AXA deal to release £20bn windfall

The life insurance industry is looking forward to an estimated £20bn windfall as a result of a landmark deal with City regulators resolving a decade-long dispute over the ownership of so-called orphan assets.

The life insurance industry is looking forward to an estimated £20bn windfall as a result of a landmark deal with City regulators resolving a decade-long dispute over the ownership of so-called orphan assets.

Insurance industry executives have been primed to expect "within the next few days" an announcement of the result of a test case brought by AXA, the French insurance giant, over the £2.1bn Equity & Law estate. The result could unlock billions of pounds' worth of dormant surpluses from past policies to fund windfall payments to millions of share and policyholders.

Under the terms of the deal that AXA has struck with the Financial Services Authority, hundreds of thousands of holders of Equity & Law life insurance policies will be offered cash bonuses in return for giving up their rights to the inherited estate.

It is understood that the FSA has agreed to accept a scheme which will split the proceeds on the basis of 60 per cent going to policyholders and 40 per cent to shareholders. Previously, regulators only allowed redistribution under limited circumstances and on a strict ratio of 90 per cent to policyholders and only 10 per cent to shareholders.

Orphan assets are reserves that have built up in with-profits life funds from undistributed investment profits relating to life and pensions policies that have long since lapsed.

The regulator's change of heart is understood to have followed the transfer of responsibility for life insurance industry regulation from the Department of Trade and Industry to the FSA last year.

The AXA deal is likely to form the template for further similar schemes allowing life insurance companies to restructure their balance sheets in return for one-off bonus payments to policyholders. AXA refused to comment yesterday.

Heading the queue of life companies with large inherited estates is Prudential, which has been waiting for the outcome of the Axa case before seeking approval of its own plans to unlock some £7bn-£9bn of orphan assets in its life fund.

CGNU, the composite insurer formed by the £10bn merger of CGU with Norwich Union earlier in the year, is believed to have an inherited estate worth £5bn.

Philip Scott, chief of executive of UK life at CGNU, said yesterday: "My understanding is that there is announcement relating to another company coming out in the next week. I await with interest."

Consulting actuaries who have been pressing hard on the issue say that the FSA is unlikely to want to see the proceeds being used to fund an immediate return of the capital to shareholders through share buybacks or special dividend payments. However, the ability to release surplus capital from life funds would boost valuations and lead to more efficient capital structures. This would in turn enable companies to redeploy capital within the business and improve profitability.

Axa acquired the right to the Equity & Law orphan assets when the company merged with Sun Life in 1997 following an earlier merger of the respective parents Axa and UAP. The transfer of these assets to the French parent company comes just three months after the company struck a deal to buy out the minority shareholders in Sun Life & Provincial Holdings for £2.34bn.

The scheme will be subject to approval by Equity & Law policyholders and by the High Court.

City analysts have long argued that the release of orphan assets could substantially boost the values of Britain's leading life insurers. A recent report by Schroders suggested that CGNU's share price could rise by 13 per cent, and Prudential by 10 per cent.