the dividend was increased 12 per cent to 14.5p per share.

Shares in Prudential, which have risen 29 per cent in the past year, were slightly lower on Thursday afternoon.

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