Prudential’s increasing business in Asia in particular had led to talk that the firm would look to spin off or sell its U.K. operations. That speculation increased last year when Britain’s largest insurer combined its U.K. asset-management unit with its insurance business. The spun-off firm is likely to be included in the FTSE 100.
“The new M&G Prudential has much stronger prospects and the separation has the capability to unlock quite a large amount of value for shareholders,” said Berenberg analyst Trevor Moss, who estimates the company could be worth as much as 15 billion pounds. “The U.K. business valuation has suffered as a consequence of being a small part of the sum of the parts and being a low-growth business in recent years.”
Prudential climbed as much as 5.8 percent in London trading, the biggest gain since November 2016, and was up 4.7 percent at 1911 pence as of 8:30 a.m.
The U.K.’s largest insurer, which derives about one third of its earnings from Asia, is benefiting from an expanding middle class and growing insurance coverage in the region. Household wealth in Asia is predicted to rise from $53 trillion to $78 trillion over the next five years, creating opportunities for asset managers and insurers to sell products.
The parent company will remain headquartered in London and retain its other listings. The timing of the demerger is subject to a number of factors including the completion of the sale of the U.K. annuities.
The sale is part of a strategy to make the company more capital light as insurers look to exit that type of business to free up money for share buybacks, debt repayment or acquisitions. Bloomberg News reported last week that Rothesay, backed by Blackstone Group LP, was in pole position to buy the annuities.
M&G Prudential will be led by its current CEO John Foley, according to Wednesday statement, and remains on track to deliver an earlier plan for 145 million pounds of annual cost savings by 2022. Assets under management at M&G Prudential rose 13 percent to 351 billion pounds last year after record net inflows from external managers.
“There’s a lot more they can do in the market,” Prudential Chief Executive Officer Mike Wells said in a call on Wednesday, referring to M&G Prudential. “As far as what more the group can do for them, I think it’s a harder question. They’ve grown to a size and scale where they are capable of being national champions.”
Spinning off the firm will mean it’s no longer competing with Asia or other parts of the business for capital, he said. “If the U.K. has very good returns but it’s not equivalent to the other two markets, there’s a conflict there that wouldn’t exist if you’re standalone.”
The group will rebalance its debt within the two groups prior to the demerger. That may include redeeming issued debt as well as new issuances, according to the statement.
Acquiring annuities is attractive to private equity-backed firms including Blackstone, who are betting that they can generate better returns than insurers. Liabilities on the contracts for annuities — which guarantee customers a future income stream in return for a lump sum — can rise if interest rates are lower than anticipated, or if equity markets plunge.