Standard Life faces ?4.8bn endowment bill

Standard Life, Europe's biggest mutual insurance company, faces a potential bill of up to £4.8bn to honour the promises it made to 800,000 holders of endowment policies which are failing to hit their targets.

Doubts are now being raised whether the Edinburgh-based insurer can afford to meet the promise in full, because its own financial strength is weakening.

The company, which disputed the figure last night but would not offer an alternative, is due to update the City on its position today.

As the UK's biggest provider of endowment policies, Standard Life made the pledge to customers after it fought off an aggressive demutualisation campaign three years ago.

It told them that if their endowments - typically taken out to pay off a mortgage - fell short it would inject extra cash to help make up the difference.

In September 2000, this promise was made to just over half its 1.5m policyholders.

Since then it has been hit by the fall in the stock market, sapping its own financial strength just as the potential bill to make good the endowments' shortfall has risen rapidly. It has already admitted it will apply to the financial services authority, the City regulator, for a waiver of its solvency rules to ease its financial predicament.

It is sending the 1.5m policyholders projections whether their endowments will be able to pay off their home loans.

City analysts say that estimating the size of the potential bill is difficult. It requires a number of assumptions to be made about the size of endowments and how the stock market will perform, since many of the policies will not have to be paid off for 10 years or more.

Even so, industry sources believe Standard Life is storing up problems for the future.

By one estimate, it could be looking at a £4.8bn hole. This is based on a valuation re ceived by one typical policyholder who bought a house in the late 1980s - when these types of policies were at their most popular - for a standard £60,000 mortgage of the time.

Standard Life made a "promise" in 2000 to top up the policy by £6,000 to ensure it would meet its target range when it is due to pay off the mortgage in 10 years.

Just under three years later this policyholder is already being told that even with the pledge the endowment is still not on track to pay off the loan. But under the wording of the promise Standard Life has capped its bill to policyholders at 2000 levels - otherwise it would face an even larger bill.

While it is one of two big companies to make promises to endowment policyholders - the other is Norwich Union - it has not been clear what measures it is taking to pay the potential bill.

Ned Cazlet, an independent expert, said that until this month the insurer had been saying it did not need to set aside any money for its potential bill, which he put at around £1bn.

Last night a Standard Life spokesman said the company had put £100m a year aside for the past three years. "This £100m is more than enough to cover all of the promise in the worse case scenario and we do not expect the worse case scenario to happen," he said.

Any payments under the pledge will come from its with-profits fund, worth£30bn, although this is also used to pay its commitments to other customers, such as holders of life insurance and pensions.

The company is assuming that the stock market will rise again soon.

Its promise is made on the basis that it can provide poli cyholders with a 6% rise in value each year. Last year - like many other companies - policy values fell.

Standard Life also says it will only keep the promise if it has enough capital to set aside regular provisions to meet any shortfalls.

The spokesman said: "This isn't a guarantee. It's a promise, subject to us having the resources available."