Investors in Pru set for surplus funds windfall

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The Independent Online

Investors in Prudential, the UK's biggest insurance group, are in line to share in a windfall potentially worth hundreds of millions of pounds, to be paid out of surplus funds accumulated over the years from the company's life and pensions business.

Analysts' estimates of the surplus - known as orphan assets - range between pounds 1bn and pounds 5bn. Some said it could add at least 100p to the future value of Prudential shares, which closed yesterday 27p higher at 454p in a falling market.

The Pru yesterday disclosed that it was in talks with Department of Trade and Industry officials over its surplus funds along with its annual results, showing a 16 per cent surge in operating profits to pounds 804m. Peter Davis, group chief executive, said: "We have spent considerable time reviewing [our] chosen markets, future direction and allocation of capital across the group.

"As part of this work, discussions have begun with the DTI regarding the balance of interests of policyholders and shareholders in the unattributed assets of Prudential's with-profits life fund.

"The discussions will focus on how a proportion of these assets, which in the past shareholders chose to leave in the fund to support business development, may be utilised more effectively in future."

Mr Davis said no timetable could be set on when a decision is made or how much, if anything, might be paid out to shareholders.

Orphan assets are surplus funds to which shareholders may be entitled once all commitments to policyholders have been met and prudent calculations about future liabilities taken into account.

Before any final decision over the surplus is made, it must be cleared with the DTI. In the case of Legal & General, United Friendly and other insurers to have taken this route, discussions over previous surpluses have lasted months or even years.

The Pru warned that expectations of a bumper dividend payout to its 85,000- plus shareholders were wide of the mark.

Sources stressed that the assets were more likely to be used to fund future acquisitions as part of the group's long-term expansion strategy.

Possible takeovers could include either a large UK building society or a mutual insurer to enable the Pru to build its presence among independent financial advisers, Mr Davis said yesterday.

In other cases, including both L&G and United Friendly, where surplus funds have been identified, policyholders have also benefited from the exercise.

The profits rise was hailed by Mr Davis yesterday as proof of its continuing success: "[They] demonstrate the benefits of the breadth and geographic spread of our operations. The long-term nature of our business produces a reliable stream of earnings that provides us with a firm base for growth and the ability to weather any local difficulties."

Profits in 1995 were boosted by a 56 per cent rise from Prudential's US subsidiary, Jackson National Life, up to pounds 241m. Total assets rose 11 per cent to more than pounds 15bn compared with 1994.

Mercantile & General, the Pru's reinsurance subsidiary, increased operating profits by 13 per cent to pounds 196m, based on a combination of long-term and general insurance business. However, underwriting losses rose from pounds 26m in 1994 to pounds 37m last year, partly on the back of setting aside higher reserves for UK personal injury business.

Profits in the group's UK operation fell 8 per cent to pounds 350m last year. But the company said the result was partly caused by a pounds 20m investment in Prudential's planned deposit-taking and mortgage business, announced last year.

Mr Davis said: "We remain committed to increasing the value of our company for shareholders. To that end we plan, subject to gaining a banking licence, to begin selling mortgages and deposit-based products in the UK in October."

The company aims to build up a mortgage book at least as large as the pounds 700m it currently places through its sales force to other lenders.

The company's profits came as it also announced a 5 per cent increase on 25-year with-profits payouts to savers, an effective annual rate of return of 13 per cent after tax on monthly savings of pounds 50. However, payouts on 10-year savings plans fell by 2 per cent compared with last year while 15-year payouts dropped 6 per cent.

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