The lingering soft market and the ongoing fallout of the financial crisis have combined to suppress merger and acquisition activity in the insurance industry, new studies find.

One report from New York-based PricewaterhouseCoopers predicts that deal activity in the U.S. insurance sector is likely to remain muted overall as there are fewer distressed sellers in the marketplace. Additionally, some insurers opted to issue new debt or avail themselves of bailout funds in order to rebuild balance sheets, rather than opting for M&A, the report states. The report, “On the Road Again—Transactions in an Opportunistic Market,” notes that deal volume in 2009 fell to $5.9 billion, down from $21.7 billion in 2008.

This decline was also remarked upon in a study released by Hartford, Conn.-based Conning Research, Global Insurance Mergers & Acquisitions in 2009. “In the U.S., the value of insurance industry transactions was the lowest we have reported since 2002,” says Jerry Theodorou, analyst at Conning Research & Consulting. “The property/casualty sector dropped 78% last year, while U.S. life-annuity marked its second year below $1 billion in M&A values, and health insurance also dipped below $1 billion. Insurance services posted the only increase in values year over year, and represented more than half of the total transaction value for the industry.”

The current year will likely portend more of the same, PricewaterhouseCoopers notes, adding that the unknown impact of proposed regulatory reforms may also serve to blunt deals going forward.

One notable exception to this trend is New York-based American International Group, whose divestitures total roughly $35 billion in 2010.  Likewise, other struggling life insurers may look to raise capital through the sale of non-core businesses.