Aviva, Britains' largest insurer, will pay out half of its inherited estate in a £2.1 billion giveaway to 1.1 million with-profits policyholders. Shareholders will receive £230 million from the estimated £5.4 billion surplus in two of the insurer's with-profits funds.

Negotiations are continuing with policyholder advocate Clare Spottiswoode, who is representing policyholders' interests in the reattribution of the inherited estate, on how the other half of the estate will be shared out.

Aviva can afford to share out the cash because its CGNU Life and CULAC with-profits funds have grown larger than is necessary to cover the payouts promised to policyholders on the maturity of their policies. The insurer has also changed its investment strategy on the surplus in the funds, moving from equities to bonds, which means that it needs to hold less cash aside. This surplus is called the inherited estate.

Policyholders will receive the £2.1 billion payment in three instalments that will increase their total policy values by about 10 per cent. The extra payments mean that between 20 per cent and 25 per cent of policyholders whose policies are currently unlikely to be sufficient to pay off their mortgages will now have enough cash on maturity to cover their home loan.

To receive the first instalment, a policyholder would need to have a policy invested in one of the two funds on January 1, 2008. The next two cut-off points are January 1, 2009 and January 1, 2010. Shareholders will also receive their payments over three years.

Aviva said this morning that it had also improved the offer it has made to Ms Spottiswoode on how it would share out the other half of the inherited estate. Aviva's shareholders want to buy the rights to the rest of the inherited estate but the insurer must agree with Ms Spottiswoode what these rights are worth, and calculate the appropriate payment to policyholders.

Aviva has made two previous offers to Ms Spottiswood over the past two years, which she has considered insufficient to compensate policyholders for the loss of their rights to the estate. Aviva said that it expected Ms Spottiswoode to respond to today's offer by the end of the month.

Ms Spottiswood said this morning that she was disappointed that policyholders would receive their £2.1 billion payout over three years, rather than in a lump sum.

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