The future of Equitable Life, the world's oldest mutual life insurer, was thrown into doubt yesterday when the appeal court ruled against its controversial treatment of policy-holders with annuity guarantees.
The Court of Appeal ruled, by a two-one majority, that Equitable Life directors acted unlawfully in reducing final bonuses paid to 90,000 holders of policies with guaranteed annuity rates.
The unexpected ruling, which overturned a High Court ruling last September, reignited speculation that the 238-year-old company could be forced into a merger or takeover to raise sufficient funds - losing its mutual status.
Equitable's policy of distributing investment gains in full to members means the company has not built up a cushion of surplus capital, giving it less room for financial manoeuvre than its competitors. It has also lost business because of adverse publicity.
The company yesterday repeated its determination to continue as a mutual and denied it was under financial pressure. Its 600,000 high-value customers and efficient computer systems would be attractive to competitors.
Companies known to be interested include: Standard Life, the Edinburgh-based mutual; Prudential, Britain's biggest life assurer; and Sun Life & Provincial Holdings, the British arm of the acquisitive French insurer Axa.
Mr Roman Cizdyn, life insurance analyst with Merrill Lynch, said: "I think this makes it very difficult for them to carry on."
Equitable decided to pay lower bonuses to guaranteed annuity rate policy-holders than to other policy-holders after current annuity rates fell below guaranteed rates in October 1993.
Equitable directors were ruled to have acted wrongly given the details of the guaranteed annuity policies and had exceeded the discretion given them by the society's articles of association.
The ruling overturned a High Court decision last September that the society had acted within its powers.
In the original hearing, High Court vice-chancellor Mr Justice Richard Scott had given a clear ruling in Equitable Life's favour and forecast any appeal on the case's key aspect was likely to be "hopeless".
Equitable was allowed to appeal to the House of Lords, that acts as the highest court.
Britain's life and pensions industry had breathed a sigh of relief last September when Equitable won the original court case on its treatment of guaranteed annuity policies written over the past 40 years.
Observers believed the industry could be liable for extra payouts of up to £14 billion sterling (€22.9 billion) were Equitable to lose, while analysts had warned such a decision could force Equitable into the arms of a predator.
Such concerns were reignited by yesterday's decision.
Lord Woolf, Master of the Rolls and heading the Appeal Court, said when overturning the decision yesterday: "The conclusion I have come to is that it was not a permissible exercise for the Society to declare a differential bonus. To do so is inconsistent with the tenor of the policy".
