Business Analysis: Prudential's £1bn cash call faces a rough ride

The Prudential's chief executive thinks the UK savings market is set for rapid growth. Others are not so sure...

Having managed to keep his job throughout the worst bear market in a several decades, the axing of his direct salesforce, and the company's first dividend cut in almost 90 years, Jonathan Bloomer may well have begun to believe he was invincible.

Having managed to keep his job throughout the worst bear market in a several decades, the axing of his direct salesforce, and the company's first dividend cut in almost 90 years, Jonathan Bloomer may well have begun to believe he was invincible.

During his four and a half years as the chief executive of Prudential, the company has underperformed the UK life insurance sector by more than 25 per cent. Nevertheless, his shareholders have consistently given him the benefit of any doubt.

Even this summer, as the group conceded that it had not found a buyer for its 79 per cent stake in Egg, many investors were simply relieved that Mr Bloomer had not sold the holding at a derisory price, rather than angered at the unsatisfactory outcome to an almost year-long auction. After all, the Prudential board had made it quite clear that even without the sale of Egg, it wouldn't need to come to the equity markets to raise capital - hadn't it?

Just nine months ago, as the Pru unveiled its preliminary results, Mr Bloomer boasted about the strength of his business, doing his best to distance the company from the kind of capital problems that its Scottish rival Standard Life was suffering. "We have one of the strongest UK life funds in the industry, our capital position is strong and we are well placed to manage the business for growth," he said.

In spite of this, he conceded that the prospects for the UK market were not too exciting, and that it would be Asia which was to be the driver of Prudential's growth over the next few years.

By this summer, Mr Bloomer was beginning to change his mind. Now, the UK market was beginning to look promising again. However, on the capital front there was still not so much as a hint that the company might need to do anything as drastic as come to the equity markets to raise money.

So when Prudential unveiled its £1bn rights issue last Tuesday, investors were left gob-smacked. Not only was the group looking to its shareholders for more money, but Mr Bloomer was announcing what appeared to be a volte-face in the insurer's strategy. He claimed it is now the UK which provides the biggest opportunities.

Although the first instinct of shareholders was to try to work out whether the Pru's yarn about UK growth potential was a smokescreen for something more sinister, most are now coming round to the idea that the company was genuine in its motive. But it is the company's lack of warning which has proved to be the bone of contention. As when the company cut its dividend and attempted to sell Egg, it has not been the action which has angered shareholders, but its lack of communication.

Furthermore, what differs this time is that while many willconcede that the Pru truly believes in the UK market's potential, few share its optimism.

While it cites the depolarisation of the financial advice market - whereby financial advisors will be tied to a handful of providers rather than be independent or tied to a single company - and the Government's increasing focus on pensions as the two main reasons why the UK presents such an opportunity, these are issues which the industry has been well aware of for the past two years.

John Morgan of Legal & General believes that the Pru's predictions for the UK may be too optimistic, arguing that it is far from a given that the majority of advisers will be multi-tied, as Prudential is assuming. "We think that's far and away too simplistic an analysis," he said. "From where we see it, you'll have independent financial advisers that stay independent, some that will go tied, some that will go multi-tied - and the same with the tied advisers. Then you'll have some advisers that tie for one product type and stay independent for others. It's also too simple to assume that all the banks will multi-tie."

Although most of the bigger players agree with the Pru's diagnosis that depolarisation will be good for the biggest providers, most also believe that the changes may take a long time to have a real effect.

The chief executive of one Prudential rival said: "People get very excited about changes in the business model. But in my experience, although they're right in the long term, they're wrong in the short term. I think that the endgame - in four or five years' time - will be that there will be three or four major providers with very large market shares. But next year, I just can't see it."

While most of the industry is at least cautiously optimistic for the UK,insurance analysts are not so sure. JP Morgan and Credit Suisse were among the many houses that put out dismissive notes, unconvinced by the Pru's bullish outlook.

Ned Cazalet, of Cazalet Consulting, said he believes the prospects for the sector look dire. "We believe the UK life sector is going nowhere in aggregate terms," he said. "It actually went backwards last year, meaning the industry paid out more than it took in premiums. This year isn't going to be much better. And next year isn't either."

Mr Cazalet adds, however, that this may not mean Prudential cannot steal market share. He points out that insurers such as Equitable Life, Standard Life and Scottish Mutual are now either no longer around or struggling. These have all provided opportunities to pick up business. The most important factor, however, is whether the Pru can succeed in writing new business profitably. "Any old chimp can get market share," he said. "It's about making it profitable."

Although the Pru's rights issue leaves it well placed to capitalise on opportunities in the UK market, it will be at least two years before investors are in a position to see whether its decision was the right one. If Mr Bloomer survives this wobble, he will have to be on his best behaviour if he is to be in the top job long enough to see the results of his latest risky venture.