The ingredients are in place for stronger U.S. mergers andacquisitions activity in 2013, and the potential for deals amongBermuda reinsurers may finally be realized as competitive pressuresincrease momentum for consolidation, a new report says.

In Conning’s latest industry report, “U.S. and Global InsuranceIndustry Outlook 2013, Economic, Capital Markets, andRegulatory Challenges Continue: Nothing to Be Gained by Waiting forThings to Get Better,” the firm says U.S. M&A activity in theP&C sector could increase due to limited organic-growthopportunities, low interest rates and financing terms that areattractive to potential buyers, and an increased focus within thesector on reducing expense ratios.

Conning also says improved equity valuations “providecurrency for stock buyers, potentially providing a more-attractivesale environment.”

Additionally, the firm says private-equity-owned companies inolder vintage years will likely be seeking an exit strategy in2013. “In the [P&C] sector alone, there are 16 private equityportfolio company insurers from vintages of 2009 and prior,”Conning says. “Of these, seven were acquired in 2007 or prior,meaning that they have been held for seven years or more. We maytherefore expect private-equity exits to be one of the more activeareas of insurance M&A in 2013.”

For Bermuda (re)insurers, Conning says, “The longstandingexpectation of consolidation among reinsurers in Bermuda,particularly involving companies with relatively undifferentiatedproducts, such as property-catastrophe cover, has yet tohappen.”

But the firm says emergence of the new hedge-fund-backedreinsurance model may drive consolidation. “The appearance of thisnew type of provider, alongside the emergence of additionalreinsurance capacity in the form of sidecars, catastrophe bonds,and ILWs (industry loss warranties), may shrink demand for moretraditional forms of reinsurance and retrocessional capacity,adding pressure for consolidation among existing reinsurers.”

For 2012, Conning says most P&C transactions involved smallto mid-sized companies as targets. “The largest was Markel’sannounced acquisition of Alterra, while Flagstone represented theother Bermuda-company transaction. Two of the 2012property-casualty transactions involved Lloyd’s companies astargets, an increasingly scarce commodity,” says Conning.