Shareholders to Profit from the Unwind of Guarantee Costs

Aviva PLC's annual accounts don't usually interest me greatly, but the following paragraph caught my attention:

"On an ongoing basis, profits will arise from earnings on the re-attributed estate (estimated at £45 million per year on an IFRS basis), the financial unwind of guarantee costs, the movement in value in any un-hedged assets backing the guarantees, and any demographic profits /losses (e.g. lapses) resulting from policyholder action." - page 6 of Part 2 of Aviva FY 2009.

Initially I was drawn to the estimated annual profit from the reattribution of the CGNU Inherited Estate in 2009. Having paid £450M in the reattribution, £45 million a year represents a 10% annual rate of return. In approving the reattribution scheme the FSA stated that they calculated the Internal Rate of Return that Aviva might expect to enjoy in assessing whether the offer from shareholders to policyholders was fair, although they would not disclose what they considered fair (see FSA's Second Report, paragraphs 77 to 81). It seems that a 10% return is fair. Hmm, in the post credit crunch world and 0.5% per year base rates, I'm struggling to see a 10% return as fair.

But actually the point I think policyholders should really note in Aviva's paragraph is "profits [to shareholders] will arise from earnings on...the financial unwind of guarantee costs." This issue should be at the very heart of how you assess your policy. The sad reality, as evidenced by this statement, is that Aviva KNOW that on the whole, policyholders don't take advantage of their guarantees and that a large chunk of the funds reserved to pay for guarantees will eventually unwind back to shareholders.

Right now there are tens of thousands of Aviva (CGU) With Profits Bond policyholders who have passed their 10th anniversary and are eligible to claim these guarantees. Unless they act, the value will unwind and what would have been profit to policyholders will revert to profit to shareholders.

Policyholders in an Aviva CGU With Profits Bond who are in any doubt about the value of this guarantee can read our Aviva Aluminium Report. Please contact me at Fraser Heath Financial Management if you have any questions.