Orphan assets plan defended

Insurance company Axa yesterday invoked the spectre of the Equitable Life crisis as it defended its decision to hand over only a small chunk of its £1.7bn surplus cash pile to its policyholders.

Axa went to the high court to seek approval for its plans to distribute part of its "orphan assets" - money which has been built up over decades from surpluses and unclaimed policy proceeds.

It is being challenged by a 1,800-strong group of unhappy customers, backed by the Consumers' Association, who claim policyholders are being short-changed and are entitled to a larger slice.

The French insurer is handing its 660,000 policyholders £225m of the total orphan assets money, which they will receive in the form of bonuses that will be added to their policies. It also plans to use £300m of shareholders' funds to give policyholders a cash payment averaging £400 in return for surrendering any future claims to the orphan assets - also known as "inherited estate".

The disgruntled policyholders, led by London chartered accountant Stuart MacWhirter, believe they are entitled to a greater share of the money but Axa argues that it would be imprudent to hand any more of the surplus cash out because this would weaken the strength of the with-profits fund.

The company's barrister, David Richards QC, told the court yesterday that among other things, the surplus cash allows it to meet "unexpected claims," something that he said had become very topical in the light of Equitable's problems.

Earlier this month Equitable warned 1m existing with-profits policyholders that they can expect lower investment returns in future so that it can meet the cost of promises made to some of its pension customers in past decades.

Because it had not set aside enough of the investment profits during good years to protect itself from problems, there was limited surplus cash to draw upon when the House of Lords ruled in July that Equitable must meet the promises, at a cost of at least £1.5bn.

By contrast, said Mr Richards, Axa had been able to meet the costs of similar pension promises it had made because these could be "absorbed" into the inherited estate "without any damage to the interests of the with-profits policyholders". Mr Richards added: "That is not a position that is the same for all life offices, as recent events demonstrate."

Axa also argued that policyholders had no legitimate claim on the £1.7bn, pointing out that the surpluses were built up 30 or 40 years ago. Axa's view was that "the current generation of policyholders have not contributed to the inherited estate," said Mr Richards. The proposed distribution was "fair", he said, adding: "It does not involve any adverse consequences for any policyholder."

The Consumers' Association has claimed that, under Axa's plans, policyholders would be getting £525m, or 31%, of the orphan assets but shareholders would receive as much as 19% or £319m. The evidence of Mr MacWhirter and the Consumers' Association, is to be heard today or tomorrow.If Axa's distribution is approved, policyholders will receive the cash payments by February.