While deal value of 2011 insurance M&A transactions in the United States increased 43 percent to $12.9 billion from $9 billion in 2010, insurers are still plagued with low valuations, according to a new study.

PwC’s “Balancing Uncertainty and Opportunity: 2012 US Financial Services Insights” study reports that insurance M&A activity was relatively flat in 2011 with 310 announced deals compared to 304 in 2010.

“There haven’t been many deals or as many sellers due to the low valuation of insurance companies in 2011. Insurers have been trading at less than their book value,” PwC Transaction Services Partner Sam Yildirim told Insurance Networking News. “But we expect overall values to improve in 2012.”

In contrast, a Conning Research & Consulting study found that U.S. insurance M&A transactions increased by 36 Percent in 2011 with deal values increasing by 18 percent.

“We focused on majority acquisitions. We didn’t include minority deals in our analysis,” said PwC’s Yildirim.

PwC’s study found that market volatility kept many deals from being completed in the second half of last year and could also harm deal making in 2012.

“Many deals died last year because of the volatility in the equity and bond markets. When interest rates are low, life insurance suffers because of variable annuity books, which impacts the profitability of the insurance company overall,” Yildirim said. “For property and casualty companies, the majority of their investments are in bonds and treasuries, which are also susceptible to market volatility.”

While Guy Carpenter’s “Property & Casualty M&A Outlook for 2012” counted stormy weather as a force for insurers to merge or be acquired, PwC reported that catastrophic weather losses could result in stable or increased prices.

“There have been small losses accumulating the past two years, but they haven’t reached the reinsurance level,” said Yildirim. “More catastrophes equals increased pricing, which leads to better profitability. Better profitability leads to valuation, which makes a more attractive company for acquisition.”

Overall, insurers are recovering from the 2008 financial crisis more quickly than banks because the collapse was credit related, according to PWC’s study.

“Insurance companies are recovering quicker because they had no exposure to bad mortgages,” said Yildirim. “The impact on insurance companies related to variable annuities and books of businesses subject to investment write downs, whereas banks had a lot of exposure to bad mortgages and credit losses.”

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