Who shot equitable life? When one of the United Kingdom's most respected insurance companies collapsed, observers blamed managers, auditors, regulators and the government, but who is most at fault?

The British government has some strong suspects in the financial whodunnit surrounding Equitable Life Assurance Society's collapse, but achieving some kind of rough justice in the matter may be a good deal harder than fingering the culprits.

On March 8, the U.K. Treasury released the long-awaited Penrose Report into Equitable's woes. Equitable Life, once among the United Kingdom's most respected insurance companies, stopped taking new business in December 2000 after a downward spiral that followed its earlier decision not to make good on bonus commitments on its with-profits life policies. Declining interest rates and weak reserving had depleted the company's financial strength. Longer life expectancies meant that Equitable faced the prospect of paying bonuses for years longer than its actuarial charts had forecast.

And while much attention has fallen on the executives and board members who were in place when the venerable company imploded, the Penrose report also reaches further back in time to the actuary who was on the job when some of the troublesome business was put on the books. That same actuary, Roy Ranson, led Equitable as chief executive from 1992 to 1997.

In his 818-page report on the problems of the mutual, Lord Penrose, a senior Scottish judge, left no doubt as to where he thought the blame should go. "Principally," he wrote, "the Society was author of its own misfortunes."

The Equitable Life debacle has raised deep questions about trust. As a result of the company's actions, thousands of people lost hard-earned savings they had hoped would sustain them in old age. What, it is now being asked, do providers of financial services owe their customers in terms of disclosure and fair dealing? And what do governments owe their citizens in terms of protection against abuses?

"This was a company that presented itself as being extremely reputable and reliable, but was engaged in systematic over-bonusing for many years," said Vincent Cable, a member of Parliament and treasury spokesman for the opposition Liberal Democrats. "It was paying out far more than it could afford."

Jeremy Goford, president of the Institute of Actuaries, said that other insurers were making large payouts on their with-profits policies. "'But they had an estate to draw on," Goford said. "In the case of Equitable, it could only come from future policyholders, unless the equity market performed extremely well. Which it didn't."

Cutting Payments

Equitable Life's problems became a public issue in the late 1990s when the management announced that it would reduce the lump sums paid to policyholders who held the company to annuity rate guarantees made when interest rates were higher. Many of these policies had been sold in the very different environment of the 1970s and 1980s.

So confident was Equitable that its decision would stand up that it financed a court case against itself. The company lost. In July 2000, the House of Lords, the United Kingdoms highest appellate court, ruled that Equitable Life had acted unlawfully when it restricted the bonuses. This court's verdict, Cable said, "was in a way the straw that broke the camel's back."

Faced with a potential bill of about 1.5 billion [pounds sterling] (approximately $2.7 billion), Equitable announced that it would demutualize and sell itself. But no buyer could be found, and Equitable had to turn to its only sure source of funds: its policyholders. The effective devaluation of existing policies set off a downward spiral that led Equitable to announce in December 2000 that it would accept no more new business.

Equitable Life declined to comment for this article.

In a cover letter to Ruth Kelly treasury secretary in the government of Labor Prime Minister Tony Blair, Penrose described Equitable Life as a company with "deep-seated financial and management problems." These troubles, Penrose added, existed before the controversy over annuity guarantees came to light.

Penrose said that the lessons from Equitable's fall "relate to the responsibilities of all the main parties concerned, directors, management, auditors and regulators." But in a sentence that no doubt pleased the Blair government, Penrose wrote: "Regulatory system failures were secondary factors." Penrose added that he had no jurisdiction over regulatory lapses. And he refused to offer a view as to what the government should do if it determined that the regulators hadn't done their duty.

Penrose carried out his task with the thoroughness and deliberation characteristic of such inquiries in the United Kingdom. He received his assignment in August 2001 and delivered the report on Dec. 23, 2003. The government, in no apparent rush to publish, then allowed organizations that had been mentioned in the report to review those sections that related to them. The 2.5 million [pounds sterling] cost of the report raised some eyebrows. George Mudie, a Labor member of Parliament, suggested that it was 'the most expensive history book ever written."

Penrose's attachment of the main blame to Equitable Life came as an obvious relief to the Blair government, which has resisted calls for Equitable's members to be compensated out of public funds. The cost of compensation has been estimated at more than 3 billion [pounds sterling]. Calls for compensation have come from Equitable policyholders and the company itself, which now is under the control of a new board.

