The dog has its day

Churchill's deal with Prudential has seen it leap up the league table and gives the insurer the chance to use its direct-selling skills to offer the Pru brand.

Industry experts praised the deal, but brokers expressed concern it would reduce customer choice.

The partnership gives Churchill control over the Pru's book of business. All Prudential staff will be transferred to work for Churchill.

Prudential has 1.9 million general insurance policies. Churchill and Winterthur will be able to renew these and sell motor and household insurance policies to Prudential's four million medium and long-term UK savings customers for 15 years. However, the deal is expected to be permanent.

It is aimed to generate a 15% return for Churchill and £810m for Prudential through payments and the release of capital. The single largest payment is for £353m, which HSBC insurance analyst David Hudson says is a generous valuation of Prudential's business.

"There's only one winner here and it's the Pru. It's been two or three years since I've seen a premium price that exceeds this one. You don't often see books of business sold for nearly 100% of premium income. Usually the norm is about 30%.

"From the Pru's perspective, it releases a lot of capital to redeploy elsewhere in the business, which is good news for the equity.

He adds: "The most amazing thing is that they've sold right at the top of the business. It's essentially a house contents book of business and results in that sector are totally reliant on employment. We know unemployment is going to soar upwards, claims will rise and the results won't be as good."

Hudson suspects in a year's time, Churchill could regret the price it paid and is sceptical the deal will begin earning money for Churchill in its first year, as aimed.

Under the terms of the deal, Prudential transfers its general insurance business to Churchill's parent company Winterthur.

But Prudential is expected to win new customers from the deal, as it keeps the right to cross-sell all other financial products to existing and new customers covered by the long-term partnership. This gives it access to 3.8 million Churchill customers.

As a result of the deal, the Pru can now release about £200m tied up in its general insurance division to use elsewhere. It will also gain access to £21m from reserves and a further sum, estimated at £236m, representing payments from a profit share arrangement.

Winterthur will reinsure Prudential's general insurance business. The deal catapults Winterthur up the general insurers' league. A glance at Insurance Times' Top 50 General Insurers list shows , in terms of gross written premiums, Winterthur's parent company Credit Suisse, previously number seven, bumps rival Allianz out of the way to become number six, behind Direct Line's parent, the Royal Bank of Scotland.

No redundancies are expected from the deal, but the Pru is restructuring its life and pensions side and will cut 2,100 jobs. In 1995, it employed 16,800 staff. The current tally is 8,300, but in two years' time it expects to have just 6,200.

Standard & Poor's (S&P) director Hans Wright says the deal with Churchill fits in with Prudential's long-term strategy. "Clearly it wants to focus on life and its asset accumulation business. The deal's probably quite favourable to the Pru because it gets access to the customer base and can redeploy the capital that was allocated to the general insurance business."

Wright says the redundancies are part of a long-term cost-cutting plan that is probably nearing completion. He doubts the Pru is as financially strong as it was when it embarked on major structural changes in the 1990s, but it is making more efficient use of capital.

S&P gives Prudential a rating of AAA on a negative outlook, meaning the rating could go down within the next one to three years.

Moody's analyst Simon Harris says: "The general insurance side was a relatively profitable business, but it obviously felt the scale wasn't what it needed. It fits in with what Prudential wants to do strategically and, to that extent, it makes sense."

A rival firm's chief executive says Churchill's call centre experience could be used to take advantage of Prudential's huge customer base.

For years, Prudential was known for its door-to-door salesmen and face-to-face service. But the "man from the Pru" disappeared earlier this year and the company had been moving towards telephone sales techniques.

Churchill is known for its slick marketing operation and efficient telephone-based operation. It outbid a number of rivals, thought to include Direct Line, Royal & Sun-Alliance and CGNU, to get its hands on Prudential's business.

Churchill business development director David Hiddleston says: "The Pru has been selling over the phone for the past two years and is used to direct mail. There's a good fit between the brands. The perception is that they are different, but the reality is it has moved much more to a call centre approach."

The deal ends face-to-face selling of Prudential-branded insurance. Prudential chief executive Mark Wood says Churchill will only sell direct to customers. "The business will not be sold through brokers at all. The transition from face-to-face to telephone has been taking place for some time."

Towry Law Insurance Brokers managing director Martin Wright says the deal reduces customer choice. "Effectively it is taking another insurer out of the market."

He denies brokers will suffer a significant reduction in commission as a result, because most of Prudential's business had been sold through its own sales operations. He says the move could even benefit brokers if it prompts customers to review their insurance and opt for independent, personal service.

Prudential's shares rose in price by 47p to 782p after the news.