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Aviva has backtracked on a pledge to hand 1 million policyholders a windfall payment of an average £1,000 each.
Britain's largest insurer said this morning that sharp falls on the stockmarkets and in the property sector have slashed its reserves of surplus capital. It claimed the original offer was no longer fair to its shareholders.
The deal was first announced last July, following long discussions between Aviva and Clare Spottiswoode, the former gas industry regulator who represents the interests of Aviva's Norwich Union policyholders. The money was due to come from the insurer's "inherited estate" - surplus money that has built up in the with-profits funds over many years.
Since last summer the world's stockmarkets have tumbled, with the FTSE 100 index losing31%. Property values have continued to slide and the recession has forced businesses to cut staff and halt expansion plans
"Continuing market volatility and uncertainty means that the original reattribution offer for the inherited estate no longer meets our critical test of being fair to both policyholders and shareholders," said Aviva this morning.
"We are working closely with the policyholder advocate to see how we can restructure our offer. While we realise this will be disappointing for our eligible policyholders, it does reflect the nature of the current exceptional investment market conditions," the company added
Chief executive Andrew Moss refused to say what the new payout might be, explaining that the company was in "constructive discussions" with Spottiswoode.
A decision on any lower payout is not expected for several months. Around 700,000 people had originally been told they would receive between £400 and £1,000 if they accept the offer, while a further 220,000 would get between £1,000 and £3,500.
Today's U-turn is the second blow to Norwich Union investors in recent weeks. Last month it emerged that returns on its with-profits policies fell by up to 16% last year. Aviva has also prevented investors from quitting its property fund.
An earlier deal to distribute £2.1bn between policymakers is not affected by today's move. Moss said that £1.5bn has now been distributed to policyholders.
The Financial Services Authority has been criticised in the past for not regulating inherited estates better. Consumer group Which? has said the FSA should have stopped insurance groups using this surplus capital to cover expenses such as compensation to customers who were missold a policy.
Shares in Aviva, which is dropping its Norwich Union brand after 200 years, rose by over 6% this morning to 353p. Analysts were encouraged that the company has said its dividend policy would remain unchanged despite the market turbulence.
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