The fall of the house that Bright built

The meltdown at Independent Insurance took the City â¿“ and thousands of policy-holders â¿“ by surprise. Yet the signs of impending disaster had been there for years, with only the charisma of its chief executive, Michael Bright, to hide the danger. Here, in unprecedented detail, is the chronicle of a crash foretold...

Brighty, says everyone who knows him, wasn't like that. Sure, he drove a bright red E-type but as a trainee he had always promised himself one. Sure, he held flash parties but this was a client-based business and that's what you had to do to get on. And besides, that was Brighty, ever generous, always up for a good time. Yes, he kept Playboy in his reception for visitors to pore over but that was Brighty, a man's man.

If there was a late-night drink going on, Brighty wouldn't be the first to leave. "Oh no, he'd be there until the end, Brighty wouldn't be the first to blink." So says a close pal of Brighty. Big bloke, big personality. And a big heart, say his friends. And a giant of a mess left behind by the collapse of Brighty's £1bn insurance company.

The demise of Independent Insurance – chief executive Michael Bright, but always "Brighty" – left 500,000 individuals and organisations from the London Fire Brigade to the Oval cricket ground to Somerfield supermarkets and the McLaren Formula One racing team seeking new cover, cost more than 1,000 people their jobs and will almost certainly lead to a further 1,000 losing theirs eventually, and punched a hole in the investment portfolios of thousands of shareholders.

As ever, there are winners: accountants and lawyers are poring over Independent's books, and legal actions are being planned. Two official investigations are being made into the disaster, by the Serious Fraud Office and the Financial Services Authority. As for the man himself, for the first time in his career he is keeping a low profile. The fabulous dinner parties for the press at his Wapping apartment overlooking The Thames ("he always served the finest wine", says one former City editor, fondly) are consigned to memory. Now, journalists' calls are not returned, their many questions not answered. Suddenly, Brighty is no more.

The story of the rise and fall of Independent Insurance and of Michael Bright has a familiarly depressing ring. A strong character with huge ambition sweeps all before him; compliant colleagues stay, those who beg to differ are ousted; prestigious name advisers, dazzled by thoughts of partnership pay-outs and bonuses, queue to assist him; some sections of the financial press, prompted by the attentive prodding of City public relations executives, fawn all over him; and all the time, his strategy is built on sand.

For Michael Bright read any other business star who seemed to have found a way of making money where others hadn't, and crashed to earth with terrible results. "I know what you're thinking, that it's very Maxwellian," says his close friend. "Well let me tell you, it wasn't. Brighty's not like that."

Michael Bright left school at 18 with five O levels. Born with the gift of the gab, he was a natural salesman, ideally suited to the ultra-competitive but well rewarded business of selling insurance. He started out at the bottom, as a lowly clerk, living in a bedsit in Brixton, south London. In 1967, aged 23, he moved to Orion, then an up-and-coming insurer. Mr Bright, well-built and hearty, discovered he had a knack of getting on with people from all walks. He could mix with directors in London who had invariably been to smarter schools than his and he could stand his round with junior salesmen from the provinces, away from the glitzy metropolis.

This, allied to a sharp business brain, was the key to his success. At Orion he worked his way up until he was put in charge of growing the company's national sales force. With Phil Condon, subsequently to be his deputy at Independent, he motivated and galvanised salesmen up and down the land to sell, sell, sell for Orion. Later, the consequences of Mr Bright's aggression came home to haunt Orion. Claims from the provincial side began to stack up, and so large did they become that on the advice of the firm's auditors, the division was shut for new business.

By then, Mr Bright had moved on, to Lombard Elizabethan. He joined Lombard in 1982 and again the same hard-sell approach was brought to bear. At Lombard, Mr Bright teamed up with Robert McCracken and Alan Clarke, both, like Mr Condon, to be senior members of his team at Independent. Mr Bright argued for a twin-track strategy, the same method which would stand him in good stead for several years at Independent.

On the one hand he encouraged his sales teams to pile up the policies, to take on new business, to keep adding to the cash flow. On the other hand, say those who worked at Lombard then, he advocated cutting the company's reserves against potential claims as a way of boosting profits. It was not illegal, but it was fraught with danger.

Mr Bright became a "player" while at Lombard. Not everyone, especially those from the old school end of the market, liked what they saw. He was loud and brash but he also produced results. Nowhere is more conservative than Edinburgh's financial community. The bankers, accountants and insurers in the offices round the old grey city's Charlotte Square make their south of the border cousins look positively reckless, such is their aversion to risks. They wear their caution with pride, testament to centuries of making profits from safeguarding other people's money.

