Aviva, Britain’s biggest insurer and the world’s fifth largest insurer, on Wednesday confirmed it would cut the size of the £1bn payment it had earlier agreed to make to 1m policyholders.

The company said the cut would reflect “substantial reductions in the value of equity and property investments” since the deal was agreed in July last year.

Andrew Moss, chief executive, said it was too early to say how much payments would be reduced by as it was a complex calculation. “We have a bunch of actuaries in York working on it now,” he said. He hoped to be able to give a better indication when the group reports annual results on March 5.

The move is likely to anger policyholders who had expected to receive an average of £1,000, with a minimum of £400 and maximum of £3,500, most of which would be tax-free.

Mr Moss said the group was in “constructive discussions” with Clare Spottiswoode, the policyholder advocate.

The payment arose because Aviva had a surplus on two life funds operated by Norwich Union, although the payment will be made from shareholders’ funds. Policyholders were expecting to receive the money this summer. The terms had been thrashed out with Ms Spottiswoode but parameters set at the time no longer applied.

Aviva, which is in the midst of a high-profile advertising programme to rebrand Norwich Union as Aviva, said: “While we realise this will be disappointing for our eligible policyholders, it does reflect the nature of the current exceptional investment market conditions.”

Dominic Lindley, policy adviser at Which? the consumer group, said policyholders would be “very disappointed by the news, which would cap a miserable few months for them” as they had also seen bonuses cut.

He said Norwich Union had continued to take money out of the inherited estate – the surplus built up in with-profits life funds – to pay penalties for mis-selling cases and to put into its own pension fund, for instance.

“The money is being reduced not just by the markets but by Norwich Union taking money out,” Mr Lindley said.

Under Financial Services Authority regulations, Aviva is allowed to use part of the surplus for corporate purposes. Mr Lindley said that put policyholders at a disadvantage, and Which? was continuing to campaign for rule changes.

Comments were beginning to appear on a Norwich Union policyholders’ action group internet bulletin board as the news emerged. One read: “Well, what a surprise…NOT”.

The news came as Aviva reported a 1 per cent rise to £40.3bn in its long-term savings sales in 2008. With 65 per cent of sales outside the UK, the figures were boosted by the decline in the pound, and in local currency terms sales fell 7 per cent.

Mr Moss said the group’s geographical spread had given it “an additional real benefit from currency appreciation.”

Aviva switched to a market consistent embedded value basis rather than the European embedded value method for reporting the figures. On the new basis, life and pensions sales rose 11 per cent to £36.3m, a 2 per cent gain excluding currency benefits. That equates to a 9 per cent rise to £34.6bn on the old EEV basis, which compares with the consensus of analysts’ forecasts of a rise to £33.5bn.

The better than expected figures lifted the shares, which were 38¼p or 11.5 per cent higher at 371p in late London trading.

Mr Moss said the MCEV basis, which had been adopted by half the top European insurers, was a more valuable measure both for the company and investors. It would not change the profit achieved on long-term sales, just the timing of when the profit was recognised.

He said the figures showed a creditable performance as “the world is still in the grip of a financial crisis.” While life and pensions sales rose, though, customers were not investing in savings products as markets fell, and sales were down 43 per cent to £4bn.

Growth in developing economies such as Asia and central and eastern Europe had offset difficult conditions in more mature markets.

Aviva had also expanded rapidly in its relatively new North American business, with sales up 45 per cent in dollar terms, reaching its earlier target to double sales in three years one year ahead of plan.

Mr Moss said the UK and European markets would be more subdued in 2009, but markets in the Asia-Pacific region should continue to show steady growth. In the difficult markets, Aviva’s focus would be on profitable growth rather than market share gains.

The group’s capital position remained strong, with a surplus of £2bn at the end of December. Thanks to hedging, a further 40 per cent fall in equity markets would cut that surplus only to £1.3bn.

Aviva said it expected its general insurance business to achieve a combined operating ratio for 2008 of 98 per cent, in line with its target.

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