Equitable 'walking a tightrope in a gale'

A leading life insurance analyst warned that troubled Equitable Life was "walking a tightrope in a gale" after the mutual insurer filed an annual return showing that it had only £65m of tangible assets over the minimum £1bn required to back its long-term liabilities of £24bn.

A leading life insurance analyst warned that troubled Equitable Life was "walking a tightrope in a gale" after the mutual insurer filed an annual return showing that it had only £65m of tangible assets over the minimum £1bn required to back its long-term liabilities of £24bn.

Equitable has also added £500m of estimated future profits to bolster that £65m but Ned Cazalet, the leading independent insurance analyst, said that although this was permitted by current regulations it should be discounted as there was little likelihood the insurer could achieve it.

Last year Equitable closed to new business in the wake of a House of Lords decision two years ago that it must meet its guaranteed policyholders' claims. But in February this year policyholders voted to waive those claims in return for one-off bonuses.

The latest statutory return to the Financial Services Authority, published yesterday, shows that Equitable's assets and liabilities fell by more than £10bn last year, mainly because 230,000 policies worth £6.2bn were surrendered or forfeited. Total earned premiums fell from an income of £2.9bn to a negative outflow of £3.2bn. The bulk of the total claims, worth £4.9bn net of reinsurance, was accounted for by pension contracts surrendered, vested, or through payments on death.

Charles Thomson, Equitable's chief executive, admitted recently that the 240-year-old society's finances were "thin", but despite the 2001 results a spokesman yesterday denied it was near insolvency. He said: "We are solvent, and can meet all our liabilities. The position of the society has greatly improved as the compromise scheme, agreed with the overwhelming support of policyholders, dealt with very significant uncertainties arising from policies with guaranteed annuity rates."

In the event of a firm going bust the industry-funded Financial Services Compensation Scheme (FSCS) pays out 100 per cent of the first £2,000 payable under any policy and up to 90 per cent of the value of the policy, taking into account bonuses already allocated but not promised – such as the final bonus, which is usually a significant sum. For those already receiving a conventional fixed annuity the FSCS would safeguard hardship cases.

However, this would depend on other insurance companies coughing up what would be a stiff levy if an insurer of Equitable's size went under. A spokeswoman for the FSCS said: "It is not an option. They have to pay."

An insurer which refused to pay could be fined or have its authorisation revoked, in effect putting it out of business.