New data shows lower underlying capital levels of British insurers

[May 19, 2017]  LONDON (Reuters) - British insurers published measures of their capital strength without the benefit of phasing-in arrangements on Friday, with analysts warning some firms might eventually have to cut dividends or abandon share buybacks to boost their reserves.

Stringent European Union capital rules for insurers introduced last year allow for so-called transitional measures, to phase in the impact of the rules to 2032.

But new more detailed reporting requirements have given analysts the first chance to see insurers' "look-through" ratios calculated without the use of transitional measures, data which has already been seen by regulators.

Under European Union Solvency II capital rules introduced last year, insurers need to set aside capital for underwriting, investment and operational risk, with a ratio of 100 percent regarded as the minimum capital requirement.

Legal & General <LGEN.L> shares briefly hit a six-week low on Friday after analysts said its ratio would slump to just 7 percent without the use of transitional measures or the so-called matching adjustment, which provides capital relief for holding long-term assets.

Aviva's solvency ratio falls to 57 percent excluding transitional measures and long-term guarantees, Bernstein said.

KBW analysts said the ratios put L&G's AA-minus financial strength rating at risk and cast doubt on "dividend sustainability for L&G and...the merits of proposed buybacks at Aviva".

L&G shares hit their lowest since April 6 and were trading at 250 pence at 1030 GMT (6.30 a, down 0.3 percent compared with a 0.5 percent rise in the FTSE 100 index.

The logo of Legal & General insurance company is seen at their office in central London, Britain, March 17, 2008. REUTERS/Alessia Pierdomenico/File Photo

Analysts said L&G's heavy use of transitional measures meant it was anticipated their ratio would come down significantly.

"This was not entirely unexpected as it was well understood that annuity-heavy UK life players would see a large drop," Bernstein analysts said in a note.

Standard Life's ratio dropped to around 110 percent on a lookthrough basis, from 177 percent, analysts said.

Aviva <AV.L> and Standard Life <SL.L> shares rose 1.3 percent and 0.4 percent respectively on Friday.

Prudential shares briefly hit three-week lows on Thursday after the insurer published its solvency ratios alongside details of a management reshuffle.

Its shares rose 1.2 percent on Friday.

(Additional reporting by Simon Jessop and Huw Jones; Editing by Elaine Hardcastle)

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