Friends' homeloans bombshell

Paul Armstrong12 April 2012

FRIENDS Provident today delivered more bad news for thousands of homeowners relying on endowment policies to pay off their mortgages, warning that further cuts in the products' crucial bonus rates are likely.

'The negative investment returns experienced in 2000 and 2001 have still not been fully reflected in payout levels,' it said. 'As a result, unless there is a significant growth in equity and property values in the remainder of 2002, further reductions in payout levels are likely.'

The warning came as the insurer revealed it would cut final bonuses on with-profit endowment policies. The move will reduce the current payout on a 25-year policy from £93,145 to £77,096 and will see the value of a 10-year policy come down from £9420 to £8126.

This is on top of the cuts in annual bonus rates payable on these policies announced by Friends in January and further decreases the chance of homeowners being able to pay of their mortgages when the policies expire.

Friends chief executive Keith Satchell also said today it would cut annual bonuses on unitised with-profit pensions from 4.75% to 4.25%. This will slash the maturity value of a 10-year policy from £40,517 to £35,364.

The move, which follows similar cuts by fellow insurers such as Legal & General, Prudential and Royal & SunAlliance, largely reflect last year's 15.4% fall in the FTSE All Share index.

But Friends said the smoothing-out process applied-to with-profits products, which is aimed at reducing the impact of the extreme fluctuations in investment markets, meant typical 25-year policies would still have secured a 7% real return after tax. The company, which listed on the Stock Exchange last year after its demutualisation, also revealed that operating profit was £196m for the six months to 31 December compared with £125m for the same time last year.

However, the latest result was reduced to £133m after stripping out the return on the £1.6bn raised through the float.

Annual premium equivalent from pensions, a key performance indicator for the insurance industry, rose 47% in 2001 to £140.7m.

But the weak financial markets took a toll on the group's 67%-owned asset management business Friends Ivory & Sime, where operating profit was flat at £27m. Funds under management fell 10% to £34bn.

Making Friends

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