23rd October 2005 Announcing New Prudential Boss Mark Tucker

Sunday October 23, 2005
The Observer


It has been billed as Mark Tucker's Big Announcement: the moment when the Prudential's new chief exec will spell out his plans for the insurance group. But some people are wondering what he can actually have to say in his strategy presentation on Wednesday. After all, most of the key decisions seem to have already been leaked or announced.

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Tucker has spent the five months since he became chief executive touring all the Pru's businesses and talking to their managements about the future. Much of what has been decided is already clear. Egg, the internet banking business that has been up for sale for years, will now be kept as an integral part of the group. Jackson National Life, the US business that has also been a candidate for disposal, is to host a visit by City analysts starting the day after the strategy update, which suggests that it, too, will be staying in the group.

The bad news in Taiwan - where a sharp fall in interest rates has left Prudential paying for expensive annuity guarantees of the type that sunk Equitable Life - was flagged at the half-year results. Even management changes have been announced in advance, with last week's appointment of Nick Prettejohn, the chief executive of Lloyd's insurance market, as head of its UK insurance business to replace Mark Wood, whose departure had been expected after he was passed over for the top job.

In fact, there is still plenty that investors want to know about Prudential's strategy. 'He will be judged on whether or not he is addressing the issues,' says Stuart Fowler, head of UK equities at Axa Investment Managers. 'It is not a matter of whether or not Egg is too cheap to sell; it is whether [Tucker] is in control of the company, and the company in control of its own destiny.'

There have certainly been questions over the mix of businesses in the group - and, under previous chief executive Jonathan Bloomer, the frequent changes in its strategy. For years, the UK was sidelined in favour of investment in the fast-growing Far East business, until last year's shock £1 billion rights issue was earmarked for UK expansion. The US was a priority until the Pru's controversial bid for American General was defeated. Even the dividend was guaranteed 100 per cent safe - until it was cut.

So Tucker will have to demonstrate that he has a clear strategy that will last the group for years, rather than months. In the UK, investors will want to be clear where he believes there is enough growth potential to justify the additional investment in the business. The company will be unveiling new business figures at the same time as the strategy announcement, and they will need to be good to convince the City.

Last week's excellent new business figures from Legal & General suggested that British investors are finally forgetting the scandals and poor practices that have dogged the life insurance industry for years and starting to worry about how little they are saving. Aviva, too, has indicated that it will be increasing investment in its life business. Tucker needs to demonstrate that Prudential can at least hold its market share in the face of competition from these two, much larger, competitors.

There have been suggestions that the company plans to make the best of its inability to sell Egg by bringing it under Prettejohn's control and using its internet platform to sell other Prudential products such as M&G's unit trusts.

Some are rather sceptical about how successful this will be. No other financial services business has had much success in selling investment products through credit card operations. And the City will also be worried that Egg will have to make big provisions against bad debts, as Barclaycard has just done.

Investors will also expect Tucker to clear up confusion about its Asian operations. Prudential has developed an attractive business in the Far East, with a presence in some of the fastest-growing markets in the area, including China, where it now has a joint venture in both insurance and investment products. Tucker knows the area well, having been instrumental in creating the business during his previous stint at the Prudential; he left to join HBOS after losing out to Bloomer for the top job.

Investors have been happy for the Pru to invest in this area to tap into growth rates that are expected to be far greater than in the more mature UK and US markets. But they were worried that the focus on the UK following the rights issue meant that Asia would be sidelined. The previous management had indicated that Asia was supposed to start paying its way: having absorbed investment for years, it was expected to start paying dividends back to the centre from next year.

If Tucker changes his mind on Asia - and many in the City would welcome more investment there - he will have to demonstrate that he is also properly managing the risks in the region. More bad news from Taiwan, for example, where some analysts fear that provisions for guarantees will have to more than treble from the £230 million provided in the summer, would not go down well.

'The company is under pressure to give more comfort on Taiwan,' says one analyst, who did not want to be named. 'But investors would still like to see more investment in India and China.'

In the US, Jackson National Life has been seen as too small to survive in a fiercely competitive market. But the analysts' trip has been planned to show that it can prosper despite its size because it has good positions in the regions and product areas in which it operates. But any suggestion that further American expansion was planned, say through another bid along the lines of its approach for American General, would not go down well. 'They need to say to what extent they are vulnerable to consolidation in the marketplace,' says the analyst. 'There could be a place for a mid-sized player, but they need to persuade us that they can execute it properly.'

When Bloomer launched the rights issue, he pledged that the company would achieve a 14 per cent return on equity by 2007 - currently, it is just under 12 per cent. Any progress towards that target would go down well.

Mark Durling, an analyst with Brewin Dolphin, says the City will be watching. 'The rights issue needed an increase in return on capital from 11 to 14 per cent to justify it. We hope that Tucker will make it clear whether he can hit that target.'

Prudential's shares have lagged well behind the market since Tucker's appointment. This is unusual, given that, at least until the past couple of weeks, the stock market has been very strong, which is usually good for insurance company shares.

Good new business figures from the UK operations, in particular, would give the shares a fillip. But if Tucker really wants the shares to be rerated for the long term, he will have to prove that he has learned the lessons of the strategic reversals of his predecessor and has a clear view of how Prudential can do business in the future.