Vulture fund raises Equitable's hopes

Vulture fund raises Equitable's hopes

The break-up of Equitable Life has moved closer following the launch yesterday of a vulture fund, Synesis, backed by some of the City's most powerful institutions, to buy out distressed annuity and pension liabilities. Equitable is keen to offload its £7bn of annuities, and is also expected to sell the rest of its troubled assets.

Speculation has until now focused on a deal with Prudential, which apart from Legal & General is the only company in the bulk annuity purchase market. Last June Prudential snapped up £1.5bn in annuities from Resolution Life and in 2004 it bought £1bn-worth from Royal London. The team behind both deals quit Prudential six months ago and yesterday re-emerged as Synesis, with enough capital from the Royal Bank of Scotland and the private equity house Warburg Pincus to accept £7bn-£10bn in liabilities - comfortably enough to absorb Equitable's annuity book.

Advertisement starts

---

---

Advertisement ends

Isabel Hudson, the chief executive, refused to comment on any Equitable deal but Equitable and other companies with problem annuity books hope a bidding war will erupt. Equitable is keen to sell because - like other life insurers - it is worried about having to pay ever increasing sums of money to retired customers if they live longer than it expects. In recent years a number of leading insurers have been forced to set aside more money to pay pensions following data showing that people are living longer than previously thought, partly as a result of a reduction in smoking and advances in medicine.

At retirement, an individual swaps his or her accumulated pension fund for an annuity, which provides a guaranteed income for the rest of the holder's life. If they live a long time the insurer has to pay out more.

When it announced its results five weeks ago, Equitable said: "Like some other funds, we are exploring the possibility of transferring the bulk of our non-profit annuities to another provider in order to remove that risk." It added that such a move could make sense for Equitable Life "provided that the financial terms are satisfactory".

Synesis will not focus exclusively on bulk annuity business. It is also hoping to grab a chunk of what is expected to be a huge new market in taking on the annuity risk of corporate pension funds. Currently, companies with final-salary pension schemes have a huge open-ended longevity risk. The Financial Services Authority has said that potential mismanagement of longevity risk "poses a threat to firms' solvency".

Synesis said it will use the annuity risk skills it built up at Prudential to acquire "in-force annuity" business from medium-to-large UK pension funds, allowing companies to take the risk off their balance sheets. It faces stiff competition from a growing number of rival start-ups, including one run by Mark Wood - a former Prudential UK chief executive.

Backstory

"Vulture funds" first swooped on the ailing life and pensions industry in the 1990s, buying moribund insurers, closing them to new business and running off their book of business. In the biggest deals, Clive Cowdery's Resolution Life bought the distressed funds of Royal & SunAlliance and Pizza Express's Hugh Osmond took over Pearl. Scottish Mutual and Scottish Provident are next on the block. Mr Cowdery has amassed a £70m fortune from vulture deals. The next feast for financiers is annuity books, which firms want rid of because of ever-rising longevity. Tony Levene

Guardian Unlimited © Guardian Newspapers Limited 2006