Bermuda insurers are likely to be involved in increased merger and acquisition activity in the industry this year, according to Deloitte.

The global accountancy firm's report, "The 2009 Insurance M&A Outlook: Opportunity in an Uncertain Environment", was released yesterday and suggests that an imbalance in supply and demand could lead to a wave of consolidation as markets stabilise.

The report found that with financial institutions looking to fund potential capital shortfalls by divesting non-core insurance businesses, strategic buyers and sovereign wealth funds may be able to expand into new markets through acquisition.

"There is currently an imbalance in supply and demand, with more companies seeking to divest than companies seeking to acquire," said Dave Simmons, Deloitte's insurance M&A leader.

"In this situation, the question becomes who will buy and how will they finance an acquisition given the decline in corporate stock's allure as an acquisition currency and tight credit market conditions.

"In the current environment, Chinese and Japanese companies with strong foreign currency positions, and those Bermuda and European insurers that avoided major investment losses, may be the strongest candidates to make acquisitions."

Mr. Simmons added that sovereign wealth funds may also seek to invest in insurance companies as Middle Eastern and Asian governments strive to increase the sophistication of their financial sectors by gaining access to needed resources and skills.

"As financial and credit markets stabilise, we expect strategic buyers to re-enter the market, take advantage of the supply-demand imbalance and a new wave of consolidation to occur," he added.

Rebecca Amoroso, head of Deloitte's US insurance practice, said that many insurers had started 2009 with their main challenge having changed from deploying excess capital to raising new capital.

Investment write-downs and market volatility had hit insurers hard, particularly life insurers, she added.

"As a result, many life and property and casualty (P&C) firms are experiencing significant losses of capital as well as downturns to their ratings. In this environment, raising capital, divesting non-performing or capital-consuming businesses or seeking protection from better capitalised firms emerges as a priority," Ms Amoroso said.

Deloitte also pointed out that potential US tax code changes in the pipeline would have to be taken into account by parties involved in mergers.

"As the tax-reform debate moves forward and specific proposals emerge, it will be important from an M&A perspective for potential acquirers to determine their best- and worst-case tax scenarios and prepare valuation models under these," the report stated.