L&G cuts bonus but not dividend

Legal & General yesterday dealt its 1.7m with-profits policyholders a new blow by cutting bonus payments and final payouts, but cheered shareholders with a dividend rise.

It is the latest insurer to pass on the stock market falls to its endowment, with-profits bond and pension policyholders in the form of reduced annual bonuses and sizeable reductions in the payouts for people with maturing policies.

L&G said it had to take action following a third successive year of falling equity markets.

David Prosser, L&G's chief executive, said: "The returns [to policyholders] are still good." He added that homeowners with endowment mortgages had benefited from much lower interest rates.

This is the second time in four months that the company, which has about 750,000 with-profits endowment holders, has reduced policy values.

A typical £50-a-month, 25-year, low-cost endowment policy backing a mortgage will now pay out £58,014, compared with the £72,279 that an equivalent policy would have delivered a year ago - a reduction of 20%.

Annual bonuses on endowments are being cut by about a third.

The insurer said its aim was to provide competitive returns to policyholders while maintaining the strength of the with-profits fund for future generations.

For the year ended December 31, L&G said, pre-tax operating profits fell 7% to £695m. Worldwide new business grew 13% to £906m "in a difficult operating environment", and the company announced a 2.5% increase in its final dividend to 3.25p a share.

Mr Prosser said it was "a good discipline for the business" to pay out an increased dividend. "Although the trading environment has been tough so far in 2003, we believe we have the strategy and financial strength to continue to outperform."

The results were better than some analysts expected and the shares closed up 5.3% at 74.25p.