Britannic Assurance is going to defer bonuses for policyholders and cut share dividends because of falling profits.

The news caused the company's shares to drop 50% to 164 pence.

The board is confident that solvency can be maintained at appreciably lower equity markets than current levels Britannic Group statement

Britannic said it was taking the action on bonuses and dividends to protect the interests of policyholders and shareholders.

It blamed the problems on the worst annual stock market performance since1974 - London's leading shares lost a quarter of their value in 2002.

No guarantees

The insurance industry in general has been badly affected by the fall in share prices because it has sharply reduced the value of investment assets.

We have to take account of where the markets are, and 2003 is looking more difficult than people forecast Bryan Portman, Britannic managing director

Only last week the head of the UK's financial watchdog warned that stock market falls could still pose a risk to life assurance firms.

The chairman of the Financial Services Authority (FSA), Sir Howard Davies, said there could be no guarantee that firms would not be hit by tumbling share prices.

But he told BBC Radio 4's Today programme that the FSA was happy that most firms would be able to cope with further falls in the London stock market.

Bonus cuts

Britannic insisted that it would be able to survive if stocks fell to lower levels but said it was taking "prudent, precautionary action" to maintain its financial strength.

Managing director Bryan Portman said: "We have to take account of where the markets are, and 2003 is looking more difficult than people forecast."

The company warned that Britannic Assurance's profits for 2002 would be significantly below market expectations.

And the firm said that it might have to defer the annual bonus to policyholders for 2002.

If that happens, shareholders will see their share of the bonus reduced.

Job losses

The other businesses in the Britannic Group will not be so badly hit.

The company said Britannic Asset Management's results are expected to be slightly below expectations and Britannic Money's should be slightly above.

The company said that, taking all of this into account, the group was unlikely to pay shareholders a final dividend for 2002.

Despite all the grim news the company said in a statement: "The board is confident that solvency can be maintained at appreciably lower equity markets than current levels."

Britannic has already cut more than 2,000 jobs over the past two years.

And it reported a 35% fall in profits in the six months to June.