The report adds, “Unfortunately, many of the challenges stunting M&A activity during 2011 are likely to remain unresolved in the coming year….”

For P&C deals in particular, Deloitte says activity suffered from low valuations, reserve adequacy and concerns about the prolonged soft market.

Regarding the soft-market pricing and low return on equity, Deloitte says these factors make the insurance industry unattractive to new entrants, existing insurers and many investors. Potential acquirers are thus returning capital to investors through dividends and buybacks rather than devoting it to M&A. And Deloitte says many insurance companies are following suit and engaging in share buybacks and increasing shareholder dividends rather than reinvesting excess capital in their core insurance business.

On the low valuations in P&C, Deloitte says the discount to book value is attractive for acquirers, but not for sellers who perceive their companies as having more worth than what is being indicated by the market.

Another factor depressing M&A activity, at least in the U.S., is that the nation has become a slow premium-growth market. Foreign insurers have less interest in the U.S. insurance market, Deloitte says, and they are instead looking to emerging economies in Asia and Latin America for M&A activity.

While P&C activity was slow in 2011 and is expected to remain so in 2012, agent and broker activity was the most active insurance segment for deals in 2011. “The number of deals in 2011 was up slightly compared to 2010, as was the average deal size, as buyers competed for the larger targets,” Deloitte says.

The firm expects the pace to continue in 2012 “as this industry segment proceeds down its path of consolidation.