CGU endowment policy holders win reprieve

Holders of failing endowment policies were thrown a lifeline yesterday by insurance group CGU, which said it would plug any shortfall between the value of policies and the mortgage originally targeted by dipping into its £5bn in free reserves.

CGU, the third largest endowment provider in Britain, says it will top up any policy where there is a shortfall between the payout and the mortgage it is attached to, as long as future investment returns do not fall below an average of 6% a year net. However, if returns drop below 6% CGU admits that policyholders will have to cough up extra cash to repay mortgages.

The guarantee means that none of CGU's 700,000 policyholders will be asked to increase endowment premiums in contrast to increases of £25 to £50 per month common at other companies. CGU says it only had a few thousand policies where shortfalls are "serious" but concedes that up to 400,000 policies could have had "very small" shortfalls.

The move will embarrass other insurers which are issuing millions of warning letters on endowments under orders from the financial services authority. Last week Standard Life wrote to 1m policyholders saying that many policies bought in the late 1980s "are likely to give a projected shortfall against the money needed to repay the mortgage". The FSA has now exempted CGU from sending out the letters.

CGU reported bumper new business figures earlier this week, and says its investment portfolio earned a gross return of 19% in 1999. It believes that future returns should comfortably exceed the 6% projection set by regulators, which it regards as too pessimistic.

But it says that even if the guarantee forces it to pay out, the liability will be minimal. The group has one of the highest free asset ratios in the life insurance sector, and says that total cost will at most shave a "percentage point or two" off the investment returns on its reserves. It adds that other firms with much lower free reserves will be hard pressed to match its guarantee.

However, rival insurer Standard Life says that the guarantee does not come without costs. General manager John Hylands said: "CGU is obviously pinning its hopes on earning well ahead of 6% a year on its investments. It sounds attractive from the customer point of view, but what makes me hesitate is that the nature of the guarantees constrains your investment freedom and your future investment performance."