The insurance trends private-equity investors should understand in 2021

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As the contours of a postpandemic economy begin to take shape, the implications for private-equity (PE) investors in the insurance sector are also coming into focus. When we last published our perspective on this space, in November 2020, insurance-industry M&A activity was on the rise, insurtech IPOs and special-purpose acquisition companies (SPACs) were taking off, and uncertainty around the timing of COVID-19 vaccines and the “next normal” loomed large. Today, many players in US and European markets are applying insights from their 2020 performance to emerge stronger amid increased consolidation, digitization, and specialization, as well as persistently low interest rates.

These trends also light the way for PE investors, who continue to look for ways to deploy large amounts of capital—leading to what some in the industry see as outsize valuations, especially in public markets. While PE’s total insurance investment was lower in 2020 than in 2019, it remained above 2017 levels, primarily driven by distribution and balance-sheet transactions.1 Insurance accounts for more than half of all PE deals in financial services. This is partially driven by an increased appetite for balance-sheet investments, which investors view as a significant source of permanent capital, as well as by continued opportunities for value creation in an industry that has historically been slower to adopt new business models. In this article, we offer an update on the industry’s outlook and highlight several areas for investors to consider as they search for value in insurance services, distribution, technology, and balance-sheet plays.

Insurance investment priorities in 2021

The uncertainty of 2020 caused industry-wide disruption. The SNL US Life Insurance Index closed the year more than 20 percent below the S&P 500 Index, and property and casualty (P&C) insurers, while slightly higher on a year-over-year basis, also closed significantly below the S&P 500. But the first half of 2021 showed notable improvement (Exhibit 1). Insurance stocks recovered, with life insurers and software providers leading the way. And while pre-IPO and pre-SPAC insurtech valuations remained high, publicly traded insurtech companies were a notable outlier in the first half of 2021, as investors reevaluated their appetite in this space because of increased concerns about long-term profitability.

In the first half of 2021, total shareholder returns for US insurance businesses trended upward.

Several tailwinds—consolidation, digitization, and specialization—will play a key role in informing investors’ decisions and value-creation priorities in a postpandemic environment. Persistent low interest rates can also create a tailwind for investors when existing balance-sheet asset owners look to offload risks.

Several tailwinds—consolidation, digitization, and specialization—will play a key role in informing investors’ decisions and value-creation priorities in a postpandemic environment.

Consolidation shifts focus to less trodden paths of opportunity and continued need for value creation

Despite vigorous deal making among brokerage and claims services and third-party administrators, these industry segments remain fragmented. In personal P&C, for example, new independent agencies have emerged nearly as quickly as existing ones have merged. While the number of agencies declined an estimated 20 percent from 1996 to 2006 because of agency roll-ups, the decline was less than 5 percent over the following decade.2 Two major factors are propelling agents to open their own independent agencies: the 68 percent increase in M&A activity over the past five years3 has led an increasing number of unsatisfied individual agents in M&A situations to strike out on their own. And in personal lines, insurers have decreased their use of agents who sell their products exclusively in favor of independent agents who sell multiple brands.

This activity has attracted the attention of investors, who have invested heavily in distribution compared with services, technology, and balance-sheet transactions (Exhibit 2). We expect acquisitions to continue as both distribution and services players benefit from scale.4Scale matters … to an extent: Playing the scale game in insurance,” March 2, 2021. Larger distributors can negotiate higher compensation as a percentage of premium than smaller agencies can, and larger services players can provide a wider breadth of offerings to clients, from servicing more lines to covering more steps in the claims value chain. Indeed, small insurers tend to consolidate outsourcing into just a few players that can handle most of their needs, while large insurers tend to stitch together “best-in-breed” claims solutions. Together, these tendencies will continue to influence the growth of claims agencies that develop capabilities across lines, geographies, and elements of the claims value chain.

Distribution has been a core investment across lines since 2016.

