UK regulator says capital levels at insurers "appropriate"

* Outcome of insurers' model vetting published in December

* BoE says some firms won't have enough capital under new rules

* BoE says grace period for capital building open to all

* Analysts says news on dividends a positive for sector (Adds Aviva, analyst reaction, share prices)

By Huw Jones

LONDON, July 9 (Reuters) - Britain will not use new EU insurance rules to force the sector to top up on capital but some companies will need a lengthy grace period to increase their safety buffers, the country's top insurance regulator said on Thursday.

The new EU capital rules for insurers, known as Solvency II, take effect in January.

"I have heard from some a concern that we will use Solvency II to increase levels of capitalisation across the sector, or that we are seeking to load the sector with more capital now so that it is baked into the new regime once operational," said Sam Woods, executive director of insurance supervision at the Bank of England.

"Let me state very simply: there is no such plan within the Bank of England," he told a conference.

"We think that our current regime secures an appropriate level of capitalisation for the insurance sector and puts us in a good position to make the shift to Solvency II."

Nevertheless, the new system was tougher in some ways, creating individual "winners and losers".

Given that overall capital in the sector was appropriate, Woods said that firms which fall short would be given as long as 16 years under "transitional arrangements" in the new rules to top up their buffers.

"I want to make it absolutely clear that we will give firms plenty of time to adjust to the new regime, and that those firms who wish to make use of transitional measures will be given the freedom to do so," Woods said.

When the BoE decides if an insurer can pay dividends, it will look at capital levels after the benefit of transitionals has been factored in, Woods added.

The Association of British Insurers' director general, Huw Evans, said it was reassuring to receive formal confirmation that the BoE would allow the full use of transitional measures, including for the payment of dividends.

Shares in Aviva (Other OTC: AIVAF - news) , Prudential (HKSE: 2378.HK - news) , and Legal & General were up three percent or more, outperforming the broader market on what Morgan Stanley (Xetra: 885836 - news) analysts called positive comments from Woods on transitional arrangements and dividends.

Aviva's chief capital and investments officer, Jason Windsor, said the statement on transitionals "confirms the benefit they will bring to our capital base under Solvency II."

Large insurers like Aviva, Prudential and the Lloyd's of London insurance market are allowed to use bespoke computer models to calculate how much capital they need under the new rules but each model must be vetted by the BoE.

Woods surprised some in the audience by saying the outcome for all the company models being vetted would be published at the same time in early December.

Some delegates expressed concern this would leave companies with less than a month to make any changes and face having to use the "standard" formula for capital calculations, which is typically more conservative than a bespoke model. (Editing by Keith Weir and Susan Fenton)