3 December '02 - Equitable Life - interim report for the half year ended 30 june 2002

Some comments on the accounts and the society's current financial position

1. Yield on all non-linked investments

This is worked out in note 3 as being £272 million on investments valued at the period end of £20,263 million. Annualised this is a percentage return of 2.68%. the review of the Society's current financial position says that at 30 September 2002 "further losses on equities were offset by gains on fixed interest investments" so there is no good news on investment gains. The yield therefore on investments for the whole year would be expected to be above 2.68% but not necessarily above 3.5%. The guaranteed interest rate - GIR issues is of very real relevance since ELAS is just not earning enough money. It is extremely disappointing that there is no statement in either the corporate review or the review of the Society's financial position that specifically addresses the GIR "issue".

Turning to years beyond the current year, ie. into 2003 and so on, there is no numerical estimation of yield, results, bonuses and whether they will beat the GIR. Extensive financial modelling of all possible outcomes has been done, this has been addressed to whether the Society can continue as a "going concern". No numerical estimate is given of bonuses or what the reasonable expectation with caveats would be. Again this is very disappointing.

2. Not a going concern

The position of the Society were it not a going concern has clearly been considered and fees have been paid for advice in this connection. The Board has decided not to share with policyholders the results of the advice nor to show in numerical form what the results of a cessation of trading would be.

3. Investment losses

At the half year the investment land and buildings have been revalued in line with the appropriate property index movements. The amount involved is not shown separately but the value of property is now £1,866 million. Also at 30 June 2000 the value of non-listed securities is now £682 million. These are held at director's valuation using generally accepted valuation basis. Both these categories of assets are subject to market pressures and on realisation, in a declining property and venture capital market, realisation at the total sum invested of 12.5% of the w/p fund represents scope for significant investment losses and further bonus withdrawals.

The Fund for future appropriations at £382 million as a percentage of the long-term business provision, is just 1.92% - a wafer thin margin to operate within, given the above susceptibility to investment losses and provisions subject to radical change.

4. Nature of fixed income assets

£14,070 million of assets are in listed debt and other fixed income securities. In the climate of 2002/2003 bond losses are to be expected. No geographical or type of spread of these listed bonds is given. Are they for example, all government guaranteed or are they mainly in the corporate junk bond sector? This is not in line with the FSA's instructions to give a view of risk.

5. Technical provisions

The problem that troubles any layman looking at the long-term business provision is that the provisions are based on guaranteed benefits only and do not include non-guaranteed bonuses. It is my view that if the directors of a company publish and give reasonable expectation of a non-guaranteed final bonus then the accounts should show in note form what the impact of that final bonus (even though non-guaranteed), would be. It is quite clear that the promises given in the past for non-guaranteed final bonuses well exceed some of the technical provision and the fund for future appropriations.

6. Unit linking

During the AGM a promise was made that one questioner would be given a paper on why realising a fund would not be pursued or was not feasible. There is no indication in the review of this non-feasibility nor is there any real discussion on why the Society should not be broken up. Again this is not in the best interest of the policyholders.

7. Pictures i.e. graphics

For those, like me, who feel that a good graph or bar chart explains matters better than just figures the two graphical attempts at explanation on pages 5 and 7 are not very helpful. That on page 5 shows the percentage asset mix at 31 December 2001, 30 June 2002 and 30 September 2002 with three pie charts of the same size despite the asset shrink over the nine months. That for 30 September 2002 shows 20% of assets are not in fixed interest and bonds, however the designers of the chart show a piece of pie which is clearly 25%. This is a 'picky' criticism but given the Boards' willingness to show how well they are managing the asset mix, why can they not publish the actual figures ? The second chart on page 7 is a bar chart of claims by month from January to September 2002. The commentary in the text says: " The Society has continued to experience a high level of claims and surrenders as illustrated opposite." Then in note 5 there is an analysis of claims totalling £2,811m for the six months. With my ruler I have reconciled this to the sum of the first six bars in the chart and predict that the outflow for the quarter to 30 September 2002 was over £1,400m. The obvious questions as to the impact of MVAs , the continuing rate of withdrawals and an analysis of the claims are not dealt with. Nor is there an adequate showing graphically of the nature of the liability i.e. policyholders expectations of the value of their assets. All this would be too transparent for the present Board. At least we are spared any pictures of the members of the Board.

John A Newman