Given higher multiples, investors entering the insurance brokerage space are targeting what have been traditionally considered adjacent or riskier asset classes, such as nonstandard auto agencies or MGAs focused on cyber insurance. In 2020, around 70 percent of acquired brokerages had standard P&C lines, according to McKinsey analysis of Capital IQ transaction data. Going forward, investors can look to riskier, specialized niches and models to find platforms for growth. Investors also have to consider the acquisition pipeline and diversification challenges of specialized brokerage targets. Given that niche areas naturally offer fewer opportunities for M&A, operational levers—such as commission optimization, targeted geographic expansion, and cross-selling—are more important to achieving organic growth.

The same principles for targeting adjacent and riskier spaces hold true for claims businesses. One claims-services provider, for example, has made more than a dozen acquisitions to deepen its expertise in one service adjacent to claims services, while also broadening its geographical reach and covered insurance lines to round out its portfolio. This approach has elevated the prominence and value of services providers because large customers appreciate their depth in specific services and small to midsize customers turn to them to consolidate outsourcing.

Accelerated digitization encourages investments

The capital markets are increasingly rewarding intermediaries and insurers that use technology to create value, often by augmenting their internal IT capabilities through third-party vendors. IT or data-and-analytics vendors can support insurers on a specific part of the process or value chain, from underwriting increasingly granular packets of risk (including liabilities previously aggregated with larger segments or seen as unfavorable) to gathering data and adjudicating claims without a human adjuster. Traditional brokers also seek out tech to support their growth and maximize agent time spent on value-added activities. For example, they are increasingly leveraging customer relationship management in conjunction with intelligent lead matching or dashboards and streamlining the digital experience for agents in small commercial lines. In our experience, this can lead to a reduction of up to five hours a week in the work required for submissions, freeing up valuable time for agents.

Adding to the fray are the increasing numbers of digital-native distributors that build their own technology. These distributors use their homegrown tech as a point of differentiation and a faster route to online channels in some lines. Because they often struggle to manage costs—for customer acquisition, for example—digital distributors are also adding products and acquiring balance-sheet capabilities to expand their presence along the value chain. Once a digital-native distributor gains traction with a specific customer segment—business owners who want pay-as-you-go workers’ compensation, for example, or millennial renters—it can offer additional products. However, even the most mature distributors that have gone public have yet to prove this strategy leads to long-term profitability—their loss ratios hover above 100 percent compared with a more typical ratio of approximately 70 percent for established insurers.

Likewise, the increasingly granular segmentation and data usage enabled by technology providers will continue to gain traction in the marketplace. Both digital-native and traditional insurers are becoming more adept at identifying niche customer segments and using data and analytics to serve them well. Instead of attempting to sell homeowner’s insurance to everyone, for instance, distributors and insurers are using data and technology to analyze specific cohorts—such as coastal homes in specific zip codes—to better understand properties, market directly to homeowners, and underwrite risk. This model enables rapid growth from homes that less tech-advanced insurers might charge higher rates, serve at a higher combined ratio, or decline to serve at all.

Specialty insurance opens new doors

Specialty insurance, which covers unique risks or special circumstances, and reinsurance have continued to attract investor interest in the face of ongoing market hardening.

On the carrier side, multiple de novo and scale-up platforms raised a total of more than $8 billion during 2020 to bolster their balance sheets and take advantage of the hardening.5 However, in the past decade, growth of alternative capital has increased supply in the specialty market, making the class of 2020 different from prior classes in several ways:

  • A sole focus on reinsurance has become more difficult for start-ups given a global oversupply of capital; almost all de novo carriers are building new businesses in both primary and reinsurance.
  • With growing availability of technology and data sources, insurers are looking to differentiate beyond capacity to take on insurance risk. Some are deploying capital more efficiently to boost ROE, while others are using digital and analytics to innovate underwriting, even partnering with leading tech companies that are newer to insurance.
  • While London and Bermuda remain the main incubation locations for start-up carriers, competition in the specialty market has gone global; for example, 17 of the top 20 Lloyd’s syndicates now belong to a global insurance group.6 As a result, new and growing insurers are increasingly looking for partners with global reach and expertise beyond capital.

