The UK’s biggest insurance company split itself in two this year when Prudential demerged its domestic business, M&G.
The change was one of the most significant in the company’s 171-year history, but Prudential is not alone in believing smaller may be better.
Around the world, insurers have concentrated on specialising over the past few years, resulting in the spin-off of noncore businesses or wholesale demergers along the lines of Prudential.
In the UK, Standard Life sold off its insurance business to Phoenix Group in a £3.2bn deal in 2018 shortly after merging with Aberdeen Asset Management while esure separated from GoCompare, the price comparison site group, in 2016. This month Swiss Re agreed to sell ReAssure, its UK life insurance business.
Elsewhere, Axa has floated its US life insurance business Axa Equitable, while MetLife split itself into two in 2017.
“The evidence for having a diverse [insurance] group is fairly scant,” said Rob James, a fund manager at Merian Global Investors.
According to Abid Hussain, an insurance analyst at Credit Suisse, tougher capital requirements have been a big driver of the changes, with the Prudential split partly down to the EU’s Solvency II capital rules: “Solvency II is more onerous than the rules in the US or Asia,” he said. “Prudential didn’t hide the fact that Solvency II was an issue for it.”
Bankers said Prudential was unlikely to be the last UK insurer to split itself up in some form — here are some of the other candidates.
With the UK business out of the way, attention is already turning to whether the remaining two big parts of the group — Asia and the US — will stay together in the long term.
Some shareholders want a further break-up, arguing that the main attraction is the Asian business, not Jackson National Life in the US. “Prudential Asia should be a standalone company,” said Mr James at Merian, which is a Prudential shareholder. “I don’t think being tied to Jackson does it any favours — it very clearly damages the valuation. It would be to the benefit of shareholders to have Jackson out of the group, almost at any price.” Prudential declined to comment.
New chief executive Maurice Tulloch has already started to slim down the group, selling the Hong Kong business and putting some other Asian operations on the block. But, the company’s share price has struggled in recent years, and there may soon be pressure from investors for him to go much further in simplifying the sprawling empire.
One possibility is that more of the international operations will be sold — Aviva also has businesses in continental Europe and Canada. “I’d like them to think about exiting Turkey, France, Italy and Poland,” said Mr Hussain. A more radical option would be for the company to split UK life insurance from UK general insurance. They are already managed separately, although there are big capital benefits for holding both businesses in the same group.
Saga has all the ingredients for a break up — businesses that have little in common, a faltering financial performance, a collapsing share price, a new chief executive and an activist investor. The company sells holidays and insurance to the over-50s, but the latter is by far the bigger contributor to profits.
“What they haven’t clearly demonstrated is the cross-sell between the two. It’s only for historical reasons that this thing exists at all — you wouldn’t create something like this today,” said Mr Hussain. Elliott, the hedge fund manager, has taken a 5 per cent stake in Saga but has not yet said what it wants the company to do. Euan Sutherland takes over as chief executive next year. At its first-half results in September, the company said: “It is early days in our transformation programme . . . but what we have seen so far gives us confidence that we are pursuing the right strategy.”
RSA’s three main businesses operate in similar markets — general insurance for individuals and companies — but they are geographically diverse. As well as a UK-based division, RSA has operations in Scandinavia and Canada. The UK operation is often seen by bankers as a potential partner for Aviva’s general insurance business, while they have said the others could be sold off.
One potential barrier to a break-up is the size of the UK pension scheme — if RSA were to be broken up, the company would have to ensure the pensions would still be paid.
In a statement to the Financial Times, the company indicated big changes were not on the cards: “RSA is well balanced across customers, products, distribution channels and territories, and this is core to our strategy. Our chosen markets have many similar characteristics, enabling us to share insights and learning around the group.”
The car insurer is not the most obvious candidate for a break up but a change announced this year suggested it may be preparing the ground for a shake-up of its structure. Last month Admiral said it was putting its price comparison sites in the UK, Spain, France, Mexico, Turkey and India into a single company called Penguin Portals, led by Elena Betés.
The group said this was to “accelerate global growth” but there is a precedent for spinning off this sort of business.
In 2016 esure floated GoCompare, its price comparison site. Since the IPO GoCompare’s shares are up 28 per cent, while esure itself has been taken over. Admiral declined to comment on the possibility of a demerger or spin off.