A consulting firm predicts that mergers and acquisitions in the insurance industry are likely to rise by late this year.

With many insurers and financial institutions facing potential capital losses, some will be seeking to divest non-core insurance businesses at attractive prices, enabling strategic buyers to expand into new markets through acquisitions, according to the “2009 Insurance M&A Outlook: Opportunity in an Uncertain Environment,” released by Deloitte Consulting L.L.P, New York.

Both the life and P&C segments of the industry have suffered investment write-downs, but the life sector has been hit the hardest, Deloitte notes.

“The volatility in the financial markets caused more stress in the system, particularly for those life insurance companies with guarantees on their variable annuities,” said Rebecca Amoroso, head of Deloitte’s U.S. insurance practice. “As a result, many life and P&C firms are experiencing significant losses of capital as well as downturns to their ratings. In this environment, raising capital, divesting non-performing or capital-consuming businesses or seeking protection from better capitalized firms emerges as a priority.”

Although there are currently more companies seeking to divest than there are to acquire, a number of potential foreign buyers might be interested in entering the picture, Deloitte believes. Specifically, some Chinese and Japanese companies with strong foreign currency positions, and Bermuda and European insurers that managed to avoid major investment losses, may be strong candidates to make acquisitions, according to Dave Simmons, Deloitte’s insurance mergers and acquisition leader.

“Sovereign wealth funds may also seek to invest in insurance companies as Middle Eastern and Asian governments strive to increase the sophistication of their financial sectors by gaining access to needed resources and skills,” Simmons said. “As financial and credit markets stabilize, we expect strategic buyers to re-enter the market, take advantage of the supply-demand imbalance and a new wave of consolidation to occur.”