Equitable Life deal nearer

The future of Equitable Life is getting clearer

The board of Equitable Life is locked in talks, deciding how to approach a compromise offered to them on Tuesday by despairing policyholders.

If a deal was reached, it would signal the end of the mutual insurance company's two tumultuous years of wrangling with members who held guaranteed annuities.

"Everybody involved wants some form of compromise that would break the deadlock," said Stuart Bayliss, head of the Equitable Life Guaranteed Annuity Action Group, the group which proposed the compromise.

If the deal was clinched, the main risks associated with buying Equitable Life would be greatly reduced, making it more likely that it could be sold in whole or in part to another insurance company.

Clinching the deal

A sale would certainly be good news for the one million policy holders whose investments are under threat because of Equitable's troubles.

Everybody involved wants some form of a compromise that would break the deadlock.

Stuart Bayliss
head of GAR action group

"If we're really lucky we'll get the deal through by the end of the week," Mr Bayliss told BBC News Online, adding that the deal should definitely be in place by 15 January.

"All sides are working on the same objective," he said, explaining that this was the key difference between the current negotiations and the past list of failed talks.

According to Mr Bayliss, the Financial Services Authority (FSA) is also enthusiastic about the proposition, and is encouraging people to make progress as quickly as possible.

Peace offering

The compromise involves Equitable Life offering a one-off lump sum to the 90,000 Guaranteed Annuity Rate (GAR) policy holders, in exchange for a cap on some of the benefits offered with these policies.

GAR policies were the downfall of Equitable Life, because it simply could not afford to pay out what it had promised.

And the society put itself up for sale when the House of Lords ruled that it was legally bound to the promise - which amounted to about £1.5bn.

But the nature of GAR policies means that their payment is an incalculable risk.

It was this risk that caused about 15 potential buyers to shy away from the deal, despite the good health of other areas of its business.

But the original bidders are now being informed of the cap to liability, and could be interested in re-entering negotiations.

Splitting up

Whether the compromise is reached or not, it now looks most likely that Equitable will sell-off the different sections of its business piece by piece.

The society has already made a small start by selling its subsidiary Permanent Insurance Company for £150m to Liverpool Victoria in January.

Equitable's sales force and its asset management business are two other chunks of business reportedly under negotiation.

Another possibility is to split the business into with-profits and non-profits pension schemes, and then sell off the entire non-profit policies as a block of business.

Potential buyers are not yet prepared to say whether they are tempted to re-open negotiations if a compromise is reached.

Dutch insurer Aegon, the UK's Prudential and CGNU and European alliance Eureko all considered bidding the first time round.

But all these firms will be carefully watching to make sure that the risk is really reduced before making any further bids.