5 December '02 - EMAG press release on Equitable

Countering the board's policy of spin and obfuscation, by commissioning two studies of the financial situation.

Since the Board consistently fails to provide information on the Society's financial situation, EMAG has commissioned leading lifeco actuarial consultant Ned Cazalet to prepare a financial report, and EMAG Committee Member Colin Slater (FCA) of Burgess Hodgson to prepare a restatement of the Interim Accounts.

One clear conclusion to draw from these two reports is the inadequacy of information that has been available for members to judge the performance and financial strength of the Society into which they have invested. EMAG criticises not only the incumbent board but also the FSA for this.

A very rudimentary example: This Society has, for 18 months, consistently refused to even divulge the simple fact of how many members there are and how many policyholders have departed.

The information provided in the latest interim accounts is inadequate to ascertain:-

1. the investment performance of the fund, broken down by asset class
2. the division of the with-profits fund for supporting live with-profits policies, non-profit business, annuitants, with-profit annuitants.
3. the relationship between the total values attributed to members' policies (i.e. guaranteed bonuses + non-guaranteed final bonus or now indicative value) and the assets available. Very few members realise that the Society does not now, nor ever has, provide specific reserves for any non-guaranteed or terminal bonuses. These are only "covered" by the now paper-thin Funds for Future Appropriation (FFA).
4. although the accounts of "normal" companies are generally adequate for assessing the financial strength based on debt/equity ratio, quick ratio etc, they are no value in assessing the financial strength of a lifeco because the liabilities, by way of guaranteed bonuses and other guarantees, are not set out. Further, only a specialist would understand the regulatory significance of any subordinated loan - which Equitable has.

The TRUE financial position of the Society is described each year in the solvency return to the FSA at the financial year end (calendar) and delivered in April. It runs to 300 - 400 pages and is totally inscrutable to the lay reader. Only a small number of actuarial experts have the expertise to understand such technical returns. Ned Cazalet has 'very little time for' the conventional Report & Accounts (R & A), arguing that they are so "opaque" as to be of little value.

Very few members of the Society even knew of the existence of an annual solvency return. The Society sold its policies primarily through a direct sales force. IFAs had no reason to analyse the Equitable's solvency return and there was little discussion within the IFA community. But when and if asked, they did highlight the increasingly alarming free asset ratio.

To complicate matters there is no comparability between the statutory accounts and the solvency returns. For example, in the R & A there is emphasis on excess of capital, described as FFA - but there is no direct equivalent in the solvency return. That return still incorporates future profits, which do not feature in the R & A. Similarly, treatment of subordinated loans is totally differently. The way that the GAR was accounted for was the most polar example: £200m in the R & A whilst simultaneously in the annual solvency return at £1.5bn in Spring 2000. The two returns are autonomous and incompatible.

This inadequate, conflicted financial reporting represents a major regulatory failure that has persisted unaddressed by regulators over many years. Although the FSA has embarked on a comprehensive review of with-profits policies and of regulatory reporting, matters are proceeding at a snail's pace.

In EMAG's view, Equitable is just a big investment club, bearing no resemblance to a With Profits fund. It is totally unacceptable that the directors refuse to tell the members/owners in the R & A whether the 'indications' of policy values are supported by assets and whether the terminal bonus element bears any resemblance to the 'surplus' shown in the accounts. Policyholders should not just be left to guess.

It appears that the FSA is now similarly minded: Its own Integrated Prudential Sourcebook (CP 97 June 2001) states:

"We consider that quantification of the provision for terminal bonuses and its recognition as an on-balance sheet liability would help the FSA, policyholders and the firm's own management in determining whether adequate resources are being maintained to meet policyholders' reasonable expectations."

EMAG regards the failure by the Society to provide this kind of vital information to its members as also being a regulatory failure by the FSA. It could have required the Equitable, in the special circumstances through the recent period of intense policyholder anxiety since closure, to adopt a much more thorough and transparent disclosure. Repeatedly through the period EMAG made representations to the FSA to force greater disclosure - to no avail.

Ruth Kelly told Parliament on Nov 27th 2002: "The FSA is working very closely with the Equitable's management." So closely, it appears suspiciously near to being shadow directors. The FSAs responsibility is to policyholders.