August 17, 2017
International financial services group, Prudential, is due to merge its UK life insurance business with fund group M&G, expecting to save £145mn a year. The combined group, M&G Prudential, is set to manage £332bn of assets for 6 million clients.
The merger comes in a bid to shift Prudential’s life insurance business away from annuities market, after announcing earlier this year that it would no longer write new annuities. Reports in July this year stated it was seeking to sell a £10bn back book of annuities. The news was revealed as Prudential unveiled half year results, with profits up 5 percent, the shares edged 10p lower to £18.32.
Prudential already owns M&G after purchasing the fund group in 1999; however the two UK operations were run separately. Merging the two businesses together will total around £250mn.
Eamonn Flanagan, Shore Capital analyst has said the merger made “enormous sense to us, enabling the group to drive out costs and to deliver unified proposition to the market.”
With its Optimal Income fund, one of the largest in the UK at £19.2bn, M&G has gained a strong presence in the UK bond fund market. On the other hand, the performance of the business has recently suffered, with the fund being in the bottom half of its sector over the last 3 years with a return of 12.5 percent.
The major line business in the UK for Prudential is its range of with-profits funds which aim to “smooth” return for investors by retaining some of the returns in the better years to cover the pay outs in the years when performance is weaker.
Prudential’s PruFunds with-profits range housed £24.7bn of assets at the end of 2016.
The news of the merger has inflamed further speculation that Prudential will seek to spin off its UK operations from its UK and Asia business, or pursue a sale.
Equity Analyst at Hargreaves Lansdown, Nicholas Hyett said: “There has been speculation for some time that Prudential might seek to split its mature UK business from the rapidly growing US and Asian operations.”
He added “That makes the decision to merge the UK life and M&G asset management businesses into a single operation, M&G Prudential, a significant one. The combined business would bear remarkable resemblance to several other UK life businesses, and the success of the defined contribution pension scheme-focused PruFund would seem to provide a model for a viable stand-alone future.”
“There’s no need to get rid of UK business, but todays move would make it a lot simpler.”
Partner at Cavendish Corporate Finance, Peter Gray has said the move was in response to the pressures placed on asset management groups by increasing popularity of cheap “passive funds,” saying “the merger reflects the continued trend of consolidation in the industry as firms seek to lower costs in the face of margin pressure precipitated by increasing popularity of tracker funds.”
The merger will bring new appointments within the businesses. The current chief executive for Prudential UK, John Foley, will become chief executive of the merged business. Anne Richards will remain in her position as chief executive of M&G. At the same time Anne and Claire Bousfield, chief executive of insurance for Prudential UK, will both become deputy chief executives of M&G Prudential.