Bonuses on endowment policies cut

Commercial Union and Friends Provident announced lower bonuses on their with-profits endowment policies yesterday.

Commercial Union said this was as a result of poor investment returns and lower inflation.

The overall return on 25-year policies is being reduced by 1.2 per cent to give an equivalent annual return of 13.5 per cent compared with 13.6 per cent for policies maturing last year.

On 10-year policies the reduction of 5.7 per cent in the total payout cuts the annual return from 12.5 per cent on policies maturing last year to 11.4 per cent for this year's policies.

Commercial Union pays out most of its bonuses annually, so the returns are more secure than with some other insurers. For 25-year policies 28.6 per cent of the final payment is made up by the terminal bonus compared with more than half at most insurers. For 10-year policies 14.9 per cent of the payment is made up by the terminal bonus.

Graham Warren, insurance analyst at Goldman Sachs, said: "The real returns have not changed that much. The nominal amount has come down, but inflation has also come down. With-profit policyholders have not done that badly."

He said that there was concern about all composite insurers being hit on the life side by the requirement to pay compensation for the mis-selling of personal pensions and by the new disclosure regime, which would lead to lower profit margins. On the non

- life side, competition from direct insurers and problems in the US were denting profitability.

Commercial Union's shares ended the day 1p lower at 498p.

At Friends Provident, a mutual insurer, 25-year policies are being trimmed by 2 per cent to bring annual returns down from 13.3 per cent to 13 per cent. Ten-year policy payouts are being reduced by 4.2 per cent to bring the annual return down from 12 percent to 10.9 per cent.

A Friends Provident spokesman said people using policies as backing for a mortgage would not need to increase their premiums. "But we can't rule out the possibility it might happen in the future."