The insurance merger and acquisition engine may be firing up.

Insurers and financial institutions appear ready to fund their potential capital shortfalls by divesting non-core insurance businesses at attractive valuations, setting the stage for a buyers’ market, according to a new report from Deloitte.

“There is currently an imbalance in supply and demand, with more companies seeking to divest than companies seeking to acquire,” said Rebecca Amoroso, head of Deloitte’s U.S. insurance practice, in a statement. “In this situation, the question becomes who will buy and how will they finance an acquisition given the decline in corporate stock’s allure as an acquisition currency and tight credit market conditions.”

Property-casualty firms, reflecting their weaker balance sheets and lower reserve levels, appear to be trading at discounts to book value and, in some cases, at all-time lows, according to Deloitte. Life companies are not faring better, as sizeable investment losses and ratings downgrades have besieged them.

Deloitte speculates that as a result of these financial setbacks, a good number of P&C and life companies may consider merger options. Some companies may seek to divest in order to raise capital; other companies may seek to acquire in order to diversify risks, according to this report.

Earlier this year, the primary challenge for some life insurance and property-casualty insurance companies shifted from finding ways to spend excess capital to raising new capital, according to Amoroso.

“While both the life and P-C segments have experienced investment write-downs, the life segment has been hit the hardest,” Amoroso said, noting that life insurers with guarantees on their variable annuities are experiencing “more stress” from the volatility in the financial markets.

That stress is causing many life and property-casualty firms to see “significant losses of capital as well as downturns to their ratings,” she said.

“In this environment, raising capital, divesting non-performing or capital-consuming businesses or seeking protection from better capitalized firms emerges as a priority,” Amoroso said.

Chinese and Japanese companies, because of their strong foreign currency positions, could buy insurance businesses, while insurers in Bermuda and European, who have largely avoided major investment losses, may be the strongest candidates to make acquisitions, said Dave Simmons, Deloitte’s insurance mergers and acquisition leader.