Prudential merges UK fund management with insurance in cost drive

* M&G Prudential starting to work as new unit from Thursday

* Prudential (SES: K6S.SI - news) looking at options for annuities back book

* Operating profit up 5 percent to 2.36 bln pounds (Adds CEO comments on UK merger, back books, adds analysts, updates shares)

By Carolyn Cohn

LONDON, Aug 10 (Reuters) - Britain's Prudential (Amsterdam: PD8.AS - news) moved to fend off competition from passive funds on Thursday, merging its M&G (Shanghai: 603899.SS - news) asset management and UK and European insurance businesses to save costs and improve its products.

The lure of lower-cost index funds has driven a round of consolidation in the active funds sector, with deals such as the formation earlier this year of Janus Henderson through the merger of a U.S. and a UK fund firm.

And British firms Standard Life (LSE: SL.L - news) and Aberdeen Asset Management are merging next week to form a 670 billion pound active manager.

Prudential said the combined M&G Prudential business manages 332 billion pounds ($430 billion) in assets for over 6 million customers and employs more than 9,000 people.

"We have teams with highly complementary skill sets ... We will be able to use the benefits of that scale," Prudential's chief executive Mike Wells said on a media call, adding that the management team of the combined M&G Prudential business would begin working together immediately.

Prudential will spend around 250 million pounds on the reorganisation and aims to achieve cost savings of around 145 million pounds per year by 2022.

Eamonn Flanagan, an analyst at Shore Capital which has a buy rating on the stock, said the merger made "enormous sense", allowing Prudential to cut costs and deliver a unified service.

Although Wells said the merger did not signal a spin-off of Prudential's UK division, Laith Khalaf, senior analyst at Hargreaves Lansdown (Frankfurt: DMB.F - news) , said it would make such a move far simpler.

John Foley, the chief executive of Prudential UK and Europe, will become chief executive of M&G Prudential.

Anne Richards will remain CEO of M&G and will be a deputy chief executive of M&G Prudential, alongside Clare Bousfield, CEO Insurance for Prudential UK and Europe.

BACK BOOK SALE?

Prudential may also sell part of its UK annuities book which is closed to new customers and was considering "external and internal options" for the 45 billion pound book, Wells said, although it was not planning to get rid of the whole book.

Annuity providers Legal & General (LSE: LGEN.L - news) , Pension Insurance Corporation and Rothesay Life have all said they were interested in acquiring back books.

A sale would boost Prudential's capital "significantly", KBW analysts said, reiterating their outperform rating on the stock.

Other options included reinsurance or longevity swaps, Wells said.

Prudential said its operating profit rose to 2.36 billion pounds in the first half of the year, boosted by growth in Asia and above a forecast 2.2 billion pounds.

It said it would pay an interim dividend of 14.5 pence per share, up 12 percent and in line with forecasts.

Prudential's shares, which have been trading at record highs, were down 0.65 percent at 1,830 pence per share at 1114 GMT, against a 1.2 percent fall in the FTSE 100 index. ($1 = 0.7713 pounds) (Additional reporting by Rahul B; Editing by Susan Fenton and Alexander Smith)