IN the summer of 1996, dozens of chauffeur-driven cars motored to Petworth
Park in West Sussex. The lucky passengers, more than 100 businessmen and
their partners, were in for a rare treat.
To the strains of a concert by the Royal Philharmonic Orchestra, the guests
quaffed champagne and were served up a fabulous dinner. At the end of the
black-tie evening, the tipsy throng left clutching goodie bags stuffed with
expensive beauty products.
At the centre of this extravaganza of corporate schmoozing was Michael Bright,
the ebullient chief executive of Independent Insurance. A big man, with a
big personality and huge ambition.
Brighty, as he was known to everyone, was a maverick who not only made money,
but knew how to spend it.
Events like the Petworth Park bash became regular affairs. For six years,
Independent sponsored the Royal Philharmonic to the tune of £250,000 a year.
Bright would routinely entertain 100 guests at concerts in the Barbican and
Royal Albert Hall – often opened by a rendition of Fanfare: Flying High, a
piece written to mark the insurance company’s sponsorship deal.
The parties at his London flat in Gun Wharf near Tower Bridge were legendary.
Bright made a point of doing things bigger and better than anyone – from the
10-year anniversary party with then novel ice sculptures at The Brewery in
Chiswell Street in 1997 to the boxes at Wembley and Old Trafford and the
sponsorship deals.
To call him larger than life was an understatement; loud, a jowly giant of a
man, few businessmen have been so brash.
What made Bright so compelling was Independent’s apparent stunning success. In
13 years, the company grew from a rescued basket-case to Britain’s
ninth-biggest insurer. Independent, a City darling worth £1 billion in 2000,
shook up the staid insurance world with clever marketing and a knack of
exploiting and growing niche markets.
But Bright’s life of working hard and playing hard was to come crashing down.
In June 2001, Independent collapsed after it emerged that it had failed to
make sufficient provisions for insurance claims and hundreds of millions of
pounds in claims had not been reported on its computer systems. Facing
unquantifiable losses, Independent was bust.
More than 1,000 people lost their jobs and 500,000 policy-holders were left
without insurance, including the London Fire Brigade, the Oval cricket
ground and Formula One motor-racing teams.
Last week, at Southwark crown court, Bright was convicted of two counts of
fraud and sentenced to seven years in jail.
In court, Bright was impassive. The ebullience was long gone. BRIGHT once
claimed that insurance fitted him “like a glove”, playing to his strengths
of “strategy, motivation, and an ability with figures”.
He started at the bottom. After leaving school at 18 with five O-levels, he
landed a job in 1963 as a salesman at Royal Insurance. Four years later, he
moved to up-and-coming Orion, where he moved up the ranks to lead the
insurer’s national sales force.
By 1982, he had moved onto Lombard Continental.
Five years later he got his big break when he was headhunted to lead a team to
run an ailing British business that had been bought by venture capitalists
from US insurer Allstate.
Independent Insurance was born. The approach was fearless and irreverent. In
the early days, Independent used to keep copies of Playboy in its reception
to amuse waiting brokers. Bright’s slogan was “reinventing insurance” and
his mantra was “let’s have fun, fun, fun”.
Independent was genuinely innovative. It was the first to introduce the “club”
concept for a group of 250 regional brokers who gained perks and bonuses – a
practice that is now standard in the industry.
Ever the showman, Bright unveiled the “battle bus”, a coach decked
out in Independent’s colours to tour the country. The bus was a glorified
meeting room used to “buttonhole” brokers in a place they could not get away
from. “It worked brilliantly,” said one former executive.
In 1993, Independent listed on the stock market – the first postwar flotation
of a general insurer. However, eyebrows were raised at the unusual pay
packages for the directors, which included the company paying for school
fees and home entertainment.
Even so, Independent was a success, with plush offices in a pseudo-gothic
building known as Cruella de Ville’s house after it featured in the 1996
film 101 Dalmatians.
