Norwich Union cuts payouts on mortgage endowments

Britain's biggest insurer, Norwich Union, is again cutting payouts on maturing mortgage endowment policies - despite its main with-profits funds notching up an investment return of 17.7% before tax in 2005.

The company said yesterday that from this month a typical maturing 25-year endowment mortgage would pay out about 4% less than an equivalent policy would have delivered a year ago.

It said payouts on this type of policy were likely to continue to decline "because our expectation of future investment returns has reduced compared to those historically earned".

However, many holders of shorter-term policies are to benefit from bigger payouts this year.

Norwich Union has 2.8 million customers holding with-profits policies, including 900,000 with mortgage endowments. It is one of the first big life insurers to announce 2006 bonus rates and payouts. A fairly high proportion of its policyholders' money - 72% - is invested in shares and property, suggesting customers of less financially strong insurers face even gloomier news on policy values.

John Lister, the company's chief actuary, said an "excellent" investment return and a strong fund had enabled the company to increase most final bonus rates. Annual bonus rates on so-called unitised policies have been held, with some increased, while the rates for older "conventional" policies were unchanged, meaning some policyholders will once again not receive any annual bonus. However, the company said many 15-year pension plans and bonds have seen double-digit increases in value during 2005.

A typical maturing £50-a-month, 25-year General Accident savings endowment will from this month pay out £51,927. This compares with the £57,279 an equivalent policy was delivering a year ago. For mortgage endowments the new typical payout figure is lower, at £50,295.

The company has 46,000 mortgage endowments due to mature this year, of which just over half are expected to fall short before any "mortgage endowment promise" payments - a scheme launched by Norwich in 2000 to help people facing shortfalls on their home loans. It has reserved £1bn to pay for endowment shortfall assistance and expects to hand out £1m this year.

About 72% of its mortgage endowments are officially in the "red" danger zone, indicating there is a high risk that they will not pay off the entire home loan.