Aviva secures half-price 'orphan asset' deal

FSA 'continually failed' to defend policyholders' interests, says Which? boss

Aviva has agreed terms for the "orphan asset" payout to its one million policyholders after two years of negotiations, but the offer is worth just half the sum on the table in July.

The UK insurer announced yesterday that it had agreed a deal with the policyholders' advocate, Clare Spottiswoode, for the distribution of its remaining inherited estate.

The estate was valued at £1.4bn at the end of March, which will see 90 per cent of eligible policyholders receive a payout of between £244 and £1,150. The other 10 per cent will receive more.

The value of the inherited estate is surplus money built up over the years from with-profits funds and is not made up of contributions from existing policyholders. The company and the policyholders' advocate have been in negotiations since October 2006 to work out a suitable distribution of these funds.

The decision to accept is made on an individual basis, rather than by majority vote. Those who do not bite will receive no money, but will have a potential share should there be a special distribution payment in the future.

Aviva said yesterday it also plans to access £600m of additional capital over the next five years to fund new non-profit businesses.

Mark Hodges, the chief executive of Aviva's UK Life business, said: "This is a good deal for our customers and shareholders. We've worked hard with Clare and her team to come up with a flexible offer which accommodates the exceptional market conditions but still represents good value for the vast majority of our eligible customers."

Barry Cornes, an analyst at Panmure Gordon, said the terms "appear reasonable and will benefit shareholders in the medium to long term".

The company believes that 99 per cent of policyholders would be better off if they take the deal. Yet the offer marks a 50 per cent drop from the one it tabled in July, when the estate was valued at £2.1bn. Aviva had offered a minimum of £400 each to buy out the policyholder's rights last summer, but the financial meltdown forced it "to go back to the drawing board," according to John Lister, the finance director of Aviva's UK Life business.

"We announced the offer at the end of July. Then Lehman Brothers collapsed, the equity markets collapsed, the credit markets froze and property value fell. The offer we had made didn't make sense any more," he said.

Despite the vastly reduced deal, Ms Spottiswoode called yesterday's agreement "good news for policyholders after the turmoil in the financial markets that affected the plan announced last year".

Peter Vicary-Smith, chief executive of the consumer group Which? disagreed, saying policyholders "will be disappointed by the cut in the payout". He blamed the UK market regulator, the Financial Services Authority, saying its "continual failure to defend policyholders' interests has cost them a substantial amount of money".

The Which? boss accused the FSA of looking the other way as Aviva put funds from the inherited estate to uses other than benefiting the policyholders. The insurance group has denied these claims to the Treasury Select Committee.

Separately, Aviva is considering selling its Australian business, which could raise up to A$1bn (£494m) if they secure a deal. Morgan Stanley and JP Morgan are running the process, with final bids due next month, according to Reuters.