Insurance equity analysts expect a significant increase in mergers and acquisitions among U.S. property-casualty insurers this year, a consulting firm's global poll has found.

But most do not see merger and acquisition activity as the best use of capital, preferring, share buybacks and organic growth, nor do they see it as the best way to improve ratings, according to a survey released today by Accenture.

Despite two years of relatively mild weather and natural events, 89 percent of those surveyed said climate change and natural disasters are the top challenge to p-c insurers.

Ranked second for challenge, by 85 percent, was modernization of company information technology with IT for underwriting the most important area for p-c technology investment.

The telephone study with 108 analysts was conducted by Institutional Investor Market Research Group as part of Accenture's High Performance Business research.

John Del Santo, managing director of Accenture's Insurance practice in North America, said one item that has become big budget for p-c companies, which did not register in the survey, was advertising. "It didn't pop up. I don't know if that is being rewarded," he said.

Among the survey's other key findings: Seventy-seven percent of analysts rate operational efficiency improvement--or "transformation" programs--as the most valuable use of capital after share buybacks and dividend increases, cited by 83 percent of respondents.

Seventy-one percent of all p-c analysts surveyed said they anticipate a "significant increase" in merger and acquisition activity in 2008. But the study found significant differences by geography, with p-c analysts in North America three times as likely as those in Europe to predict a significant increase in such activity.

"The logic of consolidation within the property and casualty industry, particularly in North America, may be gaining favor as the economy slows and as rates soften," said Mr. Del Santo

"However, our research suggests that analysts might not fully value these transactions without a clear linkage to organic growth or until efficiencies are realized," he added.

He said the findings concerning mergers were no surprise but he thought the analysts attitude towards transforming core operations were "pretty insightful."

Mr. Del Santo also mentioned the analysts stress on need for technology to focus on pricing, underwriting, claims management and distribution.

He said it will be interesting to see if analysts in future "really push companies on their IT strategy.'

Globally, p-c analysts attached modest importance to mergers and acquisitions in terms of earning superior ratings, but they widely favored organic growth:

o Forty-five percent ranked M&A among the most valuable uses of capital.

o Sixty-seven percent said that M&A within mature markets is important or critical to earning superior ratings over the next three years, compared with 84 percent who said the same of organic growth.

o One-third described M&A within mature markets as "unimportant" to earning superior ratings over the next three years, compared with 16 percent who said the same of organic growth.

Mr. Del Santo added, "M&A winners will focus on rigorous deal discipline and early post-merger integration planning in order to quickly realize synergies and demonstrate a path to profits."

"Research suggests that analysts overall are looking to reward carriers with bold visions for the longer-term opportunities in emerging markets," said Serge Callet, managing director of Accenture's insurance practice.

Mr. Callet said "winners" amongst insurers "will be those who have flexible, scalable and efficient operations and can strike the best partnerships and joint ventures around the globe."

Operational efficiency improvement--or "transformation"--programs were ranked only slightly behind share buybacks and dividend increases among the most important uses of capital but were significantly ahead of product and service innovations, M&A, and business-line expansion, the poll found.

"One of the most remarkable findings of our research is that such a vast majority of analysts hold such bullish views on longer-term transformation programs and see an opportunity for insurers to outperform the market through increased efficiency," added Mr. Callet. "Our recent analysis suggests that when it comes to return on equity, transformation programs can have an equal or greater positive effect than share buybacks can."

The second most widely cited industry challenge among survey respondents was "aging systems and IT modernization," after "climate change and environmental issues" among p-c analysts.

Among the survey's other findings:

o Information technology investment in areas such as policy administration claims management, process optimization and call centers are "critical" to the insurance industry over the next three years, according to 57 percent of analysts. Another 34 percent described such IT investment as "important."

o Eighty-two percent of analysts said the insurance analyst community would benefit from more education on new technologies and their role in business performance.

Accenture said insurance is a $3.7 trillion industry. Its survey involved 44 analysts in the United States; 26 in the United Kingdom; eight each in Japan and Germany; five in France; four in Switzerland; three each in Italy and Canada; two in South Africa, and one each in Belgium, the Netherlands, Norway, Spain and Sweden. It was taken December 2007 through January 2008.

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