"We are bullish that there will be consolidation in the market," Protective Life Corp. CEO and Chairman John Johns told SNL.

Johns said the slow M&A environment could be attributed to the consistent cash flows of the insurance industry; steady cash flows mitigate losses and help shield companies for longer periods of time. He said in some cases it will take time for businesses to "appreciate" the severity of their situation. Consolidation will occur once those businesses realize they cannot compete with other players for more than a few years, he said.

Additionally, many companies prefer to raise capital, even equity, because it is easier than marketing an operation, Johns said.

Steve Goulart, MetLife Inc. senior vice president of corporate development, said despite the currently inactive M&A market, we could see more transactions in the near future, since consolidation generally tends to be "lumpy" rather than a continuous process.

Johns told SNL he was surprised by the recent capital raises in the industry, but believed that large companies would consider divesting their noncore business or divisions that are not performing as well as the others. Indeed, Goulart noted that selling assets is often more beneficial than raising capital.

Goulart also said that while the current market might seem like a buyer's market due to softness, many potential sellers are not under pressure to sell. Board members of companies have a large amount of flexibility in what they decide to do, he said.

The credit crisis wreaked havoc on the first-quarter investment performance of several large insurers. For the life and health and P&C industries, first-quarter unrealized capital gains less taxes decreased $18.56 billion from the year-ago period, according to SNL Financial's statutory data for the period. Specifically looking at the life insurance industry, the sector generated $5.31 billion in realized and $8.33 billion in unrealized investment losses in the first quarter, compared to $1.03 billion realized and $1.89 billion unrealized investment gains in the year-ago period. SNL's data takes into account approximately 95% of filers.

"You have a market that is non-representative, or even worse, trading at a different air than where it should be," Marc Flaster, principal of fixed-income sales at Sandler O'Neill & Partners, told SNL.

As such, the dislocation in the markets has caused certain insurers to take a different path with their investments. As some remain cautious of another crisis that would devalue several asset types, others see the crisis as an opportunity to buy structured products at a low market price.

For instance, American Equity Investment Life Holding Co., a traditionally conservative investor, has decided to consider riskier products. John Matovina, American Equity's vice chairman, told SNL the company is seeing opportunities in "distrusted," "highest quality" MBS, such as those backed by highly rated Alt-A mortgages. Matovina said many institutions are willing to sell securities at low prices because they need to get them off their books.

Unum Group, a company that was in a de-risking mode from 2003 to 2006 due to lack of capital, is looking to take on more commercial mortgages and high-yield risk, Thomas White, the company's senior vice president of investor relations, told SNL. As far as other investments, White said the company is looking at municipal bonds due to their tax benefits.

Meanwhile, other insurers like Assurant Inc. consider losses related to the credit crunch a warning to not change their approach and continue with conservative investments. Assurant CEO Robert Pollock told a group of investors at a SunTrust Robinson Humphrey event in May that the company shifted its asset allocation after the credit crunch. The company's message to portfolio managers: "Don't take risk."

The credit crunch also prompted a portfolio review at ProAssurance Corp., Frank O'Neil, senior vice president of corporate communications, told SNL. O'Neil said the company conducted an in-depth review to identify any overexposure the company might have to certain areas, as well as where the underlying exposure in the portfolio lay. "Everybody knew that if you had overt exposure it labeled itself subprime, but then if you had an investment in a fund, or if you invested in some vehicle that may in turn have invested in subprime, that's what I think what a lot of people were forced to go back and determine," he said.

Insurers' investment portfolios primarily consist of U.S. treasuries, securities related to public utilities, municipal bonds, and other government-related securities, but mortgage-backed securities play not an insignificant role in their portfolios, particularly since wild swings on MBS have had a contagion effect in the credit markets, thereby affecting other securities.

Several factors have been adding to the existing pressure on securities held by many insurers. For instance, Flaster said that regulation on Fannie Mae's and Freddie Mac's agency eligible paper is driving up the price of MBS. Recent regulatory changes have reduced the GSEs' capital requirements, allowing them to underwrite and purchase jumbo loans of up to $729,750, depending on geographic location, thereby increasing their purchasing power.

Even more dramatic changes have occurred in the Alt-A mortgage market. Flaster said Alt-A mortgages previously traded actively and were "well accepted" in the marketplace, but said that market has "collapsed" as investor appetite has waned.

For instance, previously active Alt-A originator and issuer IndyMac Bancorp Inc. described the dire situation on its blog May 14. The company said that illiquidity in the secondary market began in August 2007, as "buyers for these loans disappeared" and "pricing on them eroded significantly."

More recently, heightened regulatory scrutiny into the banking system has caused further selling pressure on the secondary market, Flaster said. He said that examiners "are swinging machetes" at anything on bank balance sheets that are not GSE-backed paper. And unless banks can explain their reason for holding it, then regulators will deem it temporarily impaired, possibly causing banks to sell the securities, he said.

Flaster did highlight one recent positive development, however. He said former employees of brokerage companies' now-defunct structured product departments are buying these structured products with private capital and deconstructing them, sifting through groups of securities they buy and separating out securities that would find buyers. Such investors also restructure the products or reorder the collateral to create pieces with better securitization and protection.