M&A will likely dominate the insurance and reinsurance market next year, as stronger balance sheets inspire firms to look for growth through acquisitions. Following the September 2008 financial crisis, reinsurers lost around 18% of their capital, but it hasn't taken long for the carriers to stage a comeback. Now, it's time to put their money to work.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%%Several major players are expected to make acquisitions next year, including Zurich Financial Services (ZFSVY), Munich Re (MURGY), RSA Insurance Group (RSAIF) and Vienna Insurance Group (VNRGF). They have the substantial capital positions necessary to support a meaningful acquisition and can spin a transaction into a clear opportunity for market share and premium growth.

Potential targets include insurance units from diversified financial companies such as ING Groep (ING), American International Group's (AIG) European and Asian holdings and companies with specialty lines of business that complement existing capabilities. Insurance broker Marsh & McLennan (MMC) did this last week, with its acquisition of an HSBC (HBC) business unit.

"We are coming out of a phase where companies have brought their balance sheets back into order and when economic growth is starting to gain traction," Thomas Hess, chief economist at Swiss Reinsurance Co. (SWCEY), told Dow Jones Newswires. "This means, with strengthened balance sheets, companies may look once again for takeovers to tackle growth."

Zurich has been particularly active in insurance M&A over the past few years, with AIG's auto insurance division among its major acquisitions this year – at a price of $2 billion. The next step for this company may be to look outside its comfort zone of Europe and North America. Specifically, Zurich is said to be looking in Latin America but needs a return on equity of at least 16% in order to make a deal happen.

RSA, with a hefty capital base of 2.4 times the regulatory requirement, is on the prowl as well. "Acquisitions are part of our strategy," said RSA spokesman Jon Sellors. "We currently believe that there are more opportunities outside the U.K., namely in markets such as Canada or Ireland or emerging markets such as Latin America, the Baltics and Asia."

According to Deutsche Bank (DB) analyst Spencer Horgan, "Deal activity is picking up as the financial industry remolds itself post-crisis, and this in itself could rekindle interest." He continued, "Many companies may consider acquiring the insurance castoffs from the banks, and there is an interesting potential IPO pipeline from currently mutual or state-owned companies."

For many insurers – either acquirers or targets – there's no choice but to find the right transaction. Stronger carriers will need to find new ways to increase their return on equity and enter new lines of business to show outsized revenue growth, and those in weaker positions will, frankly, need the capital infusion and support of a healthy insurer. M&A is likely to be the major market trend of 2010, as carriers seek to cope with a quiet, mature market.

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