Prudential building society shares rise on AIG talk

Prudential shares recovered ground today amid speculation the insurer is working on a potential deal to buy part of US insurance giant AIG.

The plan is thought to involve overseas investors taking a 20% stake in the UK company to help finance a bid for the Asian business of AIG, which had to be rescued by the US Government last month.

The unnamed investment funds in the Middle East and China could pump £1.2bn (€1.5bn) into Prudential, the Sunday Times reported.

Prudential shares slumped at the end of last week – down 10% on Friday and 20% on Thursday – amid worries that an economic downturn could force firms such as the Pru to go to shareholders to boost their finances.

But the AIG interest suggests that the company is interested in raising money in order to fund a potential deal, rather than to bolster its balance sheet.

There are also hopes that the Pru will also reassure investors on its trading position when it publishes third quarter new business figures tomorrow.

Shares gained 13% to 305.25p today.

Prudential has been focusing on growth in emerging markets such as Asia in recent years as part of its plan to expand internationally.

Although growth in Asian markets has slowed from its recent rapid pace, an acquisition of AIG’s insurance operation in the region would nonetheless be a major deal for the Pru.

Chief executive Mark Tucker was reportedly holding talks with AIG over the potential acquisition last week.

But he could face opposition for the deal from other potential buyers including French insurance giant Axa and Holland’s ING, the newspaper said.

Prudential – along with other players in the sector – has seen its share price hit in the current turmoil as investors worry that stock market falls will erode insurers’ capital strength.

The Financial Services Authority added to these worries in a recent briefing note raising concerns over “weaknesses” in the calculation of capital buffers, increasing fears that insurers may be second after banks to fall victim to the credit crunch.

Prudential, which has declined to comment on a possible AIG deal, reported better-than-expected interim results in July, with first-half operating profits up 7% to £1.4bn (€1.8bn) and signs that its recently struggling UK business may be putting its troubles behind it.