EU watchdog alters annuity view, insurer shares up

LONDON Nov 11 (Reuters) - European insurance regulators have indicated they could be open to altering rules for annuity providers that, in their present form, could force UK insurers to raise 50 billion pounds ($84 billion) of capital.

As currently drafted, Europe's Solvency II rules for insurers would force annuity writers to hold extra capital as a reserve in case of declines in the market value of the corporate bonds they use to fund payments to their customers.

This would have a disproportionate effect on British insurers including Legal & General (LGEN.L), Prudential (PRU.L) and Aviva (AV.L) which sell far more annuities than their continental European rivals.

Relief on the news from Frankfurt, where regulatory body CEIOPS is based, helped the insurers' shares trade higher on Wednesday, with L&G, also lifted by a rising market, trading up 5.5 percent and Aviva up 3 percent at 1636 GMT.

Analysts said continental insurance companies could also benefit from the potential for increased sales of annuity-type products to replace dwindling state pensions in the future.

The DJ Stoxx index of European insurance shares rose more than 2 percent .SXIP.

CEIOPS, which two weeks ago postponed a decision on the rules in order to carry out a detailed assessment, indicated in a submission to the European Commission late on Tuesday it could be open to some form of "illiquidity premium", which reduces the liabilities companies have to hold.

The premium, which UK insurers have long been lobbying to be included, is essentially the yield enhancement insurers get from investing in a less liquid asset than a government bond, such as corporate bonds.

Without it, annuity providers would have to carry additional reserves and could be forced to sell assets to match these liabilities.

"CEIOPS is aware that the application of the new framework derived from Solvency II may have a significant impact in some types of business and certain segments of some concrete national insurance markets," it said on the premium. CEIOPS said it was "willing to analyse and develop" the outstanding issues.

Analysts said the news was positive, but cautioned there could still be restrictions on business written after Solvency II comes into force in 2012.

"We think this news is positive for UK annuity writers since it opens the door very clearly to acceptance of some form of illiquidity premium which we believe is fully justified on a technical basis," Nomura analyst Nick Holmes said in a note.

"Legal & General is the stock most positively geared to this issue," Holmes said.

The Association of British Insurers also welcomed the news.

"It is pleasing that CEIOPS has recognised that the ... premium must be included, although it has restricted this to business-in-force," Peter Vipond, director of financial regulation at the Association of British Insurers said.

"More progress is needed here and we will continue our efforts to find a suitable solution."

CEIOPS is tasked with drawing up recommendations for final Solvency II legislation which will be submitted to the European Commission next year.

(Reporting by Clara Ferreira-Marques in London and Jonathan Gould in Frankfurt; Editing by David Cowell)