ACQUISITION OF THE SOCIETY'S OPERATIONS BY
HALIFAX GROUP PLC
This morning, Halifax Group plc ("Halifax")
announced that it has agreed to acquire The Equitable's operating
assets, salesforce and non-profit and unit-linked business for
a payment of up to £1 billion into the with profits fund.
The Equitable is also announcing the outline
of a proposed scheme to achieve a compromise between policyholders
with guaranteed annuity rate policies and those with non-guaranteed
annuity rate policies.
Set out below is an extract from the announcement
released by Halifax:
"Halifax has agreed to buy The Equitable
Life Assurance Society's non-profit and unit-linked business and
its operating assets and salesforce, subject only to regulatory
Stage 1: Halifax will pay £500 million to
acquire The Equitable's:
economic interest in its non-profit
and unit-linked business, which has an embedded value of approximately
operating assets, including its
highly efficient IT and administration platform which will be
managed by Clerical Medical; and
salesforce, which will be rebranded
The Halifax Equitable.
Clerical Medical will also provide fund management
and administration services to The Equitable's closed fund.
Stage 2: Following the successful outcome of
a scheme to achieve a settlement between The Equitable's guaranteed
and non-guaranteed annuity rate policyholders, Halifax will pay:
£250 million unconditionally;
a further £250 million contingent
on the achievement of agreed new business sales and profitability
targets in 2003 and 2004 by The Halifax Equitable salesforce.
Halifax will have no exposure to The Equitable's
with profits fund, which is closed to new business and remains
mutually owned by its policyholders.
The transaction has been welcomed by the Financial
Chris Headdon, Chief Executive of the Society,
"This is a good result for policyholders
after a long period of uncertainty. If the GAR compromise is achievedand
we all have a strong incentive to ensure that it isthen
this, combined with the sale, will provide certainty for policyholders
and the prospect of higher investment returns."
In July 2000, the Board of The Equitable announced
that, as a result of the House of Lords' ruling on guaranteed
annuity rates ("GAR"), it believed it was in the best
interests of members to find a purchaser for the Society. By December
2000, no firm proposals had been received and the Board decided
the Society should close to new business. Since the Society closed
to new business, the Board and its advisers have been exploring
whether a sale of the Society's operations could offer greater
value to policyholders than the alternative of a run-off of the
closed with profits fund. On 22 December 2000, the Board of The
Equitable announced the sale of Permanent Insurance Company for
The transaction with Halifax offers the following
key benefits to policyholders:
A payment of up to £1 billion
for the operations of the Society and its non-profit and unit-linked
business, significantly strengthening the with profits fund.
This payment, coupled with the proposed
compromise scheme between GAR and non-GAR policyholders referred
to below, should restore the investment freedom of the with profits
fund leading to a potential improvement in long-term investment
returns (Note 1).
The provision of IT and administration
services at cost. The use of The Equitable's administration platform
for The Equitable's and Halifax's life and pension business will
maintain the low cost, high quality service for policyholders
and promises further economies of scale. In addition, policyholders
will continue to be able to receive advice from their representatives
and Equitable Direct.
Strengthened investment management
capabilities through the combination of The Equitable's investment
management operations with Clerical Medical, which has a very
strong investment performance record.
If there had been no sale, the Board believes
that policyholders would have been disadvantaged through the risk
of staff departures and increasing costs per policy inherent in
administering only a closed fund as well as the continuing constraints
on investment freedom.
GAR COMPROMISE SCHEME
The House of Lords' ruling in July 2000 meant
that value within the with profits fund had to be transferred
from policyholders without GARs to policyholders with GAR.
The value of this transfer was estimated at
£1.5 billion, including the £0.2 billion cost of a Rectification
Scheme for policies which matured between January 1994 and 20
This estimate was made using assumptions as
to future interest rate, longevity of pensioners, maintenance
or premiums on GAR policies and the take-up rate of the GAR option.
The Equitable believes that it would be in the
interests of policyholders as a whole if this cost could be capped
and the damaging division of policyholders into two camps with
opposing interests could be resolved. To that end, the Society
has been working on a proposal which will be put to policyholders.
Halifax strongly supports this proposal and believes that the
Equitable franchise will be more valuable if the GAR issue can
be resolved. Halifax's deferred payments of up to £0.5 billion
are conditional on a GAR compromise scheme being approved.
The Equitable intends to put policyholders in
a scheme under section 425 of the Companies Act 1985 ("the
GAR Scheme") which will give a one-off increase in all GAR
policyholders' policy values in exchange for giving up their GAR
option. As an illustration of the possible increase, the estimated
GAR cost of £1.5 billion would be sufficient to increase
the policy values of GAR policyholders by around 20 per cent in
aggregate. The Society intends to consult widely before the details
of the GAR Scheme are finalised to ensure that the scheme is as
fair as possible to each class of policyholder.
The Board believes that such a proposal offers
significant benefits for each class of policyholder:
GAR policyholders would get a definite
value for their guarantee which would otherwise fluctuate as interest
rates change in future. In addition, flexibility in the choice
of annuity option (eg investment backed annuities and income drawdown)
would become available on their increased policy value and this
would also be available on early retirement and death.
Non-GAR policyholders would see their
liability to pay for the cost of GARs fixed.
