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 take into account potential external shocks to the UK economy but will be updated to reflect such events if they occur.
The report "2012 Outlook: UK Non-Life Insurance- Testing Times Ahead: Economy and Regulation Present Key Hurdles in 2012" is available at www.fitchratings.com.
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