By Andrew Verity BBC personal finance reporter

Many people have had their bonuses trimmed

The UK's biggest life insurer Norwich Union has announced another cut in the value of its customers' policies - despite the recent uplift in the stock market.

More than 1.5m holders of old-style "with-profits" policies, including endowments, pensions and bonds, will see the value of their policies cut by up to 5%.

It is the fourth such cut in 18 months. Since the start of 2002, payouts on these policies have dropped by between 30 and 35%.

The cuts would trim the payout on a 25-year, �50-a-month endowment from �59,568 for a policy maturing last week to �56,595 for a policy maturing now.

Extra cuts

The timing of the cut is a surprise. While life offices announce their payouts at the start of the calendar year, they reserve the right to make extra cuts.

But until now extra cuts have only been needed when the stock market has taken a dive.

Since January, shares have staged a modest recovery, with the FTSE 100 edging up from less than 3,900 to more than 4,050.

The cuts will only hit old-style "conventional" with profits policies, sold before 1994, where customers' payouts are linked on their statements to the "sum assured" (the amount for which their life is insured).

Some further adjustment to payouts is necessary for overall fairness Mike Urmston, chief actuary

It does not affect newer, "unitised" with-profit policies, where the value of a customer's policy goes up and down with the value of the life insurer's main fund.

Norwich Union said the cuts had become necessary because the life insurer had been paying out too much.

Customers whose policies have matured this year have got more than their fair share of the life insurer's pot of money - leaving less for those who remain.

Norwich Union's chief actuary Mike Urmston said: "On conventional policies that have matured in 2003, we have been paying out around 118% of what has been earned so some further adjustment to payouts is necessary for overall fairness."

Old-style "conventional" policies have valuable guarantees built in. Each year the company pays interest in the shape of annual (or "regular") bonuses added to the value of the policy.

Those annual bonuses are guaranteed. In addition, a further bonus, known as a "final" or "terminal" bonus is added on customers', expressed as a percentage of the sum assured.

Investment woe

However, because the final bonus is not guaranteed, it is the first to go when the life insurer's investments are performing poorly.

Because of the stock market, Norwich Union's investments have shrunk by more than 18% in the last two years.

While the value of the funds have shrunk, the value of the guaranteed element of older policies has continued to rise, so that payouts were out of line with the underlying investment performance - potentially draining Norwich Union of funds.

However, a further 1.7m holders of new, unitised with-profits policies were, by contrast, given some relief.

The modest recovery in the stock market was passed on to them, by reducing the penalty for exiting a policy.

The penalty - or Market Value Reduction (MVR) - will fall from 11% to 9%.