For all policyholders, the proposal
would create greater certainty as to future benefits and allow
an overall improvement in the investment freedom of the with profits
fund (Note 1).
If the GAR Scheme is approved, there
would be an additional payment (by Halifax) of up to £0.5
billion into the fund for the benefit of all members.
Details of the GAR Scheme when finalised will
be set out in a proposal document to be sent to policyholders
in the summer, which will include an independent report on the
fairness of the proposals. Implementation of the GAR Scheme would
require approval by a 75 per cent majority by value and 50 per
cent majority by number of each class of policyholder voting at
EGM and subsequent approval by the High Court. The GAR Scheme
is unlikely to become effective until the autumn.
The Equitable has consulted the FSA on the proposed
GAR Scheme. More work remains to be done but the FSA have stated
that, in their view, there is now a promising basis for a fair
deal for policyholders.
Where policyholders require assistance, they
should contact their usual Equitable representative at their local
branch or telephone 0870 9010052. For general information, policyholders
should telephone 0870 6002272. This announcement will be posted
on the Society's website (www.equitable.co.uk). All policyholders
will receive a letter as soon as possible detailing this announcement
and containing further information.
Briefings for the press will be held at 12 noon
(City Correspondents) and 1.30 p.m. (Personal Finance Journalists)
at Halifax's offices at 33 Old Broad Street, London EC2N 1HZ.
Note to editors:
1. When Equitable closed to new business
on 8 December, it announced that this would require a switch in
the with profits fund's investment from equities to fixed interest
securities. Expectations were that some 15 to 20 per cent of the
with profits fund would be switched, leading to a lower expected
overall return of 0.5 to 1 per cent per annum.
A GAR Scheme would bring much greater certainty
to the Society's pensions business. This would allow a correspondingly
substantial reduction in the technical reserves which Equitable
is required to hold in its statutory solvency returns to Financial
Services Authority. The payments from Halifax will also strengthen
the solvency of the with profits fund. Together, these factors
are expected to enable the restoration over time of Equitable's
former equity backing ratio and investment freedom.
In accordance with the agreements between Halifax
and The Equitable, the initial £500 million payment in respect
of the first stage of the transaction will be paid on 1 March
2001, subject to necessary regulatory clearances.
The proposed legally binding settlement between
The Equitable's guaranteed and non-guaranteed policyholders, which
will be recommended to policyholders by The Equitable's Board,
will be sought by means of a Court sanctioned Scheme of Arrangement
expected to become effective in the autumn.
3. Information on Halifax
Halifax is one of the UK's leading financial
services organisations. In 1999, the most recent financial year
for which information is available, Halifax derived 35 per cent
of its profits from diversified earnings in Consumer credit, Personal
Lines Insurance, Long Term Savings and Protection, and its Treasury
operations. This is targeted to grow to 50 per cent by 2002 in
order to complement its UK market leading positions in Mortgages
In the Long Term Savings market, Halifax operates
under its own brand in the bancassurance sector and, in the IFA
sector, through Clerical Medical, a wholly owned-subsidiary of
Halifax. In June 2000, Halifax added to its capabilities in this
area through the acquisition of a 60 per cent interest in St James's
Place Capital, a major UK provider of life insurance and investment
products whose principal operation is the J Rothschild Assurance
Group which sells exclusively through over 1,000 dedicated advisers
who sell exclusively to higher net worth individuals. In addition
to providing an extensive range of life assurance and pensions
products, J Rothschild Assurance Group sells a St James's Place
branded range of unit trusts.
In an extension of Halifax's own branded distribution,
Halifax Direct and Halifax Online now have one million direct
banking customers and around 400,000 online customers for a full
range of personal financial products including sharedealing services.
In addition, Intelligent Finance, a stand alone telenet banking
operation was launched during 2000 and markets a full range of
banking products: current accounts, savings, mortgages, personal
loans and credit cards. Intelligent Finance systems automatically
allow customers the chance to offset debit and credit balances
to maximise the interest on savings and minimise the cost of borrowing.
A motor and household insurance business with
the generic brand esure is being established and will be operational
over the telephone and internet in 2001.
1999 saw record Group profits of £1.78
billion before tax, exceptional items and pensions review. Earnings
per share rose by 12 per cent and dividends increased by 19 per
cent. This performance reflected sales growth in every retail
diversified business in excess of 20 per cent and record profits
in each business.
In the first half of 2000, Halifax achieved
profits of £909 million before tax and exceptional items.
Underlying earnings per share rose by 8 per cent and dividends
per share rose by 13 per cent.
4. Lazard is advising Halifax on this transaction.
Jonathan Dawson, a non executive director of Equitable, is a managing
director of Lazard. Whilst Jonathan Dawson supports the transaction,
he did not take part in the Board's decision to approve the sale
of the Society's operations to Halifax.
Salomon Brothers International Limited, trading
as Schroder Salomon Smith Barney ("Schroder Salomon Smith
Barney"), which is regulated in the United Kingdom by The
Securities and Futures Authority Limited, is acting for The Equitable
Life Assurance Society and no one else, and will not be responsible
to anyone other than The Equitable Life Assurance Society for
providing the protections afforded to customers of Schroder Salomon
Smith Barney or for providing advice to any other person. Salomon
Smith Barney is a service mark of Salomon Smith Barney Inc. Schroder
is a trademark of Schroders Holdings plc and is used under licence.