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Thursday, July 29, 1999 Published at 11:49 GMT 12:49 UK

Business: The Company File

Egg cracks Internet for Pru

Egg has yet to make a profit - but the Pru believes it will in 2001

Prudential is to increase its investment in Internet-based products as it seeks to build on its direct banking arm Egg's soaring popularity.

The UK's largest insurer said online plans include the launch of an electronic credit card and a unit trust supermarket with a share dealing service.

[ image: The bowler hat and brolly image is long gone]
The bowler hat and brolly image is long gone
Prudential wants to turn its popular, but loss-making, Egg operation into a money-spinner through these and other new services which it is keeping under wraps for the moment.

Egg has far exceeded expectations with 550,000 account holders signed up in nine months. Such has been its success that its five-year target has already been reached.

Sarah Boxhall reports: "The Pru has every faith in the future of Egg and its internet services"
But the fast growth has come at a cost as losses have piled up at the operation which offers high and guaranteed interest rates for savers.

Earlier this year, partly in an effort to stem the rush, application rules were changed so that new accounts could be set up only online.

Prudential lost £69m in Egg's first few months, but the company says losses may reach up to £150m this year as it develops the service, which has taken a total of £6.7bn in deposits.

Affluent customers

Prudential said the rising cost was a sign of success as it brought forward investment plans to expand the business.

But rivals who have faced tough competition in the mortgage and savings market from Egg have argued its high interest rates for savers are too high for it to be a profitable business.

There are also a host of Internet-based initiatives from other UK banks and financial services groups, ready to compete with Egg.

[ image: Egg avoids the costs of a branch network]
Egg avoids the costs of a branch network
But Prudential, which had considered buying a Building Society before Egg's success, believes that it has found a low-cost way to beat rivals which have to bear the cost of High Street branches.

In common with other Internet related businesses, it also believes that winning customers to its electronic commerce operations will bring financial benefits in the longer term.

Chief executive Sir Peter Davis maintained the division was still on target to break even in 2001. He said the Egg products would remain competitive despite lower interest rates and tighter margins.

"We have built Egg to work on very thin margins," he said. "In Egg, we have a tremendous opportunity to become the financial services site of choice."

[ image: Sir Peter Davis: Pru leads Internet financial services]
Sir Peter Davis: Pru leads Internet financial services
Prudential said that for many of those signing up, Egg was their first mainstream savings account. Customers were "generally affluent and financially aware and have an average balance of around £17,000".

Prudential hopes to capitalise on its sought-after customer base with the range of new products and as these savers sign up to its new products or take out its mortgages and loans.

The company also said that it had no immediate plans to float Egg. There had been suggestions it may follow the lead of electronics retailer Dixons, which recently sold shares in its Freeserve Internet operation.

The heavy investment in Egg and other Internet ventures, combined with charges for restructuring and the integration of M&G, took its toll on group profit for the first half-year.

For the six months to June 30, Prudential's pre-tax profit was £369m against £499m. The company said the results "reflect the investments we are making."

Job losses

Outside the UK, Prudential's US subsidiary, Jackson National Life, reported operating profits up 9% but the company made no reference to the possibility of a US listing, as a prelude to a US acquisition.

The company did say, however, that it remained "interested in increasing its worldwide position in investment products and mutual funds."

Operating profit from UK operations totalled £213m against £245m - £196m from retail financial services, £44m from retail IFA business, £15m from corporate pensions, £27m from M&G and a loss of £69m from Egg/Prudential Banking.

The figures were also hit by a £55m charge relating to 4,000 job cuts announced earlier this year but Prudential said that after one-off charges underlying profits at its continuing operations rose 8%.

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