Eagle Star warns of endowment shortfalls

Policyholders OF Eagle Star are set to see the shortfall on their endowments widen by thousands of pounds as the insurer warned that the performance of its policies is even more dire than first thought.

The insurer, part of the Zurich Financial Services group, is writing to its 130,000 policyholders to tell them that it no longer expects to make the returns on its policies that it hoped. Almost all Eagle Star policyholders have already been warned their policy will not pay off their mortgage, and this move will mean they have an even bigger gap. The average shortfall on an average policy will increase by between £5,000 and £6,000, according to Ned Cazalet, of Cazalet Financial Consulting.

Policyholders are shown the value of their fund and whether it is on track to pay off their mortgage using projections of future investment returns. Insurers usually use 6 per cent as the average estimated rate of growth. But Eagle Star is now predicting its policies will only grow at 3.75 per cent, down from its previous projection of 6.25 per cent. On a £100,000 policy, this would increase the shortfall by £17,500, according to Mr Cazalet.

Eagle Star's customers thought they had already been told the worst. In its last round of projection letters, 83 per cent were "red", meaning the policy is not on track to pay off the mortgage. Another 6 per cent warned that the policy was likely to miss its mortgage target. Jim Reeve, director of Eagle Star Life, yesterday said the change was needed given the low expectations of investment returns that are a by-product of low interest rates and low inflation. He said new rates would "give customers a more realistic picture" of the long term value of their investment. "In the current economic conditions, 3.75 per cent is a prudent, long term assumption," Mr Reeve said. "The use of inappropriately high rates of return could lead a policyholder to make incorrect assumptions about the future value of their fund."

The Eagle Star fund closed to new business in December and has moved a greater proportion of its assets in to fixed interest stocks, which provide lower returns. Two thirds of the fund is now in bonds and cash, up from only a fifth three years ago.

Eagle Star's move follows Scottish Widows', which brought its average growth projection down to 4.25 per cent. Mr Cazalet expects many more companies will also follow suit, given the low investment returns. The average endowment shortfall is £11,000 according to his estimates. He believes that more than 90 per cent of policies will not pay off the mortgage they were taken out to cover and more than half of all policies will have a shortfall of more than 50 per cent.