Predators circle over Equitable Life
Monday 11 January 1999
The group, which has repeatedly rejected takeover approaches insisting it is wedded to the principle of remaining an independent mutual insurer, has assets of pounds 25bn and would represent a formidable prize.
It is Britain's biggest seller of pensions with 8.7 per cent of the UK life and pensions market.
It is also widely regarded as having the most efficient and productive workforce and the lowest cost-base in the business.
Potential bidders range from clearing banks such as National Westminster, to general insurers like CGU which want to expand their life business, as well as foreign players like Swiss Life which recently lost out to AMP in the bidding for NPI.
Investment bankers, who have a queue of potential buyers "running around the block", have been playing up fears about Equitable's financial situation in the hope of putting it into play.
One City source said that Equitable has had to get a waiver from the Treasury to continue writing new business after being technically in breach of a number of solvency ratios, a claim that has been dismissed by Equitable as "absolute nonsense".
Nigel Webb, Equitable's spokesman, said: "We are absolutely committed to the benefits of mutuality."
The firm is also facing a further threat from so-called guaranteed annuity issues. This is an industry-wide problem which arises from promises made about payouts to pensioners at a time when long-term interest rates were much higher than they are now.
However, a report by American credit rating agency Standard & Poors, which was published last month, warns that while the firm's capitalisation is "adequate," it is below the level expected for an AA-rated institution and below the level of its peers.
S&P also points out that the firm's ability to grow is restricted by its commitment to remaining mutual.
"Financial flexibility is relatively limited owing to Equitable's strict adherence to mutual principles," the report says.
Ned Cazalet, head of Cazalet Financial Consulting, the life insurance consultancy, said Equitable had been a favourite target for potential bidders for years.
"The big issues are: if Equitable's solvency is thin, why it is thin, and whether it will have to lower bonuses or seek more capital to support new business," he said.
Another industry source said: "Equitable's solvency ratio, according to the latest returns, was 8 per cent which is actually lower than NPI's was when it put itself up for sale."
Competitors said Equitable is also writing new business at an unsustainable rate. "Equitable writes 95 per cent of new business as with-profits business, which requires an extensive amount of capital. Standard Life, by comparison, writes just 30 per cent as with-profits," said one analyst yesterday.
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