Regular bonus rates on former Axa Equity & Law with-profits policies are to be cut from 3% to 2% in 2003.

Axa blamed the cuts on poor stock market performance despite a dramatic rise in share prices during the second half of 2003.

The cut will only hit one tenth of Axa's policyholders. The rest will know their fate in late March.

Axa cuts

The cuts on Axa's policies will mean a policyholder who had invested �50 a month into an endowment policy for the past 25 years would see their final payout fall to �51,799.

The effect of the poor performance of the stock market over the past few years means that several years of increasing performance would be needed to restore regular bonus rates Peter Shelley, Axa

If the policy had matured in December they would have been paid �56,666.

Axa merged with Equity and Law in 1998 and the cuts only apply to conventional with-profits customers.

No conventional with-profits policies were sold after 1986.

Damaged hopes

Nevertheless, Axa's decision will damage the hopes of many with-profit investors that the recent upturn in stock market fortunes will deter life insurers from slashing bonus payouts.

With-profits policies are designed to smooth out the peaks and troughs of stock market volatility.

However, heavy stock market falls throughout 2001 and 2002 forced most firms to trim bonus rates on their policies.

"Although investment returns have increased during 2003, the effect of the poor performance of the stock market over the past few years means that several years of increasing performance would be needed to restore regular bonus rates," Peter Shelley, Axa chief actuary, said.

Prudence Bond

Prudential has also announced a decision on bonus payments for its "Prudence Bond", an investment scheme with 375,000 members.

The bonus rate this year will remain the same as 2003's.