More mergers in 2012, Fitch predicts

Solvency II and low valuations will drive further merger and acquisition activity in the UK non-life insurance sector during 2012, Fitch has predicted.

Fitch believes that the UK non-life sector’s capitalisation, underwriting and operating trends will generally support insurers’ current ratings over one to two years 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, chiefly driven by much reduced level of investment income of around £3.5bn for 2011, compared to £9.1bn for last year, with a modest rebound to £5bn expected in 2012.   

Underwriting conditions are also expected to remain challenging, with the agency forecasting a calendar-year combined ratio of 105.5% for 2011, which is expected to ease to 102.5% next year.

Fitch’s outlook assumes a continued, but weak, economic recovery in the UK, with modest GDP growth.

The agency’s outlook does not take into account potential external shocks to the UK economy but will be updated to reflect such events if they occur.

Fitch’s Insurance team director Martyn Street said: “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.”