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AXA Equity & Lax transfer to AXA Sun Life
Rajeev Shah in Barnett Waddingham's Life insurance consultancy team in the London office looks at AXA's proposal to transfer all of the business written by AXA Equity & Law to AXA Sun Life.
This proposal has caused some controversy because surplus in the AXA Equity & Law life fund is divided normally in the ratio 90% to policyholders and 10% to shareholders. The proposal includes the transfer of assets over and above those attributable to policyholders (the "inherited estate") to shareholders in exchange for a cash payment of much less than 90% of the value. A blatant rip-off? It's not quite as simple as that.
AXA is proposing to transfer all existing business from AXA Equity & Law to AXA Sun Life with effect from 1st January 2001. All existing with profits business written in the AXA Sun Life fund is already reassured to the AXA Equity & Law fund and will be treated as if it had been written directly in the AXA Equity & Law fund. At the same time, AXA is offering to buy out with profits policyholders’ interests in the inherited estate. Policyholders in the old Sun Life (i.e. policies issued by Sun Life Assurance Society) are not affected.
Eligible with profits policyholders who accept AXA’s offer will have their policies transferred to the New With Profits Fund but the inherited estate attributable to them will be transferred to non-profit funds where they will be shareholder owned. The rest of the with-profits policies will be transferred to the Old With Profits Fund along with the inherited estate attributable to them. Policyholders have until 16th October 2000 to accept AXA’s offer.
The inherited estate is required to provide smoothing and investment freedom to the existing with-profits business as well as capital to write future new business. Even though shareholders would own the inherited estate if the scheme is accepted by the High Court, they cannot transfer it out of the life fund for a long time (if at all) due to the above requirement. In the normal course of events, policyholders cannot have reasonably expected the inherited estate to be paid out to them. Paying policyholders less than 90% of the inherited estate can be justified on the grounds that the inherited estate is effectively being kept within the life fund rather than being distributed to shareholders. If the reorganisation were not to take place, policyholders would not have received any payout from the inherited estate.
There is little information available to form a view on how fair the offer is to policyholders. However, AXA’s calculation of the value created for its shareholders of £100m to £200m may be an underestimate, as they seem to have used the maximum tax rate for this purpose. This compares with the £300m being offered to policyholders.
The FSA has a role in ensuring that consumers are protected during any financial reorganisations of life funds and will also seek advice from the Government Actuary’s Department regarding this. The FSA has said that AXA’s offer falls within their reasonable range of what is acceptable.
For the scheme to go ahead, AXA needs to seek approval from the High Court, where the FSA will be represented and where policyholders can also submit their views. The hearing in the High Court is scheduled for 20th November 2000. An “Independent Actuary’s report”, certifying that the security of all policies is not materially affected and that policyholders’ reasonable expectations will be maintained, has been circulated by AXA and will be submitted to the High Court.
The Consumers Association has criticised the FSA's response and publicly said that the offer is unfair to policyholders and that policyholders are entitled to 90% of the inherited estate. The Consumers Association is likely to make its objections heard in court either directly or through an AXA policyholder.
As at 27th September 2000, 46% of eligible with-profits policyholders had already accepted AXA’s offer, compared to the minimum requirement of 35% acceptance. Subject to approval by the High Court, the scheme for AXA to buy out with-profits policyholders’ interests in the inherited estate will go ahead.
The following applies to both AXA Equity & Law and AXA Sun Life policyholders.
- Holders of non-profit or unit-linked policies are not affected and should take no action.
- The scheme, if it is accepted by the High Court, prohibits the distribution of any portion of the inherited estate until 2006. With-profits policies expected to mature by 31st December 2005 will not be able to participate in the distribution of the inherited estate and so are better off accepting AXA’s offer. In the event that the scheme does not go ahead, they would not be any worse off having accepted AXA’s offer.
- For with-profits policies expected to mature after 31st December 2005, the situation is more complicated. If they accept AXA’s offer, they will receive a known fixed payment that is worth less than 90% of the inherited estate attributable to their policy. If they reject the offer, they have a possibility of getting 90% of any future distribution of the inherited estate in the Old With Profits Fund. However, their share of the inherited estate will be diluted by new business being reassured into the Old With Profits Fund. AXA maintain that they do not expect to distribute the inherited estate under normal circumstances. On balance, it may be better for policyholders to accept AXA’s offer and let the High Court decide on the fairness of the payout.
- There is no immediate advantage in switching from unit-linked to with-profits funds as AXA’s offer will only relate to with-profits funds held on 25th July 2000. For hybrid unit-linked and with-profits policies, policyholders will continue to have the option to switch funds from unit-linked to the Old With Profits Fund. Speculatively switching to the current with-profits fund or, after once the reorganisation is effective, Old With Profits Fund may be advantageous if AXA were to repeat its offer to buy out with-profits policyholders’ interest in the inherited estate for policyholders in the Old With Profits Fund. However, the payout of the inherited estate will probably take into account how long the funds have been held within the with-profits fund, and so the benefit may be quite small, especially compared to the risk of losing some of the upside in the unit-linked fund through investment market movements.
- It is not clear what will happen to new with-profits business written between 25th July 2000 and 31st December 2000. It seems likely that on the proposal going ahead, these policies would be allocated to the Old With Profits Fund.
- There is some urgency as any decision to accept AXA’s offer must be acted upon by 16th October 2000. Policyholders who accept AXA’s offer by 16th October 2000 are unlikely to lose out if the terms of AXA’s offer are improved due to representations by the FSA and the Consumers Association in the High Court.
There is less urgency regarding any decision to switch unit-linked funds to with-profits.
Rajeev Shah, October 2000.