Private equity investment in the insurance industry is surging as fund managers eye opportunities to consolidate market share and leapfrog competitors with technology.
The value of private equity and venture capital investment in insurance underwriters and brokers is on track for its highest annual total since at least 2021. Investment so far this year totaled $18.62 billion through Sept. 18, which is 52% more than the $12.25 billion total recorded in all of 2023, according to S&P Global Market Intelligence data.
Already active consolidators in various insurance segments, private equity funds are now seeing additional value-creation opportunities in the sector's digital transformation, said David Crofts, director of M&A at West Monroe Partners LLC. There is a growing sense that AI, in particular, could boost profits by streamlining time-consuming tasks.
"So much paperwork is exchanging hands every time an insurance policy is sold and underwritten and serviced from a claim perspective that just being able to automate that would be huge for the industry," Crofts said.
Digital transformation
Crofts views the use of AI and machine learning to speed document processing as the "holy grail" in the insurance space.
While no widely tested and adopted solution currently exists, there is "lots and lots of activity" focused on developing a tool, Crofts said. "The big opportunities are really much more on the commercial side, or larger accounts. Employee benefits, there's probably also some significant opportunities there to streamline that process."
The potential for digital transformation to propel growth in the insurance sector is expected to be the primary force behind insurance dealmaking over the next 12-24 months, according to the opinions of 250 private equity and insurance executives in the US and Europe surveyed by West Monroe in the second quarter. Half of the survey respondents selected digital transformation as a "main driver" of insurance sector M&A, and nearly one-fifth ranked it as the most important spur to dealmaking.
Data analytics and cybersecurity were also top tech priorities for respondents.
"Key investors want to ensure they've got a top-notch cybersecurity program in place as sort of the step one in any value-creation strategy. And then step two is when you start to do some of the AI or data projects," Crofts said.
Broker interest
Private equity's new focus on digital transformation comes as market consolidation — another private equity-driven trend — cools. While 2023 figures showed an outsize interest in insurance brokers, private equity-backed dealmaking in 2024 is lagging, with 99 transactions announced as of Sept. 18. This is slightly more than half the 181 broker M&A deals seen in all of 2023.
Brokers, with their lack of relative actuarial risk, are an appealing target for consolidation, according to Marcos Alvarez, global head of insurance at credit rating business DBRS Morningstar. Interest in the intermediaries skyrocketed in the last decade as the level of premiums has grown globally — buoyed by inflation and the increased frequency of natural disasters due to climate change — and those higher premiums drive fee revenue, Alvarez said.
This stable flow of cash is driving insurance brokerage valuations higher, Houlihan Lokey noted in its second-quarter report on the brokerage market. Higher valuations, in turn, are sparking deal activity, factoring into the industry's largest private equity-backed deal announced this year: Truist Financial Corp.'s $12.6 billion sale of Truist Insurance Holdings LLC, the fifth-largest insurance brokerage in the US, to Stone Point Capital LLC, Clayton Dubilier & Rice LLC and Mubadala Investment Co. PJSC.
Interest rate impact
Interest rate uncertainty has impacted the insurance brokerage deal market, according to a midyear report on US deals by PwC, as the relatively high cost of borrowing has changed the return profile of brokerage targets.
While this has slowed deal activity as buyers wait on the direction of the interest rate environment to change, the report stated that higher rates generally benefit carriers who "rely on spread income generated on investment portfolios to increase overall profitability," a claim echoed by Alvarez.
"I think insurance is a business, particularly life insurance, that is benefiting from this sustained higher level of interest rates," Alvarez said. "This made some valuations attractive, because [insurers are] now better capitalized and they can make more profits on their investment book, which has attracted some players to the industry."