David Berridge, Scottish Equitable's pounds 157,000-a-year chief executive, said the Aegon deal was 'definitely not' prompted by the Department of Trade and Industry, which regulates insurers' solvency. However, strengthening the company's solvency, which weakened again last year, was the main reason behind the move.
Charles Sleigh, Scottish Equitable's chairman, said the life office had been seeking additional capital for two years. It approached a number of companies, some from the UK, before settling on a partnership with Aegon.
Unlike shareholder-owned companies, mutual life offices find it difficult to raise the money necessary to support the growth of their businesses. Scottish Equitable is the third mutual, after FS Assurance and Scottish Mutual, to surrender its independence in recent years.
Aegon is buying an initial 40 per cent share of the profits from Scottish Equitable's unit-linked contracts, the fastest-growing part of its business. In return, the Dutch insurer will pay pounds 200m into Scottish Equitable's with- profits fund, which will be ring- fenced in an attempt to preserve the essence of mutuality: all profit from the with-profits business will be shared among participating policyholders.
A small part of the pounds 200m will be used to pay with-profits policyholders a special bonus. Bill Stewart, marketing director, said the payment would be 'much less than one year's bonus'.
Aegon will invest another pounds 40m in capitalising Scottish Equitable plc, a new and wholly-owned company, which will acquire all the existing office's business. Aegon's share of unit- linked profits will eventually rise to 50.1 per cent and possibly beyond. The deal requires the approval of Scottish Equitable policyholders and the DTI.
A crude analysis suggests Aegon would have had to pay pounds 700m- pounds 800m to acquire Scottish Equitable in its entirety. Abbey National spent pounds 288m buying the smaller Scottish Mutual.
A voting trust, initially consisting of nine Scottish Equitable directors, will be established to protect policyholders' interests. The trust will have 'a golden share' in the new plc, giving it a say in the future business plan, acquisitions and disposals, and the investment and bonus policies. It was not clear yesterday how Aegon and the voting trust will resolve any disputes they might have.
Scottish Equitable currently has pounds 200m of free assets above its required solvency margin of about pounds 175m. The life office's relatively weak financial position has constrained its investment policy.
Aegon already owns another smaller UK life insurance business, Aegon Financial Services, which it bought two years ago.Reuse content