Norwich Union to pay £2.1bn bonus to break impasse over surpluses

Aviva yesterday announced a £2.1bn special bonus for policyholders of its Norwich Union with-profits funds, as it attempted to accelerate talks with Clare Spottiswoode, the policyholder advocate, over sharing out the funds' remaining surpluses.

The £2.1bn for policyholders is 90 per cent of the total special distribution payout, with £230m going to shareholders. About half the funds' surplus remains, and is the subject of tough negotiations between Aviva and Ms Spottiswoode. Aviva wants to buy out the policyholders to get its hands on the rest of the surplus.

Britain's biggest insurer said it had made what it called a third, improved offer to Ms Spottiswoode to try to bring two years of talks over the surplus to an end.

The funds' 1.1 million eligible policyholders would be free to reject any proposal from Aviva, and could at some point get a further special distribution that would be split 90:10 in favour of policyholders over shareholders. But the company said that the payout announced yesterday made that prospect less likely.

Mark Hodges, chief executive of Norwich Union Life, said: "The likelihood of a further distribution ... is more remote, and the cash offer made today on reattribution might be more attractive to the policyholders. We will do this transaction today and then negotiate hard with Clare to bring the other side to a conclusion."

Aviva said the special bonus was possible because it had changed the funds' investment strategy so that shares and property had been replaced by high-grade corporate bonds and government securities. Under the special bonus plan, a typical with-profit bond would get a boost of £4,500, based on a £30,000 investment in 2001.

The company has asked Ms Spottiswoode to respond to its proposals on the remainder of the inherited estate by the end of this month so that payments can be made by the end of the year. Aviva wants to get Ms Spottiswoode's recommendation before putting its offer to shareholders.

Ms Spottiswoode welcomed the bonus payment and said it would make it easier to judge the merits of Aviva's offer for the rest of the surplus. But she said the insurer's latest proposal did not include much new money. "I am considering my response to this and still have issues to resolve with the company before doing so," she said. "[The] offer must be a fair offer and one that does not over-reward shareholders given that the money in inherited estates has accumulated purely from policyholders."

Ms Spottiswoode said that she was "disappointed" that the £2.1bn bonus would be paid over three years, so that customers whose policies mature before then would not get the full amount.

She also said people whose policy had matured after 21 November 2006 should have been included, but Aviva, its independent with-profits committee and the Financial Services Authority had rejected the idea.

Aviva did not give details of its separate offer to Ms Spottiswoode for the reattribution of the remaining surplus. But its previous offer was understood to have provided for an average payout "comfortably" over the £450 received when Axa distributed most of its UK surplus.

Ms Spottiswoode, the former chief gas regulator, is a fierce defender of policyholders' interests. Aviva has expressed frustration at the slow pace of discussions with the advocate – talks have been going on since 2006, and the insurer has indicated it could get fed up and walk away.

Mr Hodges said: "Let's see if we can bring negotiations to a head. If Clare and ourselves agree that there is an offer to be made to policyholders and they like the offer, we want to pay them this year."