Despite challenging economic conditions, institutional investors are allocating a growing portion of their private equity (PE) to the insurance sector, which remains attractive despite difficult economic conditions, reveals an international analysis by research firm McKinsey & Company titled Insurance Investors: Priorities and Opportunities. 

McKinsey has identified trends that support the growth of PE in insurance, despite the hostile environment created by inflation, high capital costs, and the upward spiral of interest rates. The firm also notes the escalation in the valuation of certain assets. 

When it announced on October 25th that it was keeping its key rate at 5%, the Bank of Canada emphasized that it is continuing its quantitative tightening. "The global economy is slowing and growth is forecast to moderate further as past increases in policy rates and the recent surge in global bond yields weigh on demand," it said. 

Central banks remain vigilant about persistent underlying inflation, the Bank of Canada added. "Oil prices are higher than was assumed in July, and the war in Israel and Gaza is a new source of geopolitical uncertainty," it noted. 

A decline begins 

According to McKinsey's analysis, PE activities began to decline last year. "Following a frenzied 2021, the PE market saw a 15 percent decrease in deal count in 2022," write the authors of the article based on their analysis. They say that the insurance industry in North America also felt this slowdown, with a similar reduction in transactions between 2021 and 2022. 

Nevertheless, McKinsey observes that four trends support PE in the insurance sector: 

  • Aggregation and diversification of distribution. 
  • Focus on investments in insurtech. 
  • Life insurance and annuities seen as a source of permanent capital. 
  • Alternative capital solutions. 

These trends will shape the role of PE in the insurance sector in the coming months and years, according to the research firm. "PE practitioners must navigate this terrain with a blend of prudence, adaptability, and innovation to achieve success in the landscape of insurance-focused investments," it warns. 

75% targeted for consolidation 

McKinsey's analysis also reveals that the insurance sector "is an increasingly significant portion of PE financial-services deals, accounting for approximately 60 percent of all PE deal volume among financial institutions groups (by number of transactions) in recent years." 

The analysis shows that aggregation and diversification of distribution continue to be one of the main drivers of PE activity in the insurance sector: From 2020 to 2022, approximately three-quarters of insurance PE deal volume was driven by insurance distributors. "Distribution aggregation and diversification continues to represent one of the biggest drivers of PE activity within insurance," McKinsey reports. 

McKinsey believes that distributors, such as brokers and managing general agents (MGAs), remain popular PE investments because of their minimal capital intensity, high free-cash-flow conversion, recurring revenue models, and historical resilience across economic cycles. Several acquisitions have also focused on claims, underwriting, or distribution support insurtechs for established carriers and brokers. 

A recent example of a transaction is the Quebec-based PE fund Novacap partnering with Lewis & Ellis, an actuarial consulting firm based in Dallas, USA. The firm stated that the capital would support its strategic growth and innovation initiatives. 

"Lewis & Ellis offers a compelling platform within the actuarial consulting and services sector. We have invested in a promising organization with a full suite of services, ambitious growth plans, thought leadership, an exceptionally talented team, and unrivalled client tenure," said Marcel Larochelle, Managing Partner at Novacap and actuary.