16 November 2001

Dear Mr Blackburn,

The Equitable Life Assurance Society

Thank you for your letter of 29 October 2001 addressed to our Chairman. I have been asked to respond and please accept my apologies for the delay.

You refer to our communication in August when you asked whether "the unit linked funds could also be vulnerable to the troubles affecting the with-profits funds?" I replied by saying that the problems facing the Equitable Life stem from the uncertainties surrounding the guaranteed annuity rate policies and the with-profits fund. I can confirm that the unit linked business is separate from the with-profits fund and has been 100% re-insured to Halifax Life. Since then you have read the Baird report and are concerned by the comments contained therein.

I think it would be helpful if I first clarified that the report records the position as at the beginning of December 2000. The current position has changed materially in any event because the unit linked business of Equitable Life has been reinsured into Halifax Life, as part of the transactions concluded in March 2001. The fact that the business is 'transferred' by reinsurance is an important detail because although the unit-linked funds have not been used as the premium paid to Halifax Life, it means that technically the unit-linked policyholders remain policyholders of Equitable Life.

More generally, the position is that for normal purposes, where a Life Office has more than one notional long term fund, for all intents and purposes those funds operate independently so the profits and losses, and assets and liabilities, of the respective funds do not affect those of any other of the company's notional funds. However, that ring fencing can only work so far. In the event that an insurance company becomes insolvent, those notional internal barriers fall away and the liabilities of the funds simply become liabilities of the company alongside its liabilities to other creditors, whose rights have to be settled from the available assets of the company in accordance with the relevant insolvency legislation. The issue you allude to therefore only arises in the event of an insolvency. Equitable Life remains solvent and the solvency position is something that the FSA monitors closely in the interests of all policyholders.

Finally, the narrative in the part of the report you quote refers to a provision that is included in all Equitable Life policies. It is something that is required by the Society's articles of association (article 4). We believe the article's origins go back to the fact that the Society was created in the eighteenth century as an unlimited company although its exact purpose and effect are not entirely clear. However, whatever the provision may mean, we are advised that it does not mean that the Society could scale back its policyholder liabilities or otherwise use it to provide benefits to one set of policyholders at the expense of another.

I hope this information is helpful to you.

Your sincerely,

Miss Rebecca King
Supervisor
Life Supervision department