On the distribution side, major mergers increase market consolidation in the long term, but they have also provided an opportunity for smaller brokers to retain key talents and assets during the transition. As a result, the competitive landscape for specialty brokers is becoming more dynamic and fragmented, with a strong tier of up-and-coming brokers likely to pursue aggressive growth in the next few years, particularly in London. Recent major transactions highlighted investors’ continued interest in the distribution space. In addition, the number of managing general agents (MGAs) and the players that support them, such as fronting carriers, continues to grow. Those with scale and sophisticated capabilities in operations and analytics look for opportunities to “go upstream” and attract capital to co-invest in balance-sheet risk-taking—for instance, by setting up their own Lloyd’s syndicate. In the long run, this new model of pairing distributors’ data-and-analytics insights with high-quality alternative capital could disrupt a significant portion of the specialty market focused on lower-premium, higher-volume products.

While investing in specialty carriers and brokers in the hard market has become a proven model for value creation, investors can now also look beyond that for two new types of opportunities. First, data and insights are playing a more important role in underwriting specialty insurance and reinsurance. Investing in data and service vendors focused on complex emerging perils—including cyber, political, renewable, and environmental—could unlock new sources of value. Second, new business models that match capital more efficiently with risks—including exchanges, MGA platforms, and syndicated structures—will continue to gain traction in the market in the long term.

Capture-divestiture moves amid prolonged low interest rates

With recent moves to take insurers private, sophisticated PE investors are buying blocks of policies and assuming those risks—and billions in assets often come with that risk. In the United States in 2020, entities affiliated with general partners (GPs) acquired more than $100 billion in general account liabilities from traditional insurers’ balance sheets.7 If the current low-interest-rate environment persists, growing pressure could make acquisition candidates of another $2 trillion in liabilities, further accelerating growth in GP insurance capital.

As insurers are under pressure to divest assets and liabilities that were underwritten at much higher rates, GPs have both the investment capabilities to manage the assets and the culture and skills to build the operational capabilities to handle the policies.8Maximizing the value of in-force insurance amid enduring low returns,” April 20, 2020. Specifically, investors that combine operating capabilities with skill in managing investments and maximizing returns have a clear value proposition, making management teams more comfortable in taking over their blocks and customers.

Meanwhile, PE investors see significant value in long-term capital with a life cycle beyond that of a typical fund, reducing the fundraising burden on GPs and increasing through-cycle investment flexibility. Purchasing divested blocks also provides income diversification and a predictable, captive stream of fee income. For example, after a long track record in insurance vehicles, one investment management firm reported that nearly half of its assets under management were in insurance, amounting to half of all management fees earned.

How PE investors can make the most of these trends

Structural changes in the US insurance industry—such as heightened risk for directors and officers and ongoing risks related to the pandemic and climate change—will continue into the foreseeable future. Savvy investors playing the long game in insurance can seek pockets of opportunity among these challenges by, for instance, investing in specialty insurers writing small-business cyberrisk for which there is increased need, and partnering with ecosystem players using superior climate data to price risk at a granular level.

Consolidation will continue across sectors, but accessible targets that are both mature and profitable are becoming increasingly sparse. Many available nonpublic entities are either very small or very large, especially in the technology space, and PE investors face increasing competition from other forms of capital. According to McKinsey analysis of Dealroom data, planned or completed insurtech IPOs raised nearly $2 billion in public capital in 2020 and the first quarter of 2021, exceeding prior years’ activity.9Insurtechs are increasingly ripe for insurer investments and partnerships,” blog entry by Shitij Gupta, Varun John Jacob, and Shalija Raheja, July 16, 2021. SPAC deal momentum also increased the competition, with several multibillion-dollar announcements since the third quarter of 2020. Strategic investors (namely, insurance carriers and distribution players) are closing similarly sized deals in 2021, including the sale of annuity units to mutual insurers or other offshore insurers that are not subject to the disclosure requirements facing US publicly traded entities, as well as the purchase of multiple independent distribution networks and platforms. PE investors will need to become more creative in sourcing deals—for example, by creating earlier-stage and growth-equity funds, co-investing with venture capitalists or insurers, taking public companies private, or aggregating smaller targets to achieve scale beyond classic broker and third-party administrator roll-ups.

