Equitable Life is in talks with Prudential to pass on up to £7bn of its annuity liabilities, a move which would lay the groundwork for a sale of the rest of the troubled insurer's assets.
The negotiations are said to have reached an advanced stage, and Pru has begun due diligence on parts of the annuity business of Equitable.
Pru is keen to pick up a large proportion of the £7bn in annuity liabilities, although talks are continuing on the exact level and the number of installments in which the deal might be structured.
If successful in offloading its annuity book, Equitable would be in a stronger position to negotiate the sale of the rest of its life and pensions business, having removed a large degree of risk from the business.
It is believed Equitable is in ongoing talks with closed life book consolidators, including Resolution, with a view to selling off the remainder of the business.
Equitable, which is headed by its chairman Vanni Treves and chief executive Charles Thomson, has insisted it is still considering three potential strategic options for the business. Although a break-up is one, another would be to simply continue running the business off, while a third could be to securitise its life and pensions books.
Potential acquirers have been keen to see the end of Equitable's ongoing legal action against its directors before pushing ahead with a deal. The Society has dropped the claim against its former auditors, Ernst & Young, and is now pursuing only nine former directors. The cases are expected to complete by the end of the year.
Pru and Legal & General are the only two companies to take on so-called "bulk annuity transfers", acquiring the annuity books of final-salary pension schemes and life insurers which are closed to new business. The seller is typically forced to pay a fee to the acquirer to cover the future risks of improving longevity or potential inflation rises, both of which could push up the cost of running the book.
The addition of Equitable's book leaves an enormous oversupply in the bulk-purchase annuity market, with many more pension funds and insurers looking to offload their books than there is demand to take them on.
Marconi said last month it was looking for a buyer for £2.6bn of liabilities in its closed final-salary scheme. But to date, the likes of Pru and Legal & General have preferred to take on several smaller deals a year rather than one large one. Last year, Pru took on about £1.5bn of bulk annuities, while it had transferred a little less than £2bn in the first nine months of this year - the majority of which had come from a large deal with Resolution.
It is believed several other players are looking at entering the market, which remains high-risk, with purchasers often unable to determine the size of their profit or loss for several decades when all policyholders of the schemes have died. As yet, there are no financial instruments allowing acquirers to match their assets against their liabilities over a 25-year period.Reuse content