Key Takeaways
- • Private investors announced deals to acquire or reinsure more than $200 billion of US life and annuity liabilities in 2021, and now own over $900 billion of life and annuity assets across Western Europe and North America, according to McKinsey & Company.
- • Assuming pending deals close, private investors will own 12 percent of US life and annuity assets, totaling $620 billion, and more than a third of US net written premiums for indexed annuities.
- • All five of the largest private equity firms by assets hold life insurance positions representing 15 to 50 percent of their total assets under management, and 15 alternative asset managers have entered or signaled intent to enter the market.
- • PE-backed insurers generated 62 basis points higher investment yield than the industry average, and executing the value-creation playbook can produce internal rates of return of 10 to 14 percent.
- • Insurers are selling legacy books to improve return on equity and free capital, while the capital-light fee model and growing pressure on traditional spreads continue to shape deal flow.
Summary
McKinsey & Company examines why private equity firms view life insurance and annuities as an attractive form of permanent capital, meaning investment vehicles that do not have to be returned to investors on a fixed timetable. The firm notes that permanent capital reduces fundraising effort and gives managers flexibility to invest during periods such as crises when other capital becomes scarce. Private investors announced more than $200 billion of US life and annuity liability acquisitions or reinsurance deals in 2021. Assuming pending transactions close, private investors will hold 12 percent of US life and annuity assets, or $620 billion.
The core appeal is the spread between asset returns and the cost of servicing liabilities. General partners typically establish a controlled insurer through an equity stake, sometimes alongside sovereign-wealth funds, and then acquire or reinsure books from other insurers. McKinsey cites one analysis finding that US PE-backed insurers achieved 62 basis points higher investment yield than the industry average. Within three years of acquisition, 80 percent of these insurers had increased allocations to asset-backed securities, primarily collateralized loan obligations, and over half their investments were in private loans, compared with 37 percent for the industry. Insurers' typical asset-to-equity ratio of roughly ten times amplifies the effect of investment performance. A second benefit is the rapid build-out of alternative credit capabilities, with insurance balance sheets providing long-term assets and a source of fee-related earnings that McKinsey describes as more stable than carried interest.
Sellers are also motivated. Many insurers are shifting to capital-light, fee-based models, and McKinsey notes that insurers with higher fee income typically trade at nine to 12 times earnings, compared with five to eight times for capital-intensive peers. McKinsey cites a US carrier that divested its closed block of variable annuities, after which its total shareholder return outperformed the life index by ten percentage points over three years and its price-to-book ratio rose from 1.2 to 1.6 times while the broader industry fell from 1.3 to 1.0 times. Pressure on traditional business continues, as guarantee rates in some markets remain as high as 150 to 400 basis points while bond yields have fallen 150 to 300 basis points since 2010–11.
For new entrants, McKinsey advises that firms first define whether their insurance strategy is opportunistic or a platform for permanent capital, as this choice shapes IT, talent, geography and product decisions. Platform strategies require proprietary deal access, value-creation capability and strong risk management. The most common entry path is acquiring or reinsuring a closed block, though some general partners are exploring organic growth or smaller transactions as competition intensifies.
The core appeal is the spread between asset returns and the cost of servicing liabilities. General partners typically establish a controlled insurer through an equity stake, sometimes alongside sovereign-wealth funds, and then acquire or reinsure books from other insurers. McKinsey cites one analysis finding that US PE-backed insurers achieved 62 basis points higher investment yield than the industry average. Within three years of acquisition, 80 percent of these insurers had increased allocations to asset-backed securities, primarily collateralized loan obligations, and over half their investments were in private loans, compared with 37 percent for the industry. Insurers' typical asset-to-equity ratio of roughly ten times amplifies the effect of investment performance. A second benefit is the rapid build-out of alternative credit capabilities, with insurance balance sheets providing long-term assets and a source of fee-related earnings that McKinsey describes as more stable than carried interest.
Sellers are also motivated. Many insurers are shifting to capital-light, fee-based models, and McKinsey notes that insurers with higher fee income typically trade at nine to 12 times earnings, compared with five to eight times for capital-intensive peers. McKinsey cites a US carrier that divested its closed block of variable annuities, after which its total shareholder return outperformed the life index by ten percentage points over three years and its price-to-book ratio rose from 1.2 to 1.6 times while the broader industry fell from 1.3 to 1.0 times. Pressure on traditional business continues, as guarantee rates in some markets remain as high as 150 to 400 basis points while bond yields have fallen 150 to 300 basis points since 2010–11.
For new entrants, McKinsey advises that firms first define whether their insurance strategy is opportunistic or a platform for permanent capital, as this choice shapes IT, talent, geography and product decisions. Platform strategies require proprietary deal access, value-creation capability and strong risk management. The most common entry path is acquiring or reinsuring a closed block, though some general partners are exploring organic growth or smaller transactions as competition intensifies.
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