Policyholders Seek Restitution

The Equitable Life case has given rise to a number of ad hoc policyholder groups that have trained their sights on both the company and the government. Paul Weir, of the Equitable Late Contributors Action Group, said the damage to individual Equitable customers has been "colossal." He pointed to reduced incomes, stress-induced illnesses and the prospect for many people of having to sell their homes. "I know there are people who will not live to see the outcome of their claims," Weir said.

Michael Caley, chairman of the Equitable Life Policyholders Action Group, said that Equitable Life had enjoyed a solid reputation among Britain's professional classes. "If somebody had asked you five years ago which was the most revered insurance company [in the United Kingdom]," Caley said, "four out of five people would have said Equitable Life."

Caley, a 69-year-old retired management consultant, said he invested a lump sum of about 300,000 [pounds sterling] in three Equitable Life annuities about 20 years ago. He estimated that the value of his pension has been reduced by about 30%. Caley added that he doesn't know the full extent of his loss, for the simple reason that he doesn't know how long he will live.

Caley, who is "plowing my way through all 800 pages" of the Penrose Report, said that Equitable was able to keep its costs down by selling direct to customers rather than going through financial advisers. He noted that the company also touted the advantages of mutuality. Customers were told, for instance, that they were the owners of the business and that they didn't have to share the returns with shareholders. "What they forgot to tell us," Caley said, "was that all the liabilities are yours as well."

Caley said that is group has sought to create a productive relationship with the company, on the grounds that the current board is doing its best to put things right. "We are working towards stability," he said. "One has to be realistic about what can be achieved. The risk is that they would go belly-up, and that would be no good to anybody."

The Equitable Late Contributors Action Group has taken a more confrontational approach. Weir is a late joiner, which he defines as someone who joined "long after the society knew that it was in deep financial trouble. They were concealing the risk." He defines late contributors as existing policyholders who made large contributions after September 1998. Weir, who is 51, runs a public relations consultancy in Cheltenham, England. He said he has lost more than 40,000 [pounds sterling] as a result of investing in Equitable Life.

Management's Role

Penrose also cited the powerful dual role of Roy Ranson, Equitable's former chief executive. Ranson was the company's chief actuary from 1982 to 1997. From 1992 to 1997 he also was chief executive. Ranson, it is widely agreed, has a strong personality. "At interview," Penrose wrote, "I found Ranson to be highly intelligent and articulate, but manipulative. I was not persuaded that his memory was as inconsistent as he asserted, nor that he had put the Society's affairs so completely behind him at his retirement that he could not comment on some of the matters that were put to him."

Reached by telephone at his home in Aylesbury, England, outside London, Ranson declined to comment for this article. "I don't think I want to be involved," he said.

"By the end of the 1970s and early 1980s, Ranson had become the single most powerful executive of the Society," Penrose wrote. "He became appointed actuary in 1982, and his position was consolidated when he became a director in 1985. He held jointly the offices of managing director and appointed actuary between 1 July 1991 and 31 July 1997. But his influence and authority were established long before that time."

The picture has been complicated by the changes that have taken place in the regulatory structure over the years. Since the late 1980s, the responsibility for regulating the insurance industry has shifted from the Department of Trade and Industry to the Treasury to the Financial Services Authority. Technical expertise comes from the Government Actuaries Department.

The FSA issued a statement on April 16, 2004, in which it confirmed that it has considered the possibility of investigating Ranson's activities with Equitable Life. But the FSA noted that its power would be limited to banning Ranson from working in a position that required FSA authorization. The FSA said that Ranson's age--73--suggests that he isn't likely to request such authorization. Accordingly, the FSA said, it has "concluded that pursuing such action would be of no benefit to Equitable Life policyholders or consumers generally and would be a disproportionate use of the regulator's resources."

Goford, of the Institute of Actuaries, said that Ranson's double role and forceful personality contributed to the company's problems. "This is a story of dominance risk," Goford said.

Goford said that the rules regarding in-house actuaries have been changed. These actuaries now have more of an advisory role, he said, adding that decision-making responsibility has been placed more squarely in the hands of managements and boards of directors.

