In ten years’ time, a young man named Max-Hervé George may find himself the owner of Aviva PLC.
- Aviva is a diversified multinational insurance company. It’s the 28th biggest company listed in the London Stock Exchange, and it’s currently worth about €31bn.
- Max-Hervé George is a 25 year old private investor. He got his start in investing as a seven year old with an €8,000 gift from his dad.
So what, exactly, is happening here?
Max-Herve’s story is a weird one, to be sure. It’s a tale of incompetence, moxy, luck… and compound interest. And it starts in 1997 with the purchase of a seemingly dull life assurance policy called the “Fixed Life Arbitrage Life Insurance Product” (or, FiLALIP).
Behind every great fortune is a great sucker
The FiLALIP was marketed at high net worth individuals, and it had one very special quality.
Prices for FiLALIP funds were published once per week, and clients were allowed to change to a different fund at those prices any time before the next prices were announced, a week later. So the holder of the policy could wait until prices were due to be published on Friday evening, find out which fund had risen the most in the previous seven days, and then buy it. If the holder of the policy made the effort to switch funds every week, he was guaranteed stunning investment returns. And all at the expense of Aviva.
Why would an insurance company ever make an offer like that? Well, the world of investing looked very different in 1987 when the FiLALIP was first created. There were no online brokerages. Real-time information on market prices was extremely difficult for an ordinary investor to come by. And all transactions needed to take place over the phone.
Presumably, Aviva made this crazy deal because it valued the opportunity to meet regularly with its richest clients. It can’t have thought they would be able to fully capitalise on the offer. But Aviva didn’t figure on the George family.
In 1997 Mr George senior took out FiLALIP policies for his whole family. Straight away, he got to work enthusiastically arbitraging the difference between the value of the funds when they were last published and their value a week later. By pocketing one or two percent every week in this way, the Georges started to grow their fortune.
The war over the contract
Shortly after the George family bought their policies, Aviva twigged that FiLALIP was a massive, potentially company-destroying mistake. It needed to get out of the FiLALIP contracts.
Its first strategy was simple: it wrote to its customers asking them to switch to new contracts. Amazingly, 90% did what they were asked.
(At this time, Max-Herve’s policy would’ve been worth about €13,500.)
That left the George family, and a couple of hundred other holdouts, sticking with the old arbitrage contracts. This is when Aviva took the fight to the courts. Starting in 2005, cases started appearing in the French courts between Aviva and the holdouts.
(value of Max-Hervé’s policy in 2005: €415,000)
But French insurance law is very clear: the contract is sacrosanct. Since 2005 the courts have consistently ruled against Aviva – 64 times in total. In 2007, the George family won its first court case on the matter.
(value of Max-Hervé’s policy in 2007: €1.4m)
Aviva started using sneaky tricks to impede Max-Hervé and the other holdouts. It insisted that all changes to funds held in the contract would have to be delivered by letter. Undeterred, the Georges began sending their weekly instructions by court appointed bailiff (according to Mr George Snr, this has left them with a small warehouse full of paperwork).
As the case winds its way through the French courts, many of the initial holdouts have disappeared – including Mr George Sr. Most likely, Aviva settled with them out of court.
Max-George is one of about 30 holdouts who’re left.
You have to love his gumption
We last got a look at the value of Max-George’s policy in 2007, when it was assessed in court to be worth €1.4m. An expert witness assessed that the value of the policy was growing by an average of 68.6% each year.
Assuming that average rate of return has kept up, Max-Herve’s policy is now worth in the region of €93m. Next year, it’ll be worth €155m. And in less than ten years, it’ll be worth more than the insurance company which stands behind it (Aviva PLC is currently worth €30.9bn).
Source: Zero Hedge
You have to love his gumption. For that (and, eh, his peerless track record…) Herve has to go down as one of the great investors. But are there any lessons for the rest of us?
Well, clearly it pays to read the fine print of your insurance policies (especially when your insurer mysteriously sends you a new contract to sign).
But more importantly, Herve’s story is a demonstration of the power of compound interest.
Compounding returns on intelligent stock market investments is, quite simply, the surest route to riches in the markets. And you don’t need a daft insurance company to make it work for you (even if you might struggle to hit the €30BN mark, as Herve is on track to do in 2027).
It’s a topic I’m going to return to in future issues of Penny Sleuth. Einstein put it best:
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
The Penny Sleuth