Insurance industry mergers and acquisitions increased in 2005 to the highest level since 2001, and may foreshadow an acceleration of activity this year and the next, according to a new study by Conning Research and Consulting Inc.

Stephan Christiansen, director of research at Conning Research & Consulting, cited a number of factors in the urge to merge.

"The insurance industry is growing capital faster than revenues, and while revenue growth is anemic, prospective profitability appears relatively solid," he said.

In addition, stock performance for the industry has been relatively strong, with each of the sectors outperforming the S&P 500 from 2002 through 2005. "We believe advantages of scale are increasing in the industry for a variety of reasons," he said.

M&A transactions in 2005 increased to 324, and total values of these transactions grew to $50.8 billion, exceeding 2004 levels. "Public offerings, including secondary offerings, were strong in property-casualty but declined in all other sectors."

The p-c sector reported 49 transactions worth $9.3 billion in value. The major transaction in this total was Swiss Re's acquisition of GE Insurance Solutions, announced in November of last year and valued at $6.8 billion.

"Some consolidation in personal lines and medical malpractice sectors may presage greater insurance sector restructuring to come," the report stated.

Perceptions of the risk of M&A transactions may be replaced by new perceptions of the risk of not acquiring businesses in the p-c sector, which still remains highly fragmented.

Among the factors spurring p-c mergers are higher capital standards from regulators and rating agencies along with improved diversification from catastrophe-exposed markets, the report said.

There were 21 transactions in the life sector worth a total of $22 billion, although two transactions accounted for 90 percent of this total.

"We believe conditions are favorable for an acceleration in transactions in 2006, based on the buildup in capital, declining organic growth opportunities and increasing complexities in the business," the report said.

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Look For More M&A Deals In 2006

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