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Prudential (PRU) is to merge its UK life insurance business with fund group M&G in a bid to save £145 million a year.
Prudential owns M&G, but after buying the fund group in 1999 it has run its two big UK operations separately.
The combined group, M&G Prudential, will manage £332 billion of assets for six million clients. Bringing the two divisions together will cost £250 million.
M&G has built up a strong position in the UK bond funds market, with its Optimal Income fund one of the UK's largest, at £19.2 billion. But performance has suffered recently, with the fund in the bottom half of its sector over the last three years, having returned just 12.5%.
The merger comes as Prudential shifts its UK life insurance business away from the annuities market, having announced earlier this year it would stop writing new annuities, with reports last month it was seeking to sell a £10 billion back book of annuities.
Prudential's major line of business in the UK remains its range of with-profits funds. These life insurance and pension funds aim to 'smooth' returns for investors by holding back some of the returns in good years to pay out in years when performance is weaker.
Prudential's PruFunds with-profits range housed £24.7 billion of assets at the end of last year, dwarfing offerings from rival insurers.
Shore Capital analyst Eamonn Flanagan said the merger made 'enormous sense to us, enabling the group to drive out costs and to deliver a unified proposition to the market'.
The news has meanwhile reignited speculation that Prudential will seek to spin off its UK operations from its US and Asian business, or pursue a sale.
'There has been speculation for some time that Prudential might seek to split its mature UK business from the rapidly growing US and Asian operations,' said Nicholas Hyett, equity analyst at Hargreaves Lansdown.
'That makes the decision to merge the UK life and M&G asset management businesses into a single operation, M&G Prudential, a significant one. The combined business would bear a remarkable resemblance to several other UK life businesses, and the success of the defined contribution pension scheme-focused PruFund would seem to provide a model for a viable standalone future,' he added.
'There's no need to get rid of the UK business, but today's move would make it a lot simpler.'
Peter Gray, partner at Cavendish Corporate Finance, said the move was a response to the pressures placed on asset management groups by the increasing popularity of cheap 'passive' funds.
'The merger reflects the continued trend of consolidation in the industry as firms seek to lower costs in the face of margin pressure precipitated by increasing popularity of tracker funds,' he said.
Current Prudential UK chief executive John Foley will become chief executive of the merged business. Anne Richards will remain chief executive of M&G, while both she and Clare Bousfield, chief executive of insurance for Prudential UK, will become deputy chief executives of M&G Prudential.
The news came as Prudential unveiled half-year results, with profits up 5%. The shares edged 10p lower to £18.32.