Within that self-assured world nobody is more at home than Sir Iain Noble, third baronet, ex-Eton and Oxford, owner of the Fearann Eilean Iarmain estate on the Isle of Skye, founder of Noble Grossart, Edinburgh's premier merchant bank, trustee of numerous Scottish charities, member of the grand Edinburgh New Club, former Scotsman of the Year. Sir Iain ran an insurance company called, straightforwardly enough, New Scotland Insurance Company. His aim was to expand the firm into a Glasgow-based powerhouse, large enough to challenge the major insurers in London. His opportunity came with the desire of All State, a US insurance company, to off-load its UK operations. The plan was to set up a new insurance brand to embrace All State UK and to move the business up a gear.

A firm of head-hunters was approached and they suggested Mr Bright. His name was unknown to Sir Iain but his track record in driving a firm's sales was impressive. They were chalk and cheese: the patrician Scottish aristocrat and the go-getting, City wide boy, but the formula worked.

For Mr Bright the chance to run his own show came at an opportune time. He was fed up at Lombard not having a stake in the business; here was Sir Iain promising him a percentage. It was 1987. Adverts in the insurance press said there was going to be a new insurer, it was going to be exciting and dynamic, come and join. "I'd heard about Michael Bright, that he was very tough, an extremely hard businessman," says one of those early recruits. "But he also said it was going to be fun." The phrase, "fun, fun, fun" was one of Mr Bright's favourite expressions, a mantra he used to cajole the troops at sales conferences and parties, as in "let's have fun, fun, fun".

In the stuffy, hidebound world of insurance, there was nothing quite like Independent. It was young and aggressive, the new kid on the block not afraid of reputations, no respecter of traditions. "Insurance company found to be different – shocker!" was the heading on one of the pages on its own website.

Mr Bright recruited a first-rank team and others flocked to become part of his exciting venture. He showed a knack of marketing that transformed the industry. Independent was the first insurer, for instance, to introduce the "club" concept for its top 250 regional brokers. They got perks and bonuses and were made to feel valued – and tried even harder for Independent. Now, every large insurance group has something similar.

Sir Iain and his fellow backers were ecstatic. Any doubts they had – and there had been misgivings expressed by some in the industry who thought Mr Bright was somewhat beyond the pale – were soon dispelled. Put in charge of his own firm, he took the industry by storm. In 1993, came his crowning achievement, taking Independent to the stock market in the first post-war flotation of a general insurer. Mr Bright put in £50,000 of his own money. By the time the company collapsed eight years later, his holding was worth £60m. Later, Independent's trail-blazing would be eclipsed by Direct Line but for a period in the early Nineties, it was out on its own.

Those who know Mr Bright say taking the company public changed him. He was still running an insurance group but from then on he had to manage another audience, of City analysts, investor relations advisers, the financial press. He started to believe his own publicity, talking of grand plans for expansion, for putting Independent, still a relatively small concern in insurance terms, right up there with the giants.

His networking and partying were prodigious (part of the Bright legend is his fondness for taking naps in the day so he could party hard long into the night). Mr Bright moved in loftier circles. He held an annual cricket match in Smarden, the picture-postcard village in Kent where he lives in a converted oasthouse. Mr Bright's invitation XI would take on the village side. Independent sponsored the Royal Philharmonic Orchestra and would entertain 100 guests to drinks and canapés at concerts in the Royal Albert Hall and the Barbican. The rest of the industry could only watch and wonder. While they struggled with increased competition and a rise in litigation bringing ever-larger and more numerous claims, Independent sailed on, apparently oblivious to those pressures. In fact, Independent was just as subject to those constraints as anyone else. But, as many suspected, the company's foundations were shaky.

Mr Bright's whole career, at Orion, Lombard and Independent, has been characterised by a willingness to undercut the opposition, and a ferocious drive for profit. Just as in its front-of-house style, Independent turned the industry on its head, behind the scenes, too, he was disregarding tradition.

"What has gone wrong with Independent is not insurance but reinsurance," says a former director of the group. He means that much of what Independent did was little different from any other insurer. It was a general insurer, not especially exposed to any specialist risks or massive, company-destroying one-off liabilities.

No, what Independent did that was unique was to keep laying off its risk by buying expensive reinsurance. It did this because Mr Bright had dug himself into a hole. He realised that by not building up reserves and putting cash aside for an event that may never happen he could grow profits.

