"Mergers and acquisitions activity in 2016 was marked by a select number of property-casualty insurers playing offense and defense, as the life industry dropped to just a quarter of its 2015 activity," said Steve Webersen, Head of Insurance Research at Conning.

Particular focus on specialty assets

Despite a drop in activity in 2016, the P&C sector led the industry M&A activity with a particular focus on specialty assets. The year was marked by a selected number of insurers playing offense and defense.

"Some of the key themes we analyzed in 2016 property-casualty acquisition activity included continued Japanese pursuit of established and global underwriting platforms, serial acquirers continuing their build-outs, run-off acquisitions, and the continued focus on property-casualty specialty assets," according to Webersen.

Arch, Fairfax, and Liberty Mutual were all on offense in 2016 and led the property-casualty sector in making major acquisitions to expand their specialty capabilities. Arch’s $3.4 billion acquisition of United Guaranty cements its position as the leader in the mortgage insurance industry. Fairfax improved its North American insurance operations with the acquisition of Allied World while capitalizing on AIG’s divestment activities to expand in Latin America and Eastern Europe. Liberty Mutual accelerated its global specialty push through the acquisition of E&S (excess & surplus lines) insurer Ironshore.

AIG executed more than 10 divestment transactions

Conversely, AIG continued its global divestment of insurance and investment assets. All told, AIG executed more than 10 divestment transactions, not including its $10 billion reinsurance transaction with Berkshire Hathaway. Despite returning more than $12 billion to shareholders in the form of share repurchases and dividends, AIG continues to come under pressure from shareholders seeking an improved market position and return story.

Alternatively, The Hartford signaled a shift in its position to the market with the acquisition of E&S insurer Maxum Specialty. While a small transaction on a relative basis, this transaction was the first property-casualty acquisition for the current CEO and follows the company’s more recent divestment strategy.

Outlook for 2017

Conning anticpates that M&A activity will pick up in 2017 across all sectors. The P&C sector will likely continue to be fueled by strong fundamentals: an overabundance of capital, fewer organic opportunities in a soft market and pressure on expense ratios and earnings. Also, optimism regarding the U.S. growth outlook should drive continued focus on North American targets. Foreign capital, particularly from Japanese-owned companies, should be a key driver for larger transactions.

Related: Insurance industry looks for M&A deals in 2017

Personal lines sectors saw limited activity in 2016, but Conning believes we may see activity related to two challenged areas: Florida homeowners, where AOB (assignment of benefits) fraud is of increasing concern for market participants, and auto insurance markets that face pressure from increasing frequency of claims and the increasing threat of disruption from nontraditional players.