Michael Faulkner says the high price of entry to the insurance sector and softening makets is deterring private investment

The insurance industry's love affair with private equity looks distinctly rocky at the moment.

While, the past few years have seen billions of pounds of private equity money flood into the sector, recent months have begun to suggest that some private equity firms are now looking to realise their investments and exit the insurance industry.

Private equity group 3i has sold its share in Smart & Cook, while telebroker Kwik-Fit, which is owned by private equity firm PAI Partners, is now back on the market, joining the AA, which has also been put up for sale by owners CVC and Permira.

Meanwhile, well-placed sources say that Saga, the travel and financial services company, which is looking for a sale or public listing, is unlikely to be of interest to private equity buyers. This come despite the fact that groups such as KKR, Candover and Apax tabled bids for the company three years ago.

The issue here is timing. From the point of view of private equity firms now is a good time to sell. Prices in the insurance sector are rocketing, providing a good return on investments made a few years ago.

Conversely, soaring prices mean that now is not the best time for private equity firms to buy into the sector, as making an acceptable return is that much harder – particularly as the softening market begins to take its toll on insurers' and brokers' financial performance.

That is not to say, there has been no interest in the insurance sector from private equity.

Run-off specialist Fortress Investment Group bought Alea for £162m last month. But Alea, which has been going through a painful restructure since it was battered by severe losses from Hurricane Katrina, should be seen as exceptional, and distinguished from others in the sector.

But just as the private equity firms are beginning to look for exits, other money has flooded in to fill private equity's place.

The last year has seen a string of acquisitions by insurance companies, in both the personal and commercial lines arenas – from AXA's trio of major broker acquisitions to Allianz Insurance's move for Home & Legacy last summer.

There has also been money coming in from abroad to give foreign companies an inroad into the UK market.

Australian insurance giant IAG began to build a presence in the UK motor market with the acquisitions of Hastings and Equity, while French broker Verlingue bought Alec Finch Group in a bid to build its UK presence.

Meanwhile, Swedish mutual Agria has acquired Pet Partners as part of its international expansion plans.

And last August, US giant Lockton made a major UK push by acquiring the London-based Alexander Forbes International Risk Services from its South African parent.

European banks are also prowling around the UK insurance sector looking for suitable acquisitions. Payment protection insurance specialist British Insurance is thought to be one of the targets.

Some say this spate of acquisitions by insurers and banks may actually spur other private equity firms to look at the sector. Perhaps the love affair may not end after all. IT