The loss reserve issues surrounding the St. Paul-Travelers merger underscore how they can contribute to buyer hesitancy to assume such latent risk. Many transactions have been renewal rights deals without the assumption of loss reserve liabilities, Mr. Meredith explained.

"The introduction of Sarbanes-Oxley has also muted M&A activity by putting increased liability on chief executive and financial officers for the accuracy of their financial information," Mr. Meredith wrote.

And finally, he added, new accounting standards eliminating pooling of interest also helped curb M&A activity.

"We are not predicting a wave of insurance M&A, but rather suggesting that companies are more likely to consider transactions going forward, especially as we move into 2007," Mr. Meredith wrote.

The personal lines group presents the greatest opportunity for M&A action among all the subsectors. "With top-line growth slowing due to competitive pricing pressures, slowing growth in policies in force and less shopping on the part of customers, we believe national and large regional carriers may look for growth through expanded distribution," said Mr. Meredith's report.

The highly fragmented insurance brokerage field will also continue to undergo consolidation, he predicted. "That said, the dollar volume of consolidations will likely moderate as the supply of brokers in the smaller to midsize range--$20-to-$50 million in annual revenues--is fairly limited," Mr. Meredith wrote.