Unfortunately, the lack of cover sometimes became so bad that he had to seek reinsurance to shore up the gap. The evidence, as the former director points out, was there for anyone to see. The annual reports of Independent show that in the last four years, gross premiums rose from £438m to £830m, almost double. But the outstanding claim reserve barely moved, from £354m in 1997 to £372m in 2000.

There was plenty of sniping about Independent. Aware of the criticism that it was "under-reserved", in the annual accounts, Mr Bright included a report from the actuaries assessing the level of the firm's exposure. This always gave the group a clean bill of health.

But closer reading of the annual reports reveals a subtle shift in wording, indicating growing unease on the part of Watson Wyatt, the actuaries. A study by analysts at stockbroker Schroder Salomon Smith Barney shows the way the opinion changed.

In 1995, 1996 and 1997, Watson Wyatt was glowing. "The technical provisions of the company ... are soundly based in that overall, they exceed our projection of the corresponding liability (net of reinsurance) based on past and current trends." In the 1998 report, the word "exceed" had disappeared. Watson Wyatt said the "total provisions ... make reasonable allowance for the cost of claims and direct ongoing expenses arising from policies written are consistent with our projection of the corresponding liabilities."

In the 1999 report, in March 2000, the wording moved again, this time to a much more lukewarm stance: "The total provisions ... make reasonable allowance for the cost of claims and direct ongoing expenses arising from policies written prior to December 1999 (2000) in that they are within the range of reasonable estimates of the corresponding liabilities." Similar wording was used in the 2000 report published last March.

The actuaries' opinion had gone from the reserves "exceeding" likely liabilities to being "consistent with" probable claims to merely being "within the range of reasonable estimates". If the pukka firm of Watson Wyatt had serious misgivings about the company they did not declare so. Neither did the company auditors, KPMG. In the boardroom, too, nobody broke ranks.

But an Independent director said it would be a mistake to assume no questions were asked. "You shouldn't suppose all was well behind the scenes because it wasn't. Michael Bright was regarded as a miracle man with a very strong personality but we were also conscious it was in danger of being run as a one-man business, so we did ask questions. His answers always seemed satisfying at the time. I was never in a meeting when questions were asked and no answers given."

For all the director's claims, it is safe to assume Mr Bright was not subjected to sufficiently close scrutiny. Even this director admits to being in awe of him. "Michael Bright was in an industry that does not have a lot of bright people in it. He was an intelligent person; he had a great deal of stamina and drive. He was possibly slightly intimidating. When you spoke to him you knew you were wasting a busy person's time." And besides, the director added: "That the company was doing well is what we were looking for."

Independent, for all the director's fears was not a one-man band. Plenty of people were prepared to bask in the company's glory, lots of them were happy to go along with Mr Bright's way of doing business.

An insider at a rival company says staff would be instructed to delay paying out claims, to inflate the company's cash position. The practice, described as "white-boarding" by a former senior executive who then stressed he had never come across it, clicked into action when bankers or credit agencies were visiting the offices.

Not everyone agreed with Mr Bright's methods. Two senior managers, Colin Hawes and Sue McCall, left last year because they were unhappy with the way some large claims were not entered in the firm's books. In all, allegedly £60m in claims is thought to have gone unrecorded. Some of Mr Bright's most trusted aides on the board also went. Mr McCracken, in charge of the provincial network, quit in 1987, and Keith Rutter, director of the broker department, followed him a year later. Once inseparable friends, Mr Bright and Mr Rutter have not exchanged a word since the day he went.

Cheery and larger than life, Mr Rutter has been blamed by Bright supporters for some of the company's difficulties. They claim he landed the firm with large claims, a hangover from his time running the London liability section. This is denied by Mr Rutter's friends who say Independent's claims are no greater than any comparable group's. Bright supporter say it is disingenuous for Mr Bright's friends to point a finger at the claims when Independent's difficulties are to do with a lack of reserves. "There is no shame in having claims if you put reserves against them and move forward," said one. Mr Rutter, they say, left because he wanted the top job and that was firmly in the grasp of Mr Bright.

Mr Rutter's going left a void in the boardroom. Ambitious, outspoken and full of nous, Mr Rutter was probably the one person on the board independent minded enough to stand up to Mr Bright. Once he had gone, there was no challenge to Mr Bright. One board member said the first he knew there was a serious problem was three months ago. "It became apparent that Michael had done something inexcusable and therefore had to step down. Unfortunately we were opening a Pandora's Box which has been unravelling ever since."