Finally, implementing operational improvements continues to increase in importance relative to capturing structural differences in valuation multiples. While consolidation opportunities remain, in a competitive market a business-as-usual approach is increasingly insufficient to acquire attractive targets and achieve multiples arbitrage. Across sectors, investors need a differentiated value-creation thesis to succeed—for example, by vertically integrating, automating claims processes and services, improving agent productivity, and monetizing data-and-analytics use cases across the value chain.

While much lies ahead on the road to postpandemic normalization, some of last year’s uncertainty has abated, and opportunities abound for the prepared investor. Those who take bold, targeted action in both M&A and value creation within their portfolio companies will lead the way as the industry marches through the Roaring 2020s.

About the authors

Ramnath Balasubramanian is a senior partner in McKinsey’s New York office; Grier Tumas Dienstag and Katka Smolarova are associate partners in the Boston office, where Ruxandra Tentis is a partner.

The authors wish to thank Rajiv Dattani, Benjamin Niedner, Andrew Reich, Matthew Scally, and Josue Ulate Chinchilla, as well as the McKinsey Global Insurance Pools team, for their contributions to this article.

Creating value in US insurance investing, November 2020

Despite market complexity, many opportunities exist for private equity players to create value in insurance. We studied the US industry and offer a set of investment recommendations to guide PE firms’ decisions.

By Ramnath Balasubramanian, Matthew Scally, Ruxandra Tentis, and Grier Tumas Dienstag

In recent years, private equity (PE) firms in the insurance industry have realized impressive returns. They have profited from multiple arbitrage, particularly in the heavily fragmented insurance brokerage space. PE-backed providers of distribution technology—such as performance-marketing and agency-management players—have recorded fast growth while maintaining strong cash flows. Investors have also created value in insurance services by building dominant positions in the relatively mature claims-management space and by consolidating human resource information systems (HRIS) and benefits-administration services on the same platform.

PE firms are also completing many more insurance deals, which now account for almost half of total financial services’ PE deal volume (by number of transactions), up from one-third in 2013.1 From 2016 to 2019, the PE-backed brokerage deals completed in the United States accounted for roughly three-quarters of the total insurance deal volume (in terms of the number of transactions). Given record levels of available capital and successful exits, PE activity and competition for insurance assets has intensified. PE investors also must compete with conglomerates and insurers themselves that are investing more money, more often. As a result, multiples are high and holding.

Further complicating matters, trends and macroeconomic forces, most notably the COVID-19 pandemic, are reshaping the value-creation levers of the past. To varying degrees, the pandemic is causing ongoing disruption. It has adversely influenced the top line for many product segments and will prolong the persistent low-interest-rate environment, which continues to squeeze insurers’ profitability. Drastic improvements in productivity are likely necessary to maintain profitability in this low-interest-rate (and often lower-premium) environment.2 And amid an economic downturn in which pure multiple arbitrage may not be possible, operational value creation becomes even more important. Moreover, there is added opportunity for private capital to take undervalued public companies private.

To shed light on potential investment opportunities in insurance, we took a comprehensive look at the value-creation levers in the industry. To facilitate our analysis, we classified insurance-related companies as distribution players, service players, or technology providers. In addition to investing in these insurance ecosystem providers, many leading PE firms have shifted to employing permanent capital from insurance balance sheets to drive growth. Here, we articulate potential investment recommendations for the three ecosystem segments to guide PE investors as they navigate this complex and dynamic industry in the years to come. In addition, we articulate the rationale for investing in insurance balance sheets as permanent sources of capital.


Services providers and distribution companies outside of personal auto and homeowners are historically the most popular and profitable for PE deals in insurance, achieving more than 15 percent EBITDA3 margins (exhibit).

The COVID-19 pandemic has changed the distribution landscape, though long-term effects remain uncertain. New-business premiums for North American life and annuities dropped by about 10 percent in May 2020 but had more than recovered by July. While new business in most commercial property and casualty (P&C) segments has declined, the market continues to harden, or increasing rates will have positive effects on revenue.

Personal lines are expected to be less affected by the economic fallout of the pandemic, but new auto policies will likely decline as GDP declines.4Scale matters … to an extent: Playing the scale game in insurance,” March 2, 2021.

