By Carolyn Cohn
LONDON, June 27 (Reuters) - Market falls triggered byBritain's vote to leave the European Union will hit Britishinsurers' capital, raising concerns over their ability to paydividends or hand cash back to investors.
New European capital Solvency II rules introduced in Januaryrequire insurers to account for investment risk, and solvencymodels to be regularly updated.
Life insurers in particular invest in bond markets to matchtheir long-term pension liabilities, and have increasingly movedinto corporate bond markets which offer higher returns.
But confidence in UK corporate bonds is dipping and equitymarkets, in which insurers also invest, are weaker too.
"It is the market moves that are having the more significantimpact. Solvency II models are sensitive to moves in creditspreads, equity markets, FX, interest rates, property prices andother markets," said Marcus Rivaldi, deputy head of analytics atspecialist insurance investment manager Twelve Capital.
"The impact on the day-to-day operations of insurancecompanies in the UK should be relatively minimal," he said.
Legal & General, which reassured investors earlierthis year that it was not holding many junk energy bonds, wasthe worst performing FTSE 100 insurer on Monday.
It has lost nearly 30 percent of its value since Thursday'sclose and was trading at three-year lows at 166 pence at 1400GMT.
Legal & General's solvency ratio would drop to 158 percentif there is a fall in interest rates after a Brexit vote, from169 percent reported at end-December, ratings agency Moody'sestimated last month.
Analysts at JP Morgan estimated L&G's solvency ratiocurrently at 150 percent.
A ratio of 100 percent means insurers have enough capital tocover underwriting, investment and operational risks, but someanalysts think life insurers should have a ratio of as much as160 percent, given their long-dated liabilities.
"If the volatility continues then we believe that Prudential, Legal & General and JRP would struggleon capital," JP Morgan said in a note.
Prudential's shares have dropped nearly 20 percent since thevote, and mid-cap insurer JRP is down 35 percent.
Legal & General also invests heavily in UK property, asector that has taken the largest drubbing since the vote.
Aviva, which fell as much as 30 percent at one pointon Friday to its lowest in nearly four years, said on Monday itscapital position was resilient.
Shares in Aviva, which has a target range for its solvencyratio of 150-180 percent, rose briefly at the open, and analystsat Macquarie said the sell-off was overdone. But it quicklyreversed and was down 7.4 percent to 346.8 pence by 1405 GMT.
Ratings agency Fitch warned on Friday that life insurerswere at risk of downgrades if there was "sustained economicweakness leading to intensified competition and materialdeterioration in the market values of assets".
However, some investors and analysts were more upbeat,saying the lower pound could be a boon for some insurers,boosting earnings from overseas operations.
"In situations like this, there are often opportunities,"said Nick Martin, who runs an insurance fund for Polar Capital. (Additional reporting by Simon Jessop; Editing by Sinead Cruiseand Alexander Smith)