Insurers have been hit by falling stock markets

The group also warned that its dividend payments were likely to grow more slowly from now on.

Friends, like a number of its peers, blamed its weaker performance on falling stock markets and the UK's ageing population.

But its shares slumped 14% on Wednesday as investors punished the group for going back on its promise to grow dividends faster than the rate of inflation.

Slower growth

Friends reported profits of �305m for 2002, slightly below expectations.

The figures included a �56m charge for the cost of people living longer and therefore costing more in annuity payments.

The insurer also revealed lower bonus payments to holders of with-profits policyholders, which are based on the performance of the stock market.

Unlike a number of rivals, Friends has not cut payments or dividends altogether.

But at its flotation on the stock market less than two years ago, Friends pledged to grow dividends faster than the rate of inflation.

"While we expect to continue to grow our dividend in the future, growth will be at a lower rate than previously indicated," said chairman David Newbigging.