Fitch: Hardy Could Begin M&A Wave

December 23, 2011

Analysts at ratings agency Fitch say UK insurer Beazley’s renewed interest in buying Hardy Underwriting Bermuda underlines expectation for increased mergers and acquisitions in the non-life insurance sector in 2012, driven by low valuations and the impact of the European Union’s new Solvency II regime.

Fitch said those insurers that are struggling to repair balance sheets weakened by Asia-Pacific catastrophes in 2011, including the earthquake and tsunami in Japan and flooding in Thailand, are viewed as primary targets, as are smaller franchises.

“The likelihood of continued earnings pressure in 2012, driven by sustained low yields from investment portfolios across the non-life insurance sector, will make it harder for many insurers to convince shareholders to inject fresh capital when faced with the prospect of lower returns,” said Fitch.

Hardy announced earlier this month that it had launched a strategic review in the wake of catastrophe losses. While the firm said it had sufficient liquidity and capital to absorb the losses, it added that it would consider looking for a buyer. Beazley said Wednesday that it is interested in takeover talks after a previous approach failed last year.

“We believe insurers may also be more willing to complete deals as they get a better view of the capital requirements that will be implemented under the Solvency II regime,” said Fitch. “The capital requirements should become clearer next year, allowing potential buyers to more accurately assess the true value of targets.”

For the smallest insurers with only one or two business lines, Solvency II is likely to require higher capital levels to compensate for a relative lack of diversity. These firms could, therefore, also become takeover targets in 2012 as they would be able to operate with lower capital levels as part of a bigger group.

“Overall, Fitch’s rating outlook for the UK non-life insurance sector in 2012 is stable,” said a spokesman. “We expect the sector’s capitalisation, underwriting and operating trends to support current ratings over the next year or two, even as fundamental indicators remain weak in 2012.”

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