After a costly five-month trial in London's High Court, Equitable Life, the UK mutual life insurer has dropped its £750 million claim against its former auditor Ernst & Young. Equitable's management had accused E&Y of negligence because it approved accounts filed by previous managers, who have also been the subject of a lawsuit.
Like a number of UK insurers, Equitable had offered guaranteed annuity rates (GARs) to with-profits policyholders which became valuable when UK interest rates fell in the late 1990s. Unlike other companies, Equitable's management refused to reserve against the GAR liabilities even when the cost became known, but instead attempted to reduce the GAR policyholders' bonus rates, a policy that was overruled in 2000 by the House of Lords.
Fighting the case has put strains on E&Y's life consulting business due to the heavy demands on partners' time. In particular, the firm's annual solvency review of UK life companies, last published in July 2004, has been delayed for over three months. The review has already been criticised by some leading UK life companies for its use of outdated metrics in the context of realistic reporting and economic capital reserves.