Previous recessions have shown that the insurance brokerage industry is not immune to declining economic activity. Historically, however, the industry has proven resilient, and institutions more adaptable to the new realities of working—such as businesses with digitally focused and enabled sales forces and infrastructure to withstand exacerbated cyber exposures—will outperform others. These institutions may also have the opportunity to acquire distressed sellers and hire strong producers.

Pursue organic growth and productivity in middle-market and employee-benefits brokerage

Investors will continue to find opportunities to profit from M&A roll-ups and multiple arbitrage in the highly fragmented middle-market and employee-benefits (EB) brokerage space. A long tail of targets is available, including more than 30,000 middle-market and 8,000 EB brokerages. However, some of these brokerages that are small businesses themselves rely heavily on paper or face-to-face interactions. Also, brokerages that primarily serve small enterprises may struggle to survive in the current environment, and valuations are likely to come down as a result. Additionally, small enterprises (the most common customers for middle-market brokerages) are most susceptible to prolonged economic challenges. Therefore, PE firms will need to look for new sources of value, such as organic growth and productivity—for example, optimizing insurer and wholesale pricing strategies, digitizing, and using analytics at scale—to drive growth in the future.

Invest in the alternative distribution channels of life-and-annuities managing general agents and insurance marketing organizations

PE investors are increasingly looking outside of P&C and EB retail brokerage for opportunities. The still-fragmented space of life-and-annuities managing general agents (MGAs) and insurance marketing organizations (IMOs) has recently attracted investor attention. A handful of PE firms have acquired IMOs, furthering consolidation in the space. One leading IMO has acquired more than 20 companies since 2018. This consolidation occurred despite the expected decrease in overall life and annuities sales, as lower face-amount policies that do not require a medical underwriting exam are more easily sold via phone or digital platforms and may prove resilient. In fact, amid the COVID-19 pandemic, traffic to online life insurance sites has increased, suggesting a near-term, growing interest in life insurance products.

Deepen penetration with marketing players, digital brokers, and aggregators

In personal P&C and small commercial lines, many technology companies are vying for a share of insurers’ digital marketing spending and commissions. Prior to the COVID-19 pandemic, this spending was growing, and that growth continues as face-to-face sales become nearly impossible. Because analytics now make it easier for insurers to assess ROI, they are increasingly comfortable outsourcing to digital intermediaries the work of generating leads, recommending products to clients, and offering them advice. PE firms have historically invested in performance-marketing players to expand their digital marketing capabilities, while other intermediaries have attracted investments from incumbents.


Many insurers have seen their valuations reduced in recent months, and there is ongoing uncertainty about the environment. High expense ratios are likely to become more prevalent, and many insurers are looking to reduce overall spending, potentially by outsourcing some activities to third-party service providers.

Yet service providers also face a potential challenge: the COVID-19 pandemic has lengthened the time it takes for policy administration and claims processing. Offshored services, in particular, initially faced significant disruptions. For example, prior to the start of the pandemic, workers were required to check cell phones at the office door to protect information, a policy that needed to be completely rethought in new work-from-home arrangements. While the short-term disruptions have been resolved, they have prompted insurers to reconsider business resilience plans and increase efforts to automate. This shift will likely affect demand for claims services, as frequency of claims initially decreased in some lines such as auto (as fewer individuals drive) and workers’ comp (as fewer employees are on the payroll). The number of claims has started to increase, however, as many places reopen. In addition, demand for claims services in disability and the need for fraud mitigation across lines have increased.

As small enterprises falter and employers of all sizes lay off employees, benefits administration and HRIS players will also face significant pressure on profits. Given that the majority of revenue for benefits administration and HRIS players comes from a base fee plus “per employee per month” (PEPM) pricing, any players overindexed on particularly hard-hit industries (such as travel and leisure) will face revenue compression, and players focused on small and medium-size enterprises will be further affected by business closures that lead to lost base fees. Furthermore, revenue sharing, another source of income for benefits administration and HRIS players, will also likely decline as employers and employees drop insurance policies.

