Prudential to raise £1bn to grow UK savings business

Prudential is to raise £1bn in the biggest rights issue on the London stock market for more than two years.

Prudential is to raise £1bn in the biggest rights issue on the London stock market for more than two years.

Most of the proceeds will be used to fund growth in the group's core UK savings and pensions market.

The financing, which will cost £24m in banking fees, comes after the insurer's failure earlier this year to sell Egg, the online banking business in which it has a 79 per cent stake.

In a surprise move, the financial services group said it had identified a number of growth opportunities in a market that favoured large, well capitalised financial brand names.

Jonathan Bloomer, the chief executive of Prudential, said the company was in talks with a number of high street banks about distribution agreements for its insurance and savings contracts. It already has a deal with Lloyds TSB. The advent of multi-ties - financial advisers licensed to sell savings products from a limited number of insurers - would result in a "massive change" in the UK market, Mr Bloomer said. "We think you will see five to six providers taking 80 per cent of the market. We are very well positioned to take advantage of multi-ties. There are going to be big winners and big losers," he said.

However, he urged the Government not to force people into saving more for their retirement to plug the pensions gap. "If compulsion can be avoided it would be better. You get this effect, seen in other countries with compulsion, where other forms of savings drop. You don't get any more net saving," Mr Bloomer said.

The company is proposing to issue one new share for every six existing shares at 308p each, a 32.8 per cent discount to Monday night's closing price. The shares fell 7.25 per cent on the announcement to 425p. The issue is fully underwritten by UBS, Cazenove and Goldman Sachs.

Mr Bloomer said the Prudential was targeting a 14 per cent rate of return on business backed by shareholder capital. "In February I was cautious. In July I was more optimistic. As we have gone through this year things have improved very materially. We're going to see changes in the future like those of the 1960s and early 1970s when unit-linked savings came in," he said.

Up to £200m of the £1bn rights issue proceeds will be used to meet a projected shortfall in the group's capital requirements. These new requirements come in from January 2005 under the EU Financial Group Directive. Another portion is earmarked for increasing its stake in an Indian joint venture but the bulk of the funds will be used for its UK expansion.

The Prudential backed up plans for its rights issue with bullish third-quarter new business figures showing sales up 16 per cent for the first nine months to £1.3bn.

Elsewhere, Standard Life, the UK's largest mutual insurer, also said it would be embarking on a capital raising initiative, issuing about £400m of debt to shore up its capital position. The group, which is planning to demutualise and possibly float on the London market in 18 months' time, said it will market the bond issue to investors over the next fortnight.

Standard & Poor's said it would assign only an A- rating to the issue, because if the company became insolvent its primary responsibilities would be to its policyholders and creditors, ahead of its bondholders.