Prudential slashes bonus payments

Prudential today joined the growing list of insurers to cut bonus payments on with-profits saving and investment products because of falling share prices.

The group said that bond holders would receive a regular bonus of 3.25% this year, compared to 4% in 2002. Personal pension customers would receive 3.5%, compared to 4.5%.

The news sent Prudential shares tumbling, dragging down the rest of the financial sector as well as leading UK shares. In early morning trading, Prudential was down 13.4% at 340p.

Like other British insurers, the company has been badly hit by falling stock markets. They have undermined the value of its stock market investments, and eroded consumer confidence in many insurance and savings products.

"2002 was a tough year, with market confidence being adversely affected by increased political risk and a deteriorating economic outlook," Jonathon Bloomer, group chief executive, said.

"This year, it is clear that stock markets around the world continue to be volatile, and consumer confidence has deteriorated."

Struggling to cope with those markets, Prudential and other British insurers have cut bonus payments to holders of with-profits bond savings product and pensions.

With-profits savings and pension policies pay bonuses when the value of investments, traditionally shares, that they are based on rises. But the worst bear market in 30 years has made maintaining bonuses impossible.

The reduction came as Prudential said that operating profits rose by 2% to ?1.1bn during 2002. Prudential, which generates more than 70% of its sales outside the UK, said that total group insurance and investment sales during the year were ?27.6bn, up 29% on 2001.

New business profits grew 15% during the year, rising to ?774m, while margins for new business also improved. However, new business profits in the UK fell by 9% to ?222m, reflecting tough market conditions.

The group added: "We believe that the UK market for long-term savings will continue to be difficult in 2003."

On the potential impact of a possible war in Iraq, Mr Bloomer said: "We have got a very international business, in Asia, the UK and US, but we don't have anything in or around the Middle East. The bigger impact is that it is one of these factors leading to uncertainty in capital markets."

Prudential is the latest insurer to cut bonuses, joining Standard Life, Norwich Union and Prudential in slashing payments to with-profits policyholders.

Underlining the problems facing insurers, Standard Life is to ask the financial services authority to waive solvency rules which could have forced it to sell shares into a falling market.

The Edinburgh-based mutual insurer is the first of the leading insurance companies to concede that it will take up the FSA's offer to relax some of its rules. Other insurers are expected to follow suit.