The continuing soft market will have an impact on merger and acquisition activity among insurers, but ultimately, deals are made based on the specific needs of individual buyers and sellers, industry representatives say.

In softer markets, if companies feel that they cannot grow organically, many may look to expand through acquisitions, said Stephen Sills, president and chief executive officer of Darwin Professional Underwriters, which agreed to be purchased by Bermuda-based Allied World Assurance Company Holdings in late June.

M&A activity had fallen off after the late-1990s, noted Michael Fallon, vice president and director of corporate finance at Liberty Mutual. With rates rising, he added, insurers were able to grow through premium gains and by cleaning up balance sheets.

Now, however, that kind of organic growth is more difficult, and Mr. Fallon--speaking in April at a New York City panel discussion sponsored by Tillinghast-Towers Perrin and the Dewey & LeBoeuf law firm--predicted an increase in the number of deals.

At the same discussion, Paul W. Brown, managing director of Merrill Lynch, said the overall rate environment defines M&A activity in a given market.

Throughout 2008, many other comments by industry experts echoed those sentiments.

In a survey conducted in April by Accenture, 71 percent of property-casualty analysts said they anticipated a "significant increase" in M&A activity in 2008.

Explaining the results, John Del Santo, managing director of Accenture's Insurance practice in North America, said, "The logic of consolidation within the p-c industry, particularly in North America, may be gaining favor as the economy slows and as rates soften."

However, Mr. Del Santo also said Accenture's research suggested "analysts might not fully value these transactions without a clear linkage to organic growth or until efficiencies are realized."

He 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."

Mr. Sills also stressed the importance of compatibility and issues beyond just the numbers. He said companies should not just look at stock prices, but should consider whether a potential acquisition target is adequately reserved, and what specific hole the acquisition will fill.

This market also comes with some challenges that could impede future M&A activity, one industry executive noted.

Robert Cubbin, CEO of Meadowbrook Insurance Group, said that while he expects activity to pick up in the next six-to-12 months, M&A for insurance companies is "always difficult."

In this particular market, sellers may be reluctant to deal because their profits are depressed, said Mr. Cubbin, whose Southfield, Mich.-based company merged this year with ProCentury Corp. "So I think the better properties would probably come off the market and not be available," he said.

Additionally, he said some of the "bigger players" may not have excess capital after the hurricane season.

At a Standard & Poor's insurance conference in June, V.J. Dowling, managing partner, Dowling & Partners Securities LLC, said that another obstacle to deals could be the state-based regulation of insurance.

Mr. Dowling said regulators sometimes view their roles as job protectors for their particular states. Some deals that would otherwise occur, he said, are killed by regulators if firms targeted for acquisition do not "raise their hands" to be purchased.

He cited a past deal where Alleghany Corp. attempted to buy the St. Paul Companies. The deal received much of the necessary approvals, he said, except for a few states, and the transaction fell through.

But Mr. Dowling also noted that in the current soft insurance market some companies may begin to raise their hands.

Transactions have been occurring this year. Aside from Allied World's $550 million deal for Darwin, and Meadowbrook's $270 million deal for ProCentury, Tokio Marine Holdings also announced its intent to acquire Philadelphia Consolidated Holding Corp. for $4.7 billion.

In addition, OneBeacon Insurance Group, Hudson Insurance Group and Rockhill Insurance Company all announced purchases of specialty agencies in recent months. Late last year, James River Group, Inc. was acquired by a Bermuda-based private equity firm, and Munich Re acquired The Midland Company.

For many of the transactions, Mr. Cubbin said that foreign players tend to be more active in this market than U.S. companies. This is partly due to the relatively weak position of the dollar compared to foreign currencies, he said.

"That certainly gives the foreign acquirer a little bit more of a cushion against the prices coming out of the balance sheet, and a little more pricing power," Mr. Cubbin said. "When you look who the buyers have been lately, it seems to evidence that."

While experts at the Tillinghast-Towers Perrin/Dewey & LeBoeuf conference and those cited in the Accenture survey noted the economy as a factor that may drive more deals, Mr. Cubbin and Christopher Timm, president of Century Surety Company, a ProCentury subsidiary, downplayed the impact of the economy.

Mr. Cubbin said that M&A activity is impacted more by "the specifics of the insurance business," and Mr. Timm cited the market cycle specifically as a bigger factor than the economy.

Mr. Cubbin also said activity has a lot to do with the specific companies as well. Some entities will buy regardless of the market, if they want to grow or expand their footprint, he said.

And, sometimes, as was the case for Meadowbrook and ProCentury, the right deal comes along when one company is not even actively pursuing another.

Both Mr. Cubbin and Mr. Timm said their respective companies were not looking to do a merger of that magnitude in the months leading up to the deal.

Mr. Cubbin said that last year, Meadowbrook acquired a workers' compensation general agency, U.S. Specialty Underwriters. The owners of the agency were familiar with ProCentury and actually conducted the initial introductions.

Meadowbrook and ProCentury started by discussing some possible joint ventures--where Meadowbrook could leverage ProCentury's E&S business and ProCentury could leverage Meadowbrook's admitted specialty lines side.

Of the potential deals considered initially, Mr. Cubbin said there was the possibility of "maybe us fronting for them on some of their programs that need admitted paper, or them bringing a surplus lines product to some of our business partners that might complement one of our other programs."

Once the teams got together, Mr. Cubbin said, "We saw a tremendous cultural fit."

He added, "Unlike a lot of so-called mergers where there is a lot of redundancy, our two organizations really have very little overlap except at the public company level. So in terms of the underwriting team and claims and administrative, all of that is remaining fully intact under Chris' management."

Mr. Cubbin added that with most mergers, there are overlapping branch structures, where, for example, branch managers for each company operate in the same location, and decisions have to be made regarding which one to keep. "We're fortunate we have none of those issues to deal with," he said.

There is even very little overlap with respect to the companies' insurance partners, Mr. Timm said. He noted that out of the hundreds of agents that the companies deal with, they shared only one common agent.

Mr. Cubbin said that the deal, announced in February and closed in July, took some time to finalize, but he noted that there was not a sense of urgency on either side since neither company was actively pursuing such a deal.

Going forward, he said the companies will look to broaden their distribution systems, with Meadowbrook leveraging ProCentury's surplus lines expertise, and ProCentury leveraging Meadowbrook's admitted market expertise.

Mr. Timm added that, administratively, the deal helps out both companies as well. He said it is "difficult to be a small publicly held company with all of the additional reporting you have to do." The merger, he said, became "obviously the right thing to do."

The combined company will probably not be too active with respect to M&A for the next six months, Mr. Cubbin said. After that, if a strategic acquisition becomes available, he noted, the company would look into it if there was a fit geographically or a fit with a particular product.

"Opportunistically, we would definitely want to be in the marketplace," he said.