Fitch Ratings says in a new report that it expects Solvency II and low valuations will result in further merger and acquisition activity in the UK non-life insurance sector in 2012.
"Smaller franchises and insurers unable to repair balance sheets weakened by the unprecedented catastrophe losses incurred during 2011 are viewed as primary targets for M&A activity," says Martyn Street, director in Fitch's Insurance team.
Fitch believes that the UK non-life sector's capitalisation, underwriting and operating trends will generally support insurers' current ratings over the 12-24 months from December 2011, despite the expectation that fundamental indicators will be weak during 2012.
The agency's central forecast anticipates a significant reduction in earnings for the sector for both 2011 and 2012. The primary driver of this is a much reduced level of investment income of around £3.5bn for 2011 (2010: £9.1bn) and £5.0bn for 2012.
Underwriting conditions are also expected to remain challenging, with the agency forecasting a calendar-year combined ratio of 105.5% for 2011. "Modest premium pricing increases and tighter capacity controls should lead to a gradual improvement in the 2012 calendar-year combined ratio to 102.5%," says Bjorn Norrman, Associate Director in Fitch's Insurance team.
Fitch's outlook assumes a continued, but weak, economic recovery in the UK, with modest GDP growth. The outlook does not, however, take into account potential external shocks to the UK economy.
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