Pru set for bid as it sells reinsurer in pounds 1.75bn deal

Prudential, the UK's largest insurer, yesterday cleared the decks for its long-awaited bid for a building society or a mutual life company, as it announced the sale of its reinsurance subsidiary, Mercantile & General, for pounds 1.75bn.

The sale to Swiss Re, another leading global reinsurer, provides the Pru with additional funds for its massive war chest. The Pru has made no secret of its aim to re-assert itself as a leading financial service player in the UK, with its own savings and loans operation.

Analysts said yesterday that the pounds 1.75bn, when it is finally handed over in three or four months, would enable the Pru to move against almost any acquisition target it chooses, barring the Halifax, valued at more than pounds 10bn.

The sale of M&G back to Swiss Re, some 30 years after the Swiss firm sold it to the Pru in the first place, also marks the latest stage in the rapid rationalisation of the reinsurance industry.

Peter Davis, group chief executive at Prudential, said that despite its after-tax profits of pounds 135m, including investment gains, M&G remained peripheral to the group's overall strategy.

He said: "There is no significant operational and strategic synergies between M&G and our core operations.

"Following a review of our strategy, we decided to concentrate our activities on retail financial services and fund management. We announced in June our intention to reduce our investment in [the company] by floating a proportion on the stock market.

Mr Davis added: "After careful consideration, we have decided that a sale of the whole company at the agreed price, which we believe substantially exceeds what we could have achieved through a public offering, is clearly in the best interests of our shareholders."

He said the Pru would, as it had previously indicated, continue in its process of identifying suitable acquistion targets in line with its strategy.

But Mr Davis added: "We have spoken to several of our leading shareholders and we are under no pressure from them. Their response is that we should not rush to pay over the odds."

He said that even if a purchase was agreed, one consequence of mutuality was that the need to consult members and overcome many regulatory hurdles meant many months might pass before it was complete.

The purchase of M&G by Swiss Re, in which it was advised by Morgan Stanley, the investment bank, marks the latest stage in the rationalisation of reinsurers.

Reinsurance is one of the world's biggest and least known financial service industries, in which companies underwrite insurance sold by others for a portion of the premium paid.

In the past two years, several leading players have engaged in a series of takeover battles.

Swiss Re earlier this month lost out to Munich Re in a bid battle for US property and casualty reinsurer American Re. Its bigger rival paid $3.3bn (pounds 2.5bn).

A bid for M&G is also believed to have been made by Employers Re, another rival insurer which has recently taken over two German companies, Aachen Re and Francona Re.

It is believed that the agreement with the Pru during the Bank Holiday followed a last-minute decision by the Swiss to trump the Employers Re bid.

M&G's own attraction is in the field of life and health insurance in which it was always a leading player. After the acquisition is completed by the end of this year, Swiss Re will be the largest life and health reinsurer in the world, with a market share of 27 per cent.