Ahead of the announcement, Prudential was confronted with speculation that it was considering getting rid of its UK business to focus on its more profitable Asia division following reports that it has put £10bn of its £45bn UK annuities back book up for sale.
While the decision to merge its UK operations fuelled the rumour, Wells said it did not signal a spin-off of the division.
The company said M&G Prudential, which will manage £332bn of assets for more than six million customers, will deliver cost savings of about £145mln per year by 2022, excluding revenue synergies.
Shareholders are expected to contribute about £250mln towards the investment, the group added.
Prudential did not say whether there would be job losses as a result of the move.
“Combining these businesses will allow us to better leverage our considerable scale and capabilities,” said chief executive Mike Wells.
"In recent years, we have seen a convergence in the investments and savings markets with customers across all geographies and demographics demanding more comprehensive solutions to their financial needs. “
He added: “Bringing together these two high-quality businesses, while transitioning to a capital-light model, will enable M&G Prudential to increase its growth prospects by providing better outcomes for our millions of customers and in turn generate strong returns for our shareholders."
First half operating profits rise 5%, led by Asia
The announcement was made alongside the group’s first half results, which revealed a 5% year-on-year increase in operating profit to £2.4bn with the life business in Asia once again leading the growth.
"Our successful strategy, innovative products and strong execution have driven growth across all of our main performance measures led by double-digit growth in our Asian business,” Wells said.
“We have achieved our objective of generating over £10bn of group cumulative free surplus between 1 January 2014 and 31 December 2017 six months early and we remain on track to achieve the remaining Asia-focused objectives by the end of this year.”
Operating profits in Asia rose 16% to £953mln while new business profit increased 18% to £1.1bn and free surplus generation climbed 15% to £553mln.
In comparison, UK operating profit edged up just 1% to £480mln, hit by a weaker pound following the Brexit vote.
A 54% decline in operating profits at its UK investment business, Prudential Capital, was offset by 10% increase in M&G.
M&G was boosted by an increase in funds under management to £136.7mln from £126.5mln the same period a year ago with net inflows of £7.2mln, compared to outflows of £6.9mln last year.
In the US life insurance business, Jackson, operating profit grew 7% to £1.1bn, buoyed by its variable annuity business.
Prudential lifts dividend, boosts capital buffer
Prudential hiked its interim dividend by 12% to 14.50p.
It also improved its capital position, acknowledging that global economic conditions “remain uncertain and markets remain volatile”. The Solvency II capital surplus rose to £12.9bn from £12.5bn last year at a ratio cover of 202%, up from 175%.
Looking ahead, the company said ongoing focus on risk management and the strength of its balance sheet leave it well positioned to continue to grow profitably into the future.
"Our strategy is focused on markets where the need for our products is strong and growing, and our capabilities and execution ensure that we are successfully meeting that demand across our different regions,” Wells said.
UK merger makes 'enormous sense', says Shore Capital
Shore Capital analyst Eamonn Flanagan said the results met expectations and believes Prudential’s decision to merge its UK operations makes “enormous sense”.
The combined UK company will help to drive out costs and deliver a "unified proposition to the market", Flanagan said, repeating a 'buy' rating and target price of 1,812p.
“In so doing, Pru has now three fully formed, unified, distinct and financially robust divisions across Asia, the US and the UK. The group’s financial position improved further in the first half, with the outlook statement reading positively (acknowledging the volatility and uncertainties across the globe).”
Shares fell 0.33% to 1,832p in afternoon trading.
Combining UK operations makes it easier to get rid of, says Hargreaves Lansdown
"There has been speculation for some time that Prudential might seek to split its mature UK business from rapidly growing US and Asian operations," said Nicholas Hyett, equity analyst atHargreaves Lansdown.
"That makes the decision to merge the UK life and M&G asset management businesses into a single operation, M&G Prudential, a significant one. The combined business would bear a remarkable resemblance to several other UK life businesses, and the success of the DC pension scheme focused PruFund would seem to provide a model for a viable standalone future."
Hyett said while there is no need to get rid of the UK business, today’s move would make it a lot simpler.