Prudential, L&G and Standard to slash bonus payouts again

The six million customers who have entrusted their savings to three of Britain's biggest life insurers, Prudential, Legal & General and Standard Life, are expected to face slashed bonuses yet again as the full impact hits home of the stock market's continuing weakness.

Tomorrow the Pru is likely to cut with-profits bonuses by another 10 per cent, following cuts of 17 per cent in the past six months. Legal & General and Standard Life are expected to follow suit on Thursday, each pointing to the other as evidence of an industry-wide problem. But all three will stress they are making the cuts for tactical reasons, rather than because any of them is in any danger.

Standard Life, Europe's largest mutual insurer, is expected to come clean on the state of its finances this week when its annual results for a year that has seen it lose £4bn alone on the stock market are published. The insurer ended weeks of speculation when it admitted last night that it would be applying to the Financial Services Authority for a waiver of its solvency margins, causing concern the group is struggling with its finances. The company, however, said it would be applying from a position of strength.

"We are miles above our solvency margins," Mr John Hylands, the finance director, said. "We run the business in such a way that we can meet minimum solvency requirements at market levels significantly below what we are seeing today. We expect many companies to apply for a solvency waiver as it gives companies greater freedom to manage their finances without artificial constraints."

The FSA said last month it would allow companies to slip below their minimum solvency requirements if their balance sheet was fundamentally sound and they had a robust recovery plan. The move was intended to stop forced selling of equities by life insurers for technical rather than investment reasons. Only the financially strongest of companies will be granted a waiver.

Standard has already slashed payouts to its 2 million with-profits customers by 15 per cent in the past few weeks as it has battled against stock market losses of up to £12bn over the past three years.

Ned Cazalet, the independent insurance analyst, said yesterday the company had wiped out its surplus capital through investment losses, imprudent bonus payouts and guarantees to policyholders. He believes Standard will be very close to its regulatory minimum margin, and policyholders should expect further sharp cuts in May.

Mr Hylands said policyholders would have to "wait and see" if it will count profits it expects to bank in the future towards this year's solvency margin. It, like many companies, already has permission from the FSA to use this accounting trick, but Standard has until now abstained from using it. The practice is due to be outlawed next year.

Bondholders in the company will also be keenly awaiting information on its capital position. The company issued a £1bn bond last summer and it has the right to suspend interest payments to bond holders if its capital falls below 25 per cent of its regulatory minimum solvency margin.