Both spoke at the New York Society of Securities Analysts insurance conference in New York last month, going on to predict that the most likely deals will involve large insurers swallowing smaller ones.

“The energy that goes into integrating some of these businesses is enormous, particularly when you're talking about putting two big companies together,” said Mr. Watson, an experienced strategic buyer whose company has made roughly a dozen deals of varying sizes over the last 10 years.

“I don't know that you're going to get that much earnings benefit,” he added. “One-and-one isn't going to equal much less than two,” he said, explaining that the only place to generate increased near-term earnings is through cost savings.

“That is a reason you're likely to see larger companies buying much smaller companies that are more easily digestible,” he concluded.

Mr. Way went further. “Big companies can buy small companies and fiddle with the numbers more,” he said.

“There were several large acquisitions in the 1990s, where companies were paying two-times book and swearing [deals] were accretive when obviously they weren't,” he recalled. “If you're a multibillion-dollar company and you're buying a several-hundred-million-dollar company, I guess it can be whatever you say it is. It's hard to track it anyway.”

With smaller deals, “you can afford to pay a little extra or make a few mistakes,” Mr. Way said. “You've got to be aggressive in your forward-looking thinking [and] it's easier to do that with a smaller company than it is with a bigger acquisition.”

Providing examples of forward-looking deals, Mr. Watson said past deals at Argo were done to help the insurer “reposition itself into different markets and expand its presence in those markets.”

Argo, which in the late 1990s was a West Coast workers' compensation insurer then known as Argonaut, shed that focus when it acquired Colony Insurance, a U.S. E&S insurer in 2001.

The company later moved into the Bermuda reinsurance market with a 2007 deal to acquire PXRE, and into the London market by acquiring Heritage Underwriting Agency at Lloyd's in 2008.

Other deals for specialty businesses in the United States, including several MGAs, allowed the company to build niches, such as surety and professional liability.

“A lot of that acquisition activity occurred at the end of the last soft market,” Mr. Watson said. “It is a good time.”

Still, buyers need to have “intestinal fortitude. You have to make sure [a deal] supports your strategic goals,” he said. “I've watched competitors buy assets because they're cheap, and then they wake up and wonder what they've got their hands around and what do they do with it all.”

During a question-and-answer session, an analyst, referring to Mr. Way's remarks about the possibility of hostile-deal tactics being used in situations where managements and boards are slow to sell, asked whether activist shareholders at target companies might catalyze M&A activity.

In the insurance industry, “it's too easy to get around activist investors,” Mr. Way responded, suggesting that regulators get in the way of aggressive takeovers.

“The company only has to get their state to say no, or to say maybe, and it's all over,” he added. “You don't have to have written in your bylaws how to get rid of an aggressive purchaser. You just go to the state and get it taken care of.”

(Editor's Note: Not all the publicly traded E&S insurance organizations mentioned in this edition of NU currently trade below book. W.R. Berkley, RLI and HCC all trade at or above book value, while Argo and American Safety are trading at a about 50 percent of book values.)