Another body blow for Equitable policyholders

Equitable Life; A good deal for BP; Body Shop anger
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The Independent Online

Just as Equitable Life policyholders thought the worst of the pain was over, wham, along comes another body blow. For those with longer maturity dates, there is at least the possibility of recovery from the cuts announced yesterday in terminal bonuses, but for those close to maturity there is none, and it means they are going to be appreciably worse off than they thought.

Unfortunately, this unhappy state of affairs is not something for which there seems to be any possible redress. The responsible (or perhaps that should be irresponsible) management is now gone, and although they could be sued for negligence, it wouldn't make any difference financially to the outcome. The Financial Services Authority is potentially a much bigger pot of gold, backed as it is by the public purse, but is so hemmed around with legal immunities that it would be hard to bring a successful case even if it had deliberately set out to disadvantage Equitable's policyholders.

As for the Policyholders Protection Act, which provides for industry funded compensation, it only pays out 90 per cent of the guaranteed sum. Miserable though Equitable's announcement was yesterday, it is better than that.

If nothing else, the Equitable Life débâcle has blown the whistle on what a strange and antiquated world the with-profits life sector really is. For years, Equitable seemed to be storming ahead. Its investment performance appeared to be better than anyone else's, and so were its bonuses. The punters queued up to join. But then came the guaranteed annuity rate fiasco, which cruelly exposed just why Equitable had managed to do so well. Unlike other, more responsible life offices it had failed to put money away for a rainy day, and therefore couldn't pay the guarantees without raiding other policyholders.

Yesterday's announcement is just more evidence of the same thing. Because of the stock market downturn, Equitable cannot afford to pay the values assigned to policyholders approaching maturity without eating into the value of policies with longer to go.

All life offices are to some extent in the same boat, but for the others the pain is much less. OK, so there's a bear market going on, but it is not nearly as bad as some past ones and rarely before has a life office been forced to announce such draconian cuts in final bonuses. Normally they have been able to "smooth" the payouts by topping them up from reserves and from the cashflow generated through new premium income. Neither of these options is open to Equitable, which has limited reserves and is closed to new business.

It is a strange old trade that has allowed managers discretion to operate in this way, taking from one pot and giving to another, but it is an even stranger one that has allowed Equitable to get itself into such financial straits that it cannot shore up the policyholders by doing the same. With-profits life funds have always been about as transparent as a brick wall, and for most policyholders there is no way of telling how secure the valuations are that come with their annual statements. Watch those raids on the orphan asset estates – the reserves over and above what the life office thinks prudent. If Equitable is anything to go by, they may be needed one day.

A good deal for BP

Apart from a heavy cold, Lord Browne of Madingly seemed pretty content with himself yesterday considering BP had just forked out a large amount of money to buy a business which, as it never tires of reminding us, makes little or no money.

The exact value of the German petrol stations BP is buying from E.On is a little vague. The Germans say the deal is worth £4bn, whereas the newly ennobled BP chief executive reckons it will only cost his shareholders around £1.5bn once he has sold off the unwanted upstream operations that come with E.On's chain of Aral forecourts.

Whatever the true cost, BP has bought itself a nice little earner. E.On made profits of around £450m last year from refining and retailing petrol and yet provoked barely a whimper from the German motorist, let alone a full-blown fuel blockade.

Provided the deal does not unravel when the European Commission's competition commissioner Mario Monti gets his hands on it, the profits should become even bigger once BP has finished taking the hatchet to the German workforce. The fat margins are partly due to the fact that Germans fill up with groceries as well as fuel when they stop at a petrol station, making the economics of fuel retailing a lot more favourable. But it is also thanks to the German government's lower tax take on fuel, which enables petrol retailers to retain a bigger slice of the price of each litre for themselves.

This is hardly an Amoco or even an Arco for BP, but it nonetheless looks like a good deal. BP has filled in one of the few obvious holes in its European retailing coverage. The only other country where its green and yellow logo is not a familiar roadside feature is Italy, where Agip has the market sown up.

At the same time, by making the Aral deal an asset swap, BP has got rid of a piece of baggage it has been trying to offload for a decade. BP will cover the bulk of the purchase price by handing over to E.On its 25.5 per cent stake in Ruhrgas, a German gas distributor, which BP acquired almost by accident in the late 1960s.

If you think the financial terms of the BP/E.On deal are complicated, then they pale by comparison with the fiendishly byzantine shareholder structure of Ruhrgas. BP long ago stopped treating its stake as anything other than a passive holding and contented itself with just collecting the dividend payments each year. But E.On, being big and bossy and German, believes it can use the shareholding as a platform to seize management control of Ruhrgas and add another piece to go alongside its other recent acquisition of Powergen to its multi-utility jigsaw.

Body Shop anger

Anita Roddick, joint chairman of Body Shop, knows a lot about human rights, the environment and corporate responsibility, but if she knows anything at all about investor rights, she's not taking much notice of them. The terms of yesterday's buyout of Body Shop's joint venture partner in the US are outrageous.

Financially, the deal seems reasonable enough, and in any case it is too small to bother all but the most finicky. But the agreement under which the partner, Adrian Bellamy, gives up his voting rights to the Roddicks for a seven year period in return for a $3m cash bung (all right, so that's not the way the company puts it, but in the circumstances it seems reasonable enough), is most definitely not OK. Together with their chum, Ian McGlinn, Anita Roddick and her husband already control 51 per cent of the company. The payment of shares to Mr Bellamy would have tipped them below this crucial majority position.

If you are a Body Shop shareholder, don't even begin to think about voting against it. The deal requires only a simple majority of the shares to go through, and since the Roddicks already hold that position, the result is a foregone conclusion.

The Body Shop really shouldn't be a publicly quoted company, and this is just further evidence of it.

j.warner@independent.co.uk

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