The worried head of internal audit asked to be allowed a closer look at the claims area. His investigation is understood to have quickly found there was £60m in claims allegedly absent from the company's books. a bid to artificially shore the company's finances.

The deep sense of shock is clear when talking to one of the non-executives. His voice breaks as he talks about the discovery. Hindsight, he points out, is a wonderful thing, but "at no time did anyone ever take me to one side and tell me what had been going on. I never heard of any doubts about Michael at Lloyd's. We were confident the results were okay because they had been reviewed by the auditors and actuaries".

Even without this revelation, Mr Bright's star was on the wane. The company's 2000 report is a glossy, expensively produced document, trumpeting marketing slogans such as "Establishing the Difference" and "Surpassing expectations".

On closer inspection, the report, which was signed off in March this year, paints a far from rosy picture of Mr Bright's company. Profits were down to £40.1m from £69.8m in 1999, and in his note to shareholders the chairman, Garth Ramsay, writes of "a slowdown in the relative growth towards the year-end" and "difficult issues" facing the company.

For once, in his message in the same report, the ebullient Mr Bright strikes a gloomy chord. He decides to come clean, saying it is Independent's way, by pointing to the need to boost reserves by seeking reinsurance contracts.

Some large claims, and higher court damages and the surge in "no win, no fee" legal actions, had forced the group "to reassess the level of reserves required for all liability business". As a result, writes Mr Bright, Independent went into the market and bought two more reinsurance contracts. In total, reports Mr Bright, the company has three reinsurance agreements in place, providing cover of £287m in return for a total payment by Independent of £110m.

These were desperate sums. Worse was to come. Mr Bright agreed to step down as chief executive but to stay on as deputy chairman. Nobody at the company was under any illusion that if he remained as deputy chairman he would still, effectively, be in control.

But any attempt to cling to power soon evaporated. Sparked by the claims discovery, Mr Ramsay sanctioned a closer look at reinsurance. On top of the contracts already mentioned, further deals are said to have been made in an attempt to disguise the firm's inadequate reserves. Almost like loans, rather than normal reinsurance contracts, they had been made with the insurance side of General Electric, the giant US conglomerate. "Garth did a magnificent job," said an Independent director, "I've never doubted the integrity of Garth or any other member of the board."

None of the newly discovered deals, said the board member, were known to his colleagues. He may not be aware of them but it is difficult to imagine how Mr Bright could sign away millions of pounds without telling anybody senior what he was doing. The killer blow to the short life of Independent Insurance was hinted at by Mr Ramsay in the annual report and expanded upon by PricewaterhouseCoopers, hired by the company to examine the books: the market was tough, new business was drying up, the cash flow was disappearing.

Accounts differ on what happened next. One director claims Independent was forced under by heavy-handed regulation by the FSA. The company was in bad shape, he admits, but it was not finished and the accountants thought it could be saved. It was only when the FSA ordered Independent to cease taking on new business that the company went under. "PwC's view was that the company was not necessarily insolvent," said the director. "But as soon as we were told to stop issuing new policies that was it. We had 2,000 wage bills to pay and our cash flow had disappeared."

If the FSA had not reacted in such a way insisted the director, "it was our view and PwC's that it might have been possible to work the problems through". The FSA emphatically denied the accusations, saying the decision to close Independent was based on information that "flowed from the work by PwC who are still there trying to sort out what had been going on".

Whatever else happens, Brighty is finished. Secret deals, frantic attempts to hide the truth; one may be tempted to draw comparisons with Robert Maxwell. But, as one of Mr Bright's friends said, this is not true. Michael is said to have lost £60m personally in the collapse; his son, James, who worked for the firm, will lose his job; there is no way he was gaining personally, he was doing it to help staff, clients and investors. No way, except for the £650,000 Mr Bright was paid last year (plus the pension contribution of £597,000) and would have liked to go on receiving. The friend changes tack. "It's the staff I feel sorry for, all they've done wrong is work hard." On that we can agree. Nice one, Brighty.

The Bright stuff: other Independent characters

PHIL CONDON

Bright's loyal deputy; motivated salesmen to sell, sell, sell

GARTH RAMSAY

Independent's chairman; warned in March of 'difficult issues' facing the firm

ALAN CLARKE

One of several colleagues at Independent who had worked with Bright at Lombard