Mitsui Sumitomo Insurance Co.'s plan to buy London-based Amlin P.L.C. may make future acquisitions of Lloyd's of London companies more expensive amid a declining pool of potential takeover targets.

Tokyo-based Mitsui Sumitomo said last week that it would pay about £3.5 billion ($5.27 billion) to buy Amlin, which operates the second-largest syndicate at Lloyd's, to create “a world-leading insurance company, with an international business anchored in the Lloyd's market.”

The deal in which the Lloyd's operations would be merged follows several recent mergers and acquisitions that include Fairfax Financial Holdings' February agreement to buy Brit Insurance Holdings N.V. and XL Group P.L.C.'s April deal to purchase Catlin Group Ltd.

The Amlin deal “highlights the M&A potential for the whole Lloyd's sector,” said Sarah Lewandowski, an analyst at Haitong Securities (U.K.) Ltd. in London.

The relatively high price that Mitsui Sumitomo will pay for Amlin means that “no stock can be ruled out on valuation grounds,” she said in a note to investors. “Despite further pressure on ... rates, the Lloyd's sector represents a relatively attractive investment opportunity right now, in our view.”

Intense reinsurance competition — particularly for property catastrophe business, where an abundance of alternative capital has helped push rates down — is one potential driver for an uptick in Lloyd's M&As, said Dennis Sugrue, director and reinsurance sector specialist for the Europe, Middle East and Africa region at Standard & Poor's Corp. in London.

Smaller reinsurers with a concentrated business mix are the most likely candidates for M&A, he said.

While fewer potential acquisition targets remain, some London and Bermuda players are likely to be open to mergers to diversify, he said.

“Lloyd's is a hugely attractive platform” for insurance companies seeking to expand their international footprint, because it offers access to global licenses and highly rated underwriting paper, among other things, said Andrew Holderness, global head of the corporate insurance group at law firm Clyde & Co. L.L.P. in London.

For the past five years or so, there has been a great deal of interest from insurers eager to gain a Lloyd's presence, he said.

Setting up an operation at Lloyd's takes time and overcoming several regulatory hurdles, but buying an existing platform is a quicker route to getting established in the market, he said.

The number of potential takeover targets, however, is getting ever smaller, with just four publicly traded vehicles that have not been involved in M&As and “a handful of private concerns that might be interested in selling,” said Mr. Holderness.

This scarcity of takeover targets may drive up prices, he said.

Potential sellers may use expressions of interest to drive up the bidding, which could prompt buyers to offer a high initial price to avoid competitive bids, he said.

“So, who is next as the feeding frenzy in nonlife continues?,” analyst Eamonn Flanagan, head of the Liverpool, England, office of Shore Capital Group Ltd., asked in an investor note. “At this stage, it would not be wise to rule anyone out in our view.”

Dublin-based Beazley Group P.L.C. “offers considerable diversification benefits to a bidder and terrific exposure to liability lines,” while Hamilton, Bermuda-based Hiscox Ltd. “remains the quality play in Lloyd's, with an excellent retail offering in the United Kingdom, United States and Europe,” he said.

Hamilton-based Lancashire Holdings Ltd. “has superb units inside Lloyd's, outside Lloyd's and within the alternative capital space,” Mr. Flanagan said.

London-based Novae Group P.L.C. “is cheaper and smaller, but doesn't offer the scale or transformational nature of its peers. However, it is now a very tidy, well-managed operation,” he said.

Insurers' need to diversify “to reduce reliance on reinsurance lines of business” where pressure is greatest is one potential M&A driver, Ms. Lewandowski said.

“The Lloyd's sector is particularly attractive in this instance with exposure to, and innovation in, smaller, niche lines of business,” she said. Lloyd's players often have expertise in specialty lines such as kidnap and ransom, fine art, equestrian and cyber coverage.

Beazley's and Hiscox's specialized exposures, for example, “produce attractive returns on equity, which should be attractive to potential acquirers,” she said.

“Given the attractions of the Lloyd's sector, continued pressure in reinsurance pricing and the diversification that the specialist underwriting segments bring, we believe no company can be ruled out as a potential target,” Ms. Lewandowski said.