7th December '02 - Ruth Sunderland in the Daily Mail

Equitable - is there a better way?

POLICYHOLDERS in Equitable Life are unlikely to be looking forward to a merry Christmas or a prosperous New Year.

Only a few months ago, they were hoping that a rescue deal put together by chairman Vanni Treves would plug the gaping holes in the with-profits fund.

Instead, they have suffered a relentless battery of shocks as the mutual's finances have gone from bad to worse.

The questions now are: how dire is Equitable's true position, and what can be done about it?

In a new report, analyst Ned Cazalet, who predicted the Equitable disaster, says the insurer is lurching towards insolvency and appears to be a 'regulatory delinquent life office' with a ' dysfunctional' with-profits fund.

He said: 'The prospect of ruin is very high. It is a brown-trouser moment.' As revealed in the Daily Mail this week, Cazalet believes that Treves and chief executive Charles Thomson should undertake a second rescue deal to 'unitise' the fund: in simple terms, linking policy values directly to the performance of the assets in the portfolio.

Cazalet's analysis of Equitable's finances is grim.

He reckons it is likely to have already fallen below City solvency regulators' waterline, which is an extra safety zone before a company risks running aground. He estimates the insurer needs £700m as a capital cushion.

'I can't see how they can cover it,' he said. Cazalet casts doubt on claims by Thomson that the £16bn with-profits fund has been stabilised by switching most of its investments out of shares into bonds.

'The fund is still risky,' he said. 'The portfolio of bonds appears to be fairly low grade. They will struggle to pay guaranteed rates of bonus. The group is extremely vulnerable to even very slight movements in the value of assets and liabilities.' In a crumb of comfort for policyholders, however, Cazalet says insolvency would not cause a spectacular drop in policy values.

'Crossing the solvency line would be a small step for the society: a penny at a time.'

Paul Braithwaite of the Equitable Members Action Group, which commissioned the Cazalet report, said: 'This confirms our fears that this management is still not on top of the situation. The society appears to be a one way bet with possibly more downside to come. We believe they should appoint a fulltime company doctor to replace Vanni Treves.'

Equitable, which has already admitted it might breach regulatory solvency, said Cazalet's report adds nothing to what it has already disclosed.

It denies that its bond portfolio is ropey, saying it is 'invested sensibly, largely in gilts' and that it closely matches liabilities.

Equitable believes the best way forward is to persist with the strategy set out by Vanni Treves and Charles Thomson.

However, it admits it will take several years to restore any semblance of normality.

The insurer is not likely to be nursed back to robust health. The only realistic debate now is about the best way to wind it up.

The current management has in effect already put the fund into a long-term orderly windup. They, and the regulators, believe this offers the best chance of stability for Equitable and the industry as a whole, though policyholders run a high risk of more bonus cuts.

Cazalet's suggestion of unitising may offer an alternative but it is unlikely to be a simple one.

What no one wants is a forced liquidation, which would involve distress sales of assets, delays in pension payments, possible tax bills and a high risk of policyholders seeing even more of their pensions evaporate, not to mention huge liquidators' fees. Liquidation would not be a quick fix: the finance industry compensation scheme is still dealing with claims almost a decade after tiny Oaklife went under in 1993.

Nor would it be wise to bank on a liquidation shaming the government into compensation, given its reluctance so far.

There are no easy solutions to Equitable's woes.

Once again, as so often before with the imploded insurer, policyholders are sailing into uncharted waters.

HOW UNITS WORK

EQUITABLE members have with-profit policies, intended to smooth out the ups and downs of the stock market by adding guaranteed bonuses. It has to set aside money to meet these payments but, as members well know, there is a risk that its kitty will not be enough.

Ned Cazalet is proposing that all policies be switched into unit linked plans. With these, the returns mirror the performance of its portfolio.

The main advantage is that policyholders would know exactly what their investment is worth at any time. It would also free capital because Equitable would no longer have to tie up money in reserves.

Charles Thomson, Equitable's chief executive, opposes unitisation, saying it would be ' a huge waste of time and money'.

It would require the agreement of each policyholder or a new compromise scheme.

It would also be difficult to reach fair values for Each policyholder's entitlement.