The City largely lapped up Bright’s aggressive growth plans. The group was
lauded by its peers, winning best insurer six times in seven years at top
industry awards ceremonies.
To many, Bright was a revolutionary and a hero – named business entrepreneur
of the year by the Financial Times in 1996 and winning an achievement award
at the British Insurance Awards in 1999.
He boasted that Independent, which grew at an annual compound rate of 32%
between 1988 and 1997, was better at underwriting than its rivals. It also
exploited niche businesses such as classic cars, caravans, yachts and
household insurance for the very rich. It was strong in employer’s liability
and commercial property insurance too.
Hungry for further growth in the mid and late1990s, Independent expanded into
France and Spain; and Bright’s fortune grew. By 2000, his stake in
Independent was worth £60m, he had four homes, including a luxurious
property in Marbella, an E-type Jaguar and a Bentley Mul-sanne turbo once
owned by Henry Ford, bought at auction for more than £30,000. FOR years,
dark rumours circulated that Independent was too good to be true.
One fear was that the group’s reserves for claims were too low. As early as
1993, Nick Bunker, an analyst at Hoare Govett, warned the claims reserves
were inadequate. But Independent consistently brushed away the concerns.
Other cracks had started to appear. In November 1998, Independent made a
profit warning, blaming losses on floods and storms in Britain.
However, Independent is also understood to have been hit by problems on
claims. As part of its close links with selected brokers, it in effect gave
some the delegated authority to write insurance policies and process claims
on terms that had not been approved by Independent – a highly risky move.
The French expansion was also a strategic mistake, sucking up huge amounts of
investment, while the London market business left Independent exposed to
international risks.
Behind the scenes, a crisis was looming over inadequate reserves for claims.
Over the years, Independent had been aggressive about running low claims
reserves, but this policy was ratcheted up in the late 1990s and 2000.
Potentially, thousands of claims worth hundreds of millions of pounds were
not recorded on Independent’s systems, inflating its cash position. Overall
the complex cover-up is thought to have inflated profits by between £210m
and £350m. Equally damaging, when some claims were entered they were
recorded at a nominal amount of £1.
According to the accounts, between 1997 and 2000 Independent’s gross premiums
jumped from £438m to £830m, but outstanding claims reserves barely moved
from £354m in 1997 to £372m in 2000.
Former directors said questions were asked, but Bright seemed to provide
satisfactory answers. One allegation is that Bright, who admitted his
autocratic style had made him “unbearable” to work with in the later years,
became too dominant after trusted aides left in the late 1990s.
In court, Bright accused employees of keeping him in the dark and blamed many
of the problems on Keith Rutter, the former head of the London market
business.
Bright claimed to be shocked by the scale of problems over large claims in
1998 at the London division, the year Rutter quit: “Every time I turned
something over, something nasty, black and crawly came out . . . it was very
frightening,” he said.
Friends of Rutter argued that Bright was disingenuous – claims were not the
problem; the lack of reserving was.
Bright also claimed that Den-nis Lomas, the former finance director and
codefendant who was jailed for four years, concealed a £50m black hole from
him in 2000.
Lomas and Philip Condon, the former deputy managing director who was jailed
for three years, retorted in court that Bright knew far more than he
admitted. Certainly, Condon and Bright, who had first met at Orion, were
exceptionally close.
At the end of 2000, the actuary Watson Wyatt raised grave concerns about the
level of reserving.
Even then, Independent was optimistic. In late 2000, investment bankers at
HSBC were called in to look at raising more than £100m in a rights issue to
fund growth; and Independent’s shares hit a record in January 2001.
Within a month things started to unravel with a profit warning. At full-year
results in March, profits dived by 42% to £40.1m. The group admitted it had
been forced to reassess its claims reserves and pay £110m to take out
reinsurance contracts with Ireco, owned by GE Capital, to cover liabilities
of £287m.
It was a desperate measure – without the contracts, experts believed the group
would have made a thumping £150m loss. The Serious Fraud Office has since
calculated that by adding in the claims position, the loss would have been
at least £180m.
