Britannic punishes policyholders and shareholders alike

Howard Cottam, chairman of Britannic, came under fire last night after the insurer revealed the dire state of its finances, freezing its dividend and deferring its bonus payment to policyholders.

Shares in the troubled insurance company halved to 164p, reducing its stock market capitalisation, which once stood at more than £2.5bn, to little more than £300m.

The Birmingham-based company said it was unlikely to pay a final dividend to shareholders, who received 18.5p at the half-year stage, and said it might defer its annual bonus payment to a million policyholders.

Bryan Portman, the managing director, said the group was taking a "very cautious approach" after a 43% fall in the stock market over the last three years.

The group, which has axed 2,000 jobs in recent years, said the action was needed to "maintain financial strength at current market levels" in the light of the "worst annual equity market performance since 1974".

One City source said this would fail to placate investors, whose shares were worth more than £13 five years ago just after Mr Cottam became chairman.

"This raises serious questions about the position of Harold Cottam," one source said. He has presided over a diversification of the company and acted as chief executive for a nine month period last year when the previous incumbent, Danny O'Neil, resigned to spend more time with his family.

Industry sources also raised questions about the structure of the board, which is still without a chief executive after Mr Portman was elevated from finance director to group managing director in September.

His role as finance director was taken on in December by Paul Thompson, the insurers' former adviser at investment bank Merrill Lynch.

A spokesman for Britannic said that no shareholders had raised questions about corporate governance or the role of Mr Cottam.

Britannic, which failed to find a suitor in the summer after looking for a merger partner, indicated that it would continue to meet the financial requirements laid down by the regulator as long as the FTSE 100 remained above 3,300.

The FTSE ended yesterday just one point above 4,000 and Britannic's plight had a dramatic impact on the share prices of many larger insurance companies.

Mr Thompson, the finance director, said he was disappointed at having to tell policyholders that their bonuses would be deferred. "The real issue for policyholders is that the terminal values will not be affected," he said.

The group said that its Britannic Assurance arm was likely to produce operating profits significantly below expectations and said that its asset management arm would be slightly below expectations with its mortgage operation, Britannic Money, slightly above. It also said that itss retirement solutions arm would show increased volumes but profits slightly below expectations.

For 2003, the group said it hoped to resume annual bonus declarations and consider a final dividend - but not an interim one - if the stock market improved. When it resumes its dividend it expects it to be in the region of 20 to 25p.