L&G shares were 5.5 percent lower at 1012 GMT, despite the British insurer reporting a 14 percent rise in 2015 operating profit and an increased total dividend of 13.4 pence a share.

Traders focused instead on the insurer's capital position, with new European Solvency II capital rules requiring hefty amounts of capital to write long-term insurance.

L&G said it had a solvency capital ratio of 169 percent under the new rules. A ratio of 100 percent shows sufficient capital to cover underwriting, investment and operational risks.

"This is relatively a weaker capital position within the UK life insurers," JPMorgan Cazenove analysts said in a client note, reiterating an 'underweight' recommendation on L&G.

In the past few weeks, Prudential reported a solvency ratio of 193 percent, Standard Life of 162 percent and Aviva of 180 percent.

Insurance sector analysts are intensely scrutinising the data, which regulators say is hard to compare, and others said the L&G capital ratio was within their expected ranges.

The rush to build up capital is also prompting consolidation in the industry and for companies specialising in life insurance, economies of scale make the income generated from books of business that are closed to new customers worth the capital employed, analysts say.

L&G said it too may look to buy rivals' old life insurance and annuity policies to generate more cash.

"That might be an area we want to look at - there are one or two books of business for sale," Mark Gregory, chief financial officer, said on a results call.

Deutsche Bank is considering selling its British insurance unit Abbey Life, sources say, while Rothesay Life is in exclusive talks to buy Dutch insurer Aegon's UK annuity book, a source familiar with the matter said.

L&G reported a rise in operating profit to 1.46 billion pounds, boosted by demand for products such as lifetime mortgages and a reduction in the level of capital set aside for its annuity business.

Legal & General Investment Management, one of the biggest investors in the UK stock market, had assets under management of 746 billion pounds, a rise of 8 percent, after seeing external net inflows of 37.7 billion.

(Reporting by Carolyn Cohn; Editing by Mark Potter and Alexander Smith)

By Carolyn Cohn