Analysts have endorsed market speculation that Allianz Cornhill is preparing to mount a strong bid for a substantial stake in Independent Insurance.

Speculation over Independent's future has grown since its chief executive Michael Bright stepped down three weeks ago, following a 42% drop in its operating profits for 2000 and a dramatic fall in its share price.

Independent has also had to pay £248m for additional reinsurance, because it had insufficient reserves.

David Wharrier, an analyst with Fitch IBCA, said Independent urgently needed to increase its share capital if the company was to sustain a reasonable amount of growth. Fitch IBCA is due to publish a review of Independent's future this week.

“We believe the most likely outcomes for Independent are that it may be sold or another insurer may acquire a significant stake in the company.”

Another option for Independent, borrowing extra capital, could prove too expensive, he said. But despite its woes, Independent's shares remained an attractive investment and it continued to make operating profit.

Wharrier said Allianz Cornhill would stand to benefit from Independent's strong presence in the UK liability market if the two insurers were to link up. Independent would, in turn, gain from Allianz Cornhill's financial strength, which would boost investor confidence and support further growth.

David Hudson, from HSBC's insurance analysts team, also said a possible merger between Independent and Allianz Cornhill is feasible. “Allianz Cornhill has made it clear that it wants to be in the top five insurers in the UK and therefore it has to be interested in any insurer put up for sale in the UK market.”

Hudson said a merger with Independent would strengthen Allianz Cornhill's underwriting and management skills. But he stressed both companies had divergent management cultures and Allianz Cornhill had steered away from hostile takeovers.

He provided this possible prescription: “The Allianz Cornhill business needs sorting out and one way of achieving this would be to apply Independent's dynamic management and market leading expertise on risk assessment to its book of business.”

Independent Insurance's share price stood at 134p on Tuesday, compared to a 52-week high of 406p.

A spokesman for Allianz Cornhill refused to comment on any market speculation. Independent Insurance executive chairman Garth Ramsay said it had neither received nor made any bid approaches.