The art of business when growth isn't an option

Equitable Life's days have been numbered ever since its 1990s fall from grace, but it hasn't taken decline lying down.

by Adam Gale
Last Updated: 16 Oct 2018

Growth is widely seen as the fundamental evidence of successful leadership. If you’re not rising, you must be falling. And if your business is falling – or, an equally grave sin, stagnating – then it can’t be very well run.

Yet sometimes decline is inevitable. A manufacturer of cassette tapes in 1983 could do nothing to halt their obsolescence in the face of the CD, but if they managed that decline well they might have had a chance of diversifying before it was too late. Indeed, it is often a logical strategy for a firm to cut costs and reduce operations in one division so that it can invest in another.

Knowing how to manage decline successfully is therefore an undervalued business skill – at least in most companies.

Equitable Life makes for an interesting exception. Once one of the country’s biggest mutual insurers, it was at the centre of a colossal scandal in the 1990s that essentially revolved around making generous guarantees to policyholders in the preceding decades that it later couldn’t keep. Faced with crippling liabilities, the Equitable was forced to close to new business in 2000, leaving a million policyholders over £4bn out of pocket.

The challenge of decline

‘As soon as that decision was taken, it put a time limit on how long the company could be around for,’ explains Simon Small, who became CEO in July this year after six years as FD.

As a mutual, policyholders own Equitable Life and are entitled to a share of its assets when they retire or leave, as a bonus on the underlying value of their policies. With no new policyholders, this meant that the Equitable’s funds inevitably shrank – from a pre-scandal peak of £35bn to £6bn today – reducing its previous economies of scale.

‘We were a big company getting smaller, which meant we had the same number of products but in shrinking pools. We acted and smelt like a £35bn company, but we weren’t,’ says Small.

Aside from ever-rising inefficiencies, there was another problem. Partly as a result of what happened to Equitable Life, insurers are required to hold capital against risks, substantially reducing the amount left to distribute as bonus when a policyholder left. The result was a kind of last man standing effect, where all the assets remained for the most stubborn – and longest-lived – policyholder.

‘That would be incredibly unfair,’ says Small, adding that ‘the regulators would have been all over us’ had the Equitable done nothing about it.

The solution

Small and then CEO Chris Wiscarson came up with a plan: to de-risk their portfolio by getting out of equities and properties, selling the annuity book and focusing on bonds.

At first glance, this appeared highly counter-instinctive, because it would reduce the return for the Equitable’s with-profits policyholders, who still had a 3.5% annual return guaranteed in their contracts. But by reducing risk, Equitable Life was able to cut the amount of capital it was required to hold, thereby releasing it for pay-outs to departing policyholders.

The de-risking strategy worked, but last year they came upon a snag. ‘We got to the point where there were few risks left to de-risk, which forces you to think what’s next. We started calling it the endgame,’ says Small.

The eventual solution was to target the one core risk that remained – the 3.5% guaranteed annual return on policies. It did this by selling the company for £1.8bn to Life Company Consolidation Group (LCCG), a firm that specialises in running back books at scale. In exchange for waiving their right to the guarantee, policyholders would get a substantially higher windfall as a result both of the purchase itself and the freed-up capital, which was all the more valuable because of favourably low interest rates.

‘At the time we were thinking we’re basically doing ourselves out of a job, but it’s for the benefit of the policyholders,’ says Small.

Running a company in decline

People typically don’t want to work for employers that they suspect are failing, let alone ones that have operated for decades with a Damoclean sword dangling over their crown. Being able to attract and retain talent is therefore a key challenge for a company in decline.

Small admits that rebuilding and upholding morale was hardly straightforward, for a workforce that mostly joined the firm before its late 90s crisis.

‘They’re very loyal staff members who’ve been through hell really – people coming to the office to pick fights, coming to AGMs to throw things at the board. There have been a lot of very upset policyholders, quite rightly, and our staff has borne the brunt of it,’ he explains. ‘The message that Equitable Life equals disaster has been constantly reiterated in the press, and our team has to read that every day.’

This resulted in a siege mentality. ‘It was a bit like having a good telling off early in your career, then you get a bit introverted and don’t trust anyone any more. We had to spend a lot of time trying to rebuild trust with the staff.’

Small says this was achieved by being very open about what was happening and why, and regularly communicating through informal coffee mornings, one-to-ones or small group meetings.

‘We took them into our confidence and trusted them. We didn’t have a single leak from any of our staff members about [the LCCG sale], and they all knew what was going on,’ says Small, who adds that he was able to persuade several people to stay by focusing on the positives of working for Equitable Life: location (Aylesbury – ‘not London’), flexible working culture and interesting work (‘this is gold dust’, apparently).

Of course, not everyone was able to stay – Equitable Life has been operating a system of rolling redundancies for years as its assets have shrunk, and not all of its current employees will be able to stay with LCCG. But even this doesn’t necessarily have to be a source of disaffection.

‘They had a very good redundancy package, which is also helpful. One part of that is that every member of staff got three one-to-ones about where they are today and where they want to be tomorrow. Our commitment was to ensure they got whatever they needed for their next move,’ says Small.

Ironically, Equitable Life’s terminal condition has probably made it easier for it to handle redundancies and rounds of cost-cutting. Companies that make surprise cutbacks are unlikely to find their employees as amenable to the changes. But that only underpins the lesson the world's oldest mutual insurer learned only too late: that even in decline, trust and transparency go a long way.

Image credit: Jackmac34/Pixabay

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