Government's Role

Equitable Life inevitably has become a political issue. The two main opposition parties, the Conservatives and the smaller Liberal Democrats, want the government to authorize the parliamentary ombudsman to look into the role of the Government Actuaries Department, with a possible eye toward authorizing the payment of compensation to aggrieved customers.

Cable, of the Liberal Democrats, said there is a debate about whether the government failed in its duty as a regulator. It wouldn't be possible at this stage, he said, to promise compensation. Nor, he said, is the cost of compensation clear. "But if a truly independent body, such as the ombudsman, should [find the regulators at fault]," Cable added, "then it would follow that compensation should be paid."

Apart from how the Labor government might have acted, Cable said, the Conservatives, who were in power until 1997, were pursuing a "light touch" regulatory policy during the crucial years of the early 1990s. "The Penrose report effectively lays a substantial part of the blame on that failing," Cable said.

Weir doesn't blame one party or the other for Equitable's collapse. Rather, he said, "The institution of government" has failed. "They have crushed confidence in pensions in this country," he said, "which means that people like me are now advising our children not to save for their retirement."

The failure of Equitable Life also has raised questions about the continued viability of the mutual insurance industry in a regulatory environment that increasingly is focused on the adequacy of reserving. The assertiveness of the FSA on this issue has been cited as a major factor in the decision of Standard Life Assurance Co. to transform itself from a mutual to a publicly traded company.

Weir discerns inertia among Equitable Life policyholders toward pursuing legal action. "But if people are prepared to go to court, they will get their money," he said.

At press time, a policyholder group known as Equitable Life Trapped Annuitants was preparing to file a suit against Equitable on two grounds: that the policies were neither explained nor properly understood at the point of sale, and that the product itself was defective.

The big problem for the government, Weir said, would come if everyone sued and won. This, he said, would leave an empty pot and force the government to step in. "The government is able to duck its moral responsibility by keeping at arm's length," Weir said.

Should Other Insurers Help Out?

Weir also noted the rumblings from the insurance industry that it would challenge any assessment resulting from the failure of Equitable Life. This, he said, could lead to a lawsuit by the industry against the government. "That brings it to a head," Weir said.

Cable finds the current situation less than satisfactory. "Penrose has declared that if people feel unhappy they should start suing each other," he said. "Unfortunately, that would mean American-style litigation on a grand scale."

For its part, Equitable Life now is suing 15 former directors for 3.3 billion [pounds sterling]. It also is suing Ernst & Young, its former auditor, for 2.6 billion [pounds sterling]. Ranson is among the defendants in the first suit. This action, even if successful, would be unlikely to raise significant amounts of money. But it could provide leverage in the suit against Ernst & Young. The ultimate goal of Equitable Life, which insists that it is in good financial shape, is to win the suits and find a buyer.

There is also the possibility of criminal charges. The Serious Fraud Office has confirmed that it has been asked by the Treasury to look into the company's actions.

Goford said that Equitable's collapse holds an important lesson for insurers. They should, he said, be more cautious in their pronouncements. "If you continue to tell the customer the same story year "after year, with expectations of what their policy payouts might be," he said, "then the more you have to make sure that you are reserving for those expectations."

Equitable Life
Assurance Society
A.M. Best No. 85508

Liquidity Ratios (2002):
Liquid assets to total liabilities                74.3
Total investments to total liabilities            85.5

Profitability Ratios (2002):
Benefits paid to net
premiums written (Life)                          709.5
Expense ratio (Life)                             129.9

Source: A.M. Best Co. company report

Trail of Pain

Late 1990s

Equitable Life reduced lump sums paid to holders of policies with guaranteed annuity rates.

July 2000

The House of Lords ruled Equitable Life had acted unlawfully when it restricted the bonuses. Faced with a huge potential liability, Equitable announced it would demutualize and sell itself, but no buyer could be found.

December 2000

Equitable announced it would accept no more new business.

February 2001

Halifax plc, the United Kingdom's largest mortgage bank, agreed to buy parts of Equitable for as much as 1 billion [pounds sterling].

April 2002

Equitable announced it will sue 15 former directors and its former auditor, Ernst & Young.

April 2004

A policyholder group was preparing to file a lawsuit against Equitable Life on two grounds: that the policies were neither explained nor properly understood at the point of sale, and that the product itself was defective.