May Update (2)
Dear Policyholder,
Now that Aviva has announced it is going to go ahead with an offer to you to buy out your interests in the inherited estates, we thought you might like to know about some of the questions we have had and the preparations that are under way to help you come to your decision.
Policyholder questions
At this stage we have had relatively few, but Clare felt that one particular email summarised concerns others might have and has replied in detail.
As everyone knows the reattribution is complicated and that is why a great deal of work is put into the material that will go to policyholders with their offers. Clare's response to the email tries to go beneath the headlines and explain more about the workings of the new offer.
A pdf of Clare's letter can be found by following this link http://www.policyholderadvocate.org/downloads/letter-to-policyholder.pdf
Policyholder concerns
1. The policyholder refers to point 8 of a report from 'Citywire' (link below) suggesting that Aviva will pay £400 million for an estate of £1.5 billion (policyholder advocate's office note – the £400 million figure is based on an estate of £1.2 billion and an 80 percent take up rate).
http://www.citywire.co.uk/adviser/-/blogs/the-new-model-adviser-blog/content.aspx?ID=340003
2. 'I would also direct you to the link at the end of the article which takes you to the Aviva presentation form which I see the deal is stated to be 'good for shareholders' and various figures to support those statements.'
3. 'I am afraid I fail to see how this new deal is by any means good for policyholders. Looking at the simple maths, the July 08 deal was ok until the FTSE dropped below 5000, and we are now at approx 4500, a drop of 10% - so how does this justify a much publicised 50% drop in payout??? Where has the value in the IE gone? I am afraid the comment its current value is £1.2 billion is just unbelievable.'
4. 'Can I ask, if the FTSE hits 5000 averaged over June, July and August 09, will it be the same as the July 08 deal? I think not. Why not?' The July 08 deal I would not have been happy with, but probably would have accepted. This new deal is just not acceptable.'
Clare Spottiswoode's reply Click here for pdf http://www.policyholderadvocate.org/downloads/letter-to-policyholder.pdf
21 May 2009
Thank you for your recent emails. You raise important points about a complicated matter and I should like to address them in some detail.
We believe that it has always been clear that any reattribution would have to be attractive to shareholders and we are not surprised that in presentations to analysts Aviva will emphasise the benefits as it sees them.
It may be helpful to you to try to disentangle some of the many numbers that are used, but first it is important to put the references to the FTSE index of leading shares in context. When the previous aggregate offer was announced in July 2008, it was made on the basis of a fixed offer so long as the index remained within the range of 5000 to 7000. This 2000 point range seemed robust at the time. No one foresaw the turmoil in world markets in October that year and the dramatic fall in all equity markets.
Also during 2007 and 2008 the investment strategy for the estate changed, particularly in respect of policy guarantees, which released money that was then distributed 90 per cent to policyholders and 10 per cent to shareholders. The turmoil in the markets in autumn affected all types of assets (the estate is invested in a range of assets beyond equities including commercial property and fixed interest) and any lingering correlation with the FTSE evaporated. This is why the value of the estate alone is what is focused on in the new offer.
The estate was valued at £2.1billion in July 2008. If all policyholders had accepted the offer, the cost to Aviva shareholder funds would have been £1 billion. The new offer is a flexible version of the July offer. It states that if the estate is valued at £1.2 billion (the lowest amount at which it is expected that Aviva would proceed with a reattribution) then the cost to shareholders, if everyone accepted, would be £500 million.
A comparison between the offer and levels of the FTSE in July 2008 and the offer now, is not comparing like with like.
The figure of £1.2 billion is used so that policyholders have a clear indication of the lowest amount they will be offered. In fact, the most recent valuation of the estate is £1.4 billion. If that remained the case and all policyholders accepted the offer, the cost to Aviva would be more than £500 million. Every £100 million increase in the value of the estate is worth £55 million to policyholders at the aggregate level.
The flexible offer means that all the essential elements of the July offer have been retained but the value has reduced because the estate value has fallen If we applied the same formula to an estate valued at £2.1 billion the aggregate cost to Aviva if all policyholders accepted would be £1 billion. That is, it would be the same as July 2008.
