NU Online News Service, Aug. 15, 2:47 p.m.EDT

Merger and acquisition activity remains on the same pace it hasbeen on for the past three years, according to a report fromreinsurance broker Guy Carpenter.

The current volatility of the financial markets and the generaleconomic climate today are keeping the lid on M&A activity inthe property and casualty insurance industry, the broker says.

The report says the first half of this year was similar to whathas been seen over the last two years.

Guy Carpenter says there were 22 announced and closedtransactions for the 2011 first half, at a deal value of close to$3.4 billion. The pace is on track to match 2009 and 2010.

The broker says there were 15 other transactions announced earlythis year that have not been closed. If those deals were closed itwould add an additional $1.8 billion to the 2011 total.

According to Highline Data's M&A Weekly, among thelargest deals announced by insurers were:

• Intact Financial Corp.'s acquisition of AXA's Canadian operations for around $2.7billion.
• Zurich Financial Services acquisition of Banco Santander S.A. insurance business for$1.67 billion.
• Allstate Corp. acquisition of Esurance and Answer Financial from WhiteMountain for $700 million.

Highline Data is owned by Summit Business Media Co., which alsoowns National Underwriter and PC360.

Guy Carpenter cited two reasons for the subdued M&Amarket.

The combination of economic growth and equity-market rise lastyear and early this year led to higher insurance-company valuation,says Guy Carpenter. While stocks were still on the upside, theywere used as acquisition currency with the increase in equityvalues.

The second reason for the subdued M&A environment is recenteconomic developments that include the European debt crisis andcontinued high unemployment and debt situation in the United Statesthat place “continued strain on the current macroeconomicenvironment.”

Over the next 12 months, M&A activity in the P&C sectorwill be affected by Solvency II regulatory changes in Europe.Companies will focus on cleaning up their balance sheets, focusingon non-core reinsurance and insurance operations throughalternative M&A transactions, such as runoff sales.

With reinsurers' budgets for catastrophes exhausted by thefirst-half run of natural disasters this year, another majorcatastrophe could prove to be the “tipping point from earningsevent to capital event,” which would cause rates to increase.

“A hardening of the market would likely change insurers' focusaway from growth via acquisition and back to organic growth,” GuyCarpenter says.

Mutuals are receiving downward pressure on theirfinancial-strength ratings, giving them difficulty on both “thecapital raising and divestiture fronts.”

While not predicting what direction M&A activity will takein the coming months for P&C companies, Guy Carpenter says thecurrent volatility in the financial markets “has reinforced thecautious mood in the sector.”

“A key factor in determining future M&A activity will bewhether the recent financial volatility is a temporary blip orconfirmation of a double-dip recession,” Guy Carpenter says.