Abbey National has struck a deal with Prudential to sell the insurers' with-profits bond through the bank's branches in a move that will save Abbey from having to make further capital injections into its own life insurance business.
The deal also gives Prudential a vital inroad into the lucrative distribution network banks offer in their high street branches.
Abbey has already injected £300m in the past three months into its Scottish Mutual insurance company to keep it above its solvency margins. It has been trying to steer the company away from writing with-profits bonds, which require substantial capital backing upfront.
"We have been seeking to invest selectively in what we manufacture and where we get a return on capital. With-profits does not provide a sufficient return on capital at the moment, but there is in distributing such products," said Andrew Pople, managing director of retail banking at Abbey National.
Mr Pople said the move was not a pre-cursor to shutting down the rest of Scottish Mutual's operations, but was to improve capital efficiency in the Abbey group.
Analysts at Fox-Pitt, Kelton said the deal would boost the Pru's UK sales by 8 per cent and could add up to £24m in new business profits.
Jonathon Bloomer, the Pru's chief executive, yesterday confirmed suspicions that the company may face further problems in its US Jackson National business from bond defaults.
Rivals such as Aviva and Legal & General both have arrangements with high street banks through which they sell their products. The Pru has been keen to find similar links and is already working on finding more banking partners.
Shares in Prudential closed up 4p at 381.5p while Abbey National fell 5.5p to 588p.
"Abbey bought Scottish Mutual on the cheap and starved it of capital. It is now saying it cannot afford to offer these type of products and the Pru is saying it has the financial muscle to supply them," said Roman Cizdyn, an analyst at UBS Warburg.
Analysts are seeing the move by the Pru to cap the amount of with-profits business it will write for Abbey National at £750m as a shrewd decision, as it will ensure the burden on its own capital position will not spiral out of control.
Until rule changes currently being considered by the FSA on how companies can sell investment products are brought in, the Pru bond will be sold through Abbey branches under the Abbey brand name. The Pru and Abbey are awaiting final approval for the FSA to go ahead with the deal.
In a separate part of the arrangement, Prudential will start to sell insurance products of Abbey's protection company, Scottish Provident, which it bought in 2000. Both the Pru and Abbey will share in the commission revenue earned from selling each other's products.
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