Equitable edges closer to the brink

Equitable Life, the troubled life assurer, is likely to breach its regulatory solvency requirements by the end of the year, according to a leading credit rating agency.

Standard & Poor's estimates that the required minimum margin (RMM) – the amount by which Equitable's assets must exceed its liabilities – will be breached by the end of the month. Equitable has already warned that it is close to the margin.

The level is set by the City regulator, the Financial Services Authority (FSA), as a stopgap before a company goes bust. Breaching the rules will prompt the FSA to step in and pressure the company to resolve the problem.

If this happens to Equitable then it may have to cut the amount that it pays to policy-holders still further.

If things deteriorated and its liabilities exceeded its assets, Equitable would go into administration. Its customers would then have their fate decided by the Financial Services Compensation Scheme.

Paul Waterhouse, an S&P analyst, said staying within the solvency rules depends on how well Equitable's investments perform. "From our own internal calculations, we suspect it will be below the minimum margin by the end of this year."

Last week S&P down- graded £350m of Equitable's bonds to a "CCC minus" – just a couple of notches above the lowest credit rating. The company is due to pay £28m of interest on this bond debt next August. But if the RMM is breached, the FSA can stop the payment. "The rating is saying there is a high chance that Equitable will defer the interest payments," said Mark Button, an S&P analyst.

No one at Equitable was available for comment.