Bad Egg debts put the skids under shares in Prudential

Shares in Prudential suffered their biggest one-day fall yesterday since the life insurer's surprise £1bn rights issue 21 months ago, as the group revealed bigger-than-expected bad debts at its internet bank Egg and group first-half profits at the lower end of expectations.

Bad debts on Egg's personal loan book leapt 42 per cent during the first six months of the year, sending the bank to an interim operating loss of £39m, compared with a profit of £13m during the same period in 2005.

Prudential shares fell as much as 7 per cent in early trading, before ending 3 per cent down at 577.5p.

It was Egg's first set of results since Prudential bought the remaining 21 per cent stake in the internet bank at the end of last year. But the group chief executive Mark Tucker said he was confident the division would be back in profit during the second half, adding that he had no regrets in buying the additional stake in Egg.

"There is a certain part of the Egg loan portfolio that has performed badly," he said. "But the rest of the book we feel is in pretty good shape. We said very clearly today that Egg will go back into profit in the second half."

Mr Tucker stressed that Egg's purchase had been driven by the cost savings which could be made by integrating the business with Prudential's UK life and pensions operations.

Group operating profit rose to £962m from £799m a year earlier. This fell short of analysts' estimates of about £980m.

UK chief executive Nick Prettejohn, who joined from Lloyd's of London at the start of the year, said the group was now aiming to increase cost savings in its domestic business from £40m to £150m a year by 2009.

He said some of these savings would come from job cuts announced during the spring, while others would come from better integration of the company's UK operations. He added that it was too early to say whether there would be any further job losses.

Across its UK life and pensions divisions, the group saw a 9 per cent fall in sales, as it shifted its focus to writing more profitable business. Mr Prettejohn said the group was also suffering from increased competition in the bulk purchase annuity market - one of the drivers of Prudential's growth over the past few years. "Long term, this remains an attractive market. But in the short run, the influx of capital is having a real impact in terms of the pricing," he said. "We have quite consciously not written business at the prices some of our competitors have been prepared to go."

Mr Tucker dismissed the suggestion that the competition may keep Prudential shut out of the market. "We've been in business for 156 years, we're a long-term business," he said. "There's always short-term positions."

Outside the UK, the company's operations performed well during the half, with US sales increasing 17 per cent and sales in Asia up 43 per cent. Although its focus has been on organic growth, Mr Tucker said the company was still on the lookout for suitable bolt-on acquisitions.