Strengthen claims-management-dominant positions through automation and analytics

In the past, PE firms have generated value in claims through acquisition—they realized scale efficiencies and expanded to additional products and parts of the value chain. This activity, however, has created dominant players that have left very few attractive acquisition targets in the market. Going forward, PE-backed players can combine continued acquisition with efficiency-focused and value-added services to insurers in the downturn.

Prioritize end-to-end employee engagement platforms in benefits administration and HRIS

PE firms have consistently invested in the benefits administration and HRIS space, as well as in professional employer organizations (PEOs). Firms have prioritized investments with “sticky” revenue, direct employee connectivity, payroll outsourcing services, opportunities for M&A roll-up, and scale benefits. We expect an overall trend toward consolidation to continue with more providers offering both HRIS and benefits-administration services on the same platform. Such players use work-site selling and decision-support tools to drive benefits adoption and become more active partners for brokers and employers.

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Technology providers are benefiting from a booming ecosystem of start-ups that help insurers automate their businesses. Influenced by the current environment, insurers are using analytics to increase process efficiencies that reduce costs and to evaluate large sets of data to generate other insights. Robotic process automation and intelligent process automation, combined with cognitive automation and analytics across business lines, drive productivity and accuracy in business processes with near-zero error rates.

Influenced by the current environment, insurers are using analytics to increase process efficiencies that reduce costs and to evaluate large sets of data to generate other insights.

Expand distribution technology into integrated solutions and ancillary offerings

PE firms have backed distribution technology players, including agency management systems (AMS) that have recorded consistent growth and maintained strong cash flows. AMS and other distribution technologies have created value through increases in pricing, penetration, and cross-selling ancillary solutions.

Pursue end-to-end solutions and optimize existing core-process technology

Demand for core-process technology, including policy administration, has grown and become especially prominent in personal and commercial lines P&C and group benefits. Today, to keep pace with product innovation and online and direct capabilities, more insurers are turning to third-party solutions, which allow insurers to modernize their tech stacks and every step of their processes. Such solutions are sticky, on account of ten-year or longer replacement cycles and stable cash flows.

Invest in automation, analytics, and data in claims technology

The claims services and technology market is highly concentrated. PE firms have owned a few large players for more than a decade and may be looking to exit when there is less volatility. Current PE owners have invested in operational efficiencies and pricing optimization. More recently, these providers are looking to evolve into end-to-end claims decision players through automation and analytics.

Insurance balance sheets as a source of permanent capital

The permanent capital residing on insurance companies’ balance sheets has become a key growth driver for many PE firms. Our analysis shows that in 2020, insurance-related capital accounted for 15 to 40 percent of total assets under management of many of the world’s leading PE firms. Insurance capital delivers on several investment objectives. It is long-term capital with a life cycle beyond that of a typical fund, particularly for alternative asset classes such as credit and real estate. It provides a stream of fee-related income, which in turn provides a diversified source of earnings and is seen as a major valuation driver, particularly for publicly listed firms. And it is an attractive investment opportunity on a stand-alone basis, as its comprehensive value-creation approach delivers 10 to 14 percent internal rates of return. As the persistent “lower for longer” rate environment puts even more pressure on insurance balance sheets, and as insurers seek higher returns to meet their commitments and obligations to policyholders and regulators, we are likely to see a further acceleration of growth in permanent capital over the next few years.

Much remains to be done globally to respond to and recover from the COVID-19 pandemic, from supporting victims and families to fully understanding the pandemic’s implications for business and employment. Investors will need to evaluate their portfolios and assess where the greatest risks lie and where they can deploy capital that will help the insurance ecosystem evolve and better serve all of its participants.

As we consider the evolving insurance ecosystem and private investors’ role in it, there are bright spots in PE insurance investing, despite the uncertainty. Opportunities exist with distribution players and service and technology providers. By acting quickly and making bold moves using our eight investment recommendations as a guide, private equity investors can create value in this complex and dynamic industry.

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About the authors

Ramnath Balasubramanian is a senior partner in McKinsey’s New York office, where Matthew Scally is a partner; Ruxandra Tentis is a partner in the Boston office, where Grier Tumas Dienstag is an associate partner.

The authors wish to thank Emma He, Siddharth Sharma, and Katka Smolarova for their contributions to this article.