Independent’s financial position was so serious that it could not pay the
£110m premium. Instead the group’s investment portfolio was liquidated to
pay £39m and a £66m charge was made against property to meet the balance.
Meanwhile, the City was shocked not just by the use of reinsurance to shore up
the balance sheet, but also by the fact that the terms seemed generous to
Independent. Again, it was too good to be true. Bright had secretly signed a
side deal with Ireco in March amending the £278m cover to £171m and the
premium to £71m.
Worse, he had in effect mortgaged Independent’s future earnings from
commercial property insurance in another deal with Ireco.
On April 18, Bright was removed as chief executive and moved to deputy
chairman, though no one doubted he was in control.
It was not until May that Watson Wyatt discovered the extent of the claims
estimates not put on the system. On May 25, Mark Trayhorn, a senior partner,
wrote to the Independent board warning that the company faced unquantifiable
losses. Experts now claim reserves needed to be increased by £110m to £250m.
On June 11, the shares were suspended. Events moved at breakneck speed in the
next seven days. Astonishingly, the scale of the reserving problem only
emerged at a crisis meeting on June 12 between HSBC, Watson Wyatt and
stockbroker Collins Stewart, as advisers tried to launch a rescue
rights-issue.A rescue was impossible.
Two days later Bright resigned as deputy chairman. By June 17, 2001,
Independent was in the hands of the administrators. THOUGH Bright claimed he
was kept in the dark by colleagues, the judge, Geoffrey Rivlin, concluded he
was “undoubtedly the architect and driving force behind the fraud” and
“corrupted a lot of people along the way”.
Many believe his success made him unable to accept failure: “He got to the
point where it was impossible for him to disappoint the City. The idea of
failure would never have entered his mind. He would have done anything to
prevent it,” said one former associate.
Bright used to boast that he liked nothing better than “stuffing the rest of
the market” and making rivals realise “we are not a pair of barrow boys”.
Last week, he was condemned as something far worse: a crook.
A MAJOR TRIUMPH FOR THE MUCH MALIGNED SERIOUS FRAUD OFFICE
LAST WEEK’s conviction of Michael Bright and his two codefendants after a
four-year investigation was a huge triumph for the Serious Fraud Office. For
years the SFO, dubbed the Serious Farce Office, has been under fire for
failing to win big-name convictions in complex and high-profile cases.
Its last high-profile scalp was the 2004 jailing for six years of Carl
Cushnie, former chief executive of finance group Versailles, for a £150m
fraud. Frederick Clough, the former Versailles finance chief, also got six
years.
Other victories include the conviction of five involved in the collapse of
Bank of Credit and Commerce International, including a 14-year sentence on
Abbas Gokal. Its most famous case was the 1991 conviction of Ernest Saunders
over the Guinness affair.
But the SFO has been unsuccessful in a number of high-profile cases. Kevin and
Ian Maxwell were acquitted in 1995 of a £12m conspiracy to defraud; Andrew
Regan, who tried to buy the Coop, was cleared in 2003 of stealing £2.3m;
Henry Sweetbaum, former chief executive of Wickes, was found not guilty in
2002 of a £20m fraud.
Polly Peck tycoon Asil Nadir fled to Cyprus in 1993 when the SFO laid charges
after his empire, ranging from fruit to electronics, collapsed.
The SFO and its head, Robert Wardle, also courted controversy by dropping for
national security reasons an investigation into BAE Systems over allegations
the defence giant paid bribes to secure the $40 billion Saudi Al-Yamamah
contract.
Cases awaiting trial include nine people and five companies, among them
Goldshield, on charges of conspiracy to defraud the NHS, and the five former
directors of finance company Imperial Consolidated Group.
The SFO is investigating allegations of financial irregularities at software
group Torex Retail. Inquiries at Merlin Biosciences, run by Sir Chris Evans,
continue.
