Library : McKinsey – The insurance trends private-equity investors should understand in 2021
Executive summary :
As the contours of a post-pandemic economy begin to take shape, the implications for private equity (PE) investors in the insurance sector are also coming into focus.
It’s getting better every day
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, digitisation, and specialisation, 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.
Insurance is a big FS PE player
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.
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. 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.
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
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