FSA Statement on AXAs inherited estate proposals

Howard Davies, Chairman of the Financial Services Authority, said:

The FSA and before it the Treasury have been in discussions with AXA over a lengthy period to ensure the deal put to policyholders is fair. The FSA is now of the view that it should not object to these proposals being put to policyholders, but it is ultimately for the Court to approve them.

Under the terms of the proposed agreement, each individual policyholder would be given a choice between accepting AXAs proposals and receiving an incentive payment now, or not accepting the proposals and retaining their interest in any future distributions from the inherited estate. To help them understand the pros and cons of the two alternatives they would receive an information sheet from the FSA.

AXA is offering to buy out with profits policyholders interests in any future distributions from the inherited estate in AXA Equity and Law for a fixed sum (costing 300 million in total to shareholders resources outside the fund) in return for giving up the uncertain prospect of any such future distributions.

The proposals include an allocation of the inherited estate totalling 250 million, 90 per cent of which will be distributed to with profits policyholders in the form of enhanced bonuses.

The FSA believes that AXAs proposals take policyholders interests into account and that the value of the offer is within a reasonable range. However it is not appropriate for the FSA to advise policyholders on whether to accept the proposal or not.

The scheme requires the approval of the High Court, which will make its decision in the light of all representations put to it. The FSA will be represented at the High Court hearing scheduled for November. Other interested parties, including policyholders, are entitled to be heard by the Court.

Impact on the wider industry

The FSA has concluded that there are no regulatory reasons why insurance companies should be prevented from offering to buy out policyholders interests in inherited estates, as long as they satisfy the FSA and ultimately, where appropriate, the High Court that the offer takes policyholders interests into account and the value of any offer is within a reasonable range.

Background

Life insurance companies who have inherited estates use these to support with-profits business in a number of ways, for example:

• to provide investment flexibility (such as investment in equities, which offer higher returns than some other investments, but are also higher risk);
• to smooth bonuses to reduce the impact of sudden sharp changes in investment markets;
• to provide a cushion for extra security against unexpected calls on reserves;
• to support the sale of new business.

If any of the inherited estate is no longer needed, the excess part can be set free for distribution. Usually 90% of any distribution would be to policyholders and 10% to shareholders.

In the case of AXA Sun Life, the company has made it clear that the present inherited estate needs, for the foreseeable future, to be retained by the merged company for the above purposes.

Notes for editors

1. In reaching its view the main factors the FSA has taken into account are:-
   • the current expectations of the with profits policyholders;
   • the conclusions of the Independent Actuary that the security of all policies is not materially affected and the reasonable expectations of policyholders will be maintained;
   • the economic value to AXA if these proposals are adopted.

2. Schedule 2C to the Insurance Companies Act 1982 makes provision for transfers of life assurance business between companies. In particular, such transfers require the sanction of the Court.

3. Key dates:
   • Preliminary Procedural Court hearing 4 August 2000
   • Policyholder mailings second half of August 2000
   • End of election period 16 October 2000
   • Court hearing is expected to be 20 November 2000

4. There are approximately 750,000 with profits policies eligible for election.