Insurance industry consolidation likely to rise: Report

Consolidation in the insurance industry is likely to increase this year should companies resolve their financial problems, Deloitte L.L.P. said Monday in a report.

“For both life and (property/casualty) companies, mergers and divestitures can serve as a potentially effective means to increase capital and maintain ratings,” said the report on the insurance industry's merger and acquisition outlook.

“Moreover, it appears many large financial institutions and insurers are looking to shed noncore insurance businesses in order to raise capital. This could fuel a new wave of acquisitions as more insurance companies may be available at attractive valuations,” the report said.

The report said the likely acquirers, “other than Chinese or Japanese companies flush with foreign currency, may well be those Bermuda and European insurers that have avoided major investment losses.”

A major challenge facing buyers, though, will be to structure deals without increasing exposure to investment losses, which means some strategic buyers are seeking to acquire underwriting teams instead of companies, the report said.

The Deloitte report analyzed key factors likely to affect insurance M&A activity. Factors having a near-term effect are evolving M&A strategic objectives, investment valuations and subprime exposures, capital challenges, low valuations and integration challenges.

Under the category of regulatory and financial reporting, factors include changes in insurance company regulation, a push for a globally accepted insurance accounting standard, tax issues and legislation, according to the consulting firm's report.

Copies of the report, “The 2009 Insurance M&A Outlook, Opportunity in an Uncertain Environment,” are available at Deloitte's Web site at: www.deloitte.com/us/insurance.