It is important to put the aggregate figures into context also. You refer to the section of the Aviva presentation which suggests the cost to shareholders would be £400 million. This is based on the estate valued at £1.2 billion and an 80 per cent take up rate. On that scenario 20 per cent would not accept the offer, and whatever proportion of the estate was represented by that 20 per cent would not be owned by the company. So Aviva would not have bought an estate of £1.2 billion for £400 million, but a smaller estate. If we assume a straight-line correlation, that would mean buying an estate valued at about £960 million. The remaining estate would go to a separate fund for those who did not accept the offer and wished to retain their rights to any possible future special distributions.
That leads to the next point which is how policyholders should judge the offer being made. Aviva's is a 90:10 fund and the comparison that should be made is between what might go to policyholders by way of special distributions in future, assuming no reattribution took place, and the aggregate offer.
To assist with this comparison we have taken a 'base case' economic model with an estate of £1.2 billion and Aviva assumptions about the amount of new policies that might be sold in future (other assumptions are also built in). The sale of new policies is important because they require capital to support policyholders' guaranteed benefits. In Aviva's case, as with some other companies, this capital support is provided by the inherited estate. The Financial Services Authority permits this to tie up, without any compensation, inherited estate capital which might otherwise be available to be distributed to policyholders and shareholders. While the current generation of policyholders has benefitted from this when their policies were established, it has an impact on the amount of special distributions from the estate that could happen in future.
From this 'base case' we estimate that special distributions of the order of £100 million might take place over the next 25 years. This needs to be compared to an aggregate offer of £500 million if all voted to accept the offer. This amount is, of course, influenced by the £2.1 billion special distribution (to qualifying policyholders) that was announced in February 2008 and referred to earlier.
This is a very important point because it is the value of what is being given up by policyholders through accepting the offer that the policyholder advocate has to comment on. It should also be borne in mind that the estate is not used to pay the offer; it is kept to support the with-profits policies; this is a regulatory requirement. Shareholders pay for the offer from their funds.
The next issue is how policyholders should consider the offer, taking into account their personal circumstances, including their type of policy and how long it has to run. Included in the information to be sent to policyholders with their individual offers is a guidance document from the policyholder advocate. We have identified four specific groups of policyholders. The guidance examines a range of economic outcomes and whether possible special distributions might be equal to or be more than the offer for those groups. This is general guidance and, of course, can only be indicative. Aside from this policyholders may have a range of reasons for making one choice or another which may have nothing at all to do with the guidance.
In closing I should like to set out why I am able to come to the view that the offer is in the interests of policyholders.
Policyholders have a genuine choice. They can accept (in the great majority of cases) a tax free, cash offer now. At an aggregate level, that offer is around five times more than they might receive in special distributions. If they do not wish to accept the offer their position is protected and they retain all their rights to any future special distributions. Any distributions which take place would be paid as bonuses to their policies and be subject to tax in the normal way. It should also be borne in mind that while policyholders in the past have contributed to the growth of the inherited estate, the current generation of policyholders and shareholders have not done so.
I hope you find this a helpful reply.
Yours sincerely
Clare Spottiswoode CBE
policyholder advocate
Getting information to policyholders
Material is being printed to help you decide what to do. About a million packs of information are being prepared to go out in the post. These will comprise a letter to policyholders with their personal offers, a guide from Clare, an information booklet from Aviva, and a voting form and envelope. Voting is being run by ERS which may be familiar to you in its former incarnation as the Electoral Reform Society.
This is a very significant logistics operation as the material is available in four languages (English, French, German and Swedish) and altogether there are some 24 variants of the 'election mailing pack'. Some policyholders have several policies. Those with more than four policies are dealt with manually so that the amount of material they are sent is reduced so far as possible. The offer letter and the voting form are personalised so you will appreciate the care that has to go into the mechanical operation of ensuring that everything goes in the correct pack and to the right address. Work continues to finalise the policyholder advocate's main report, executive summary and supporting papers.
We are also finalising the arrangements for the roadshows and will operate a booking service through our website and call centre. As soon as all the technical aspects of our booking service are tested and working properly we will let you know.
Once all the preparations are complete and the material is with you we hope that it gives you sufficient information to make your choice. We have designed it so that you can access as much detail as you wish.
Yours faithfully,
Jonathan Haslam
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