Tag: McKinsey

Why private equity sees life and annuities as an enticing form of permanent capital

Mary Pat Campbell

Link: https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/why-private-equity-sees-life-and-annuities-as-an-enticing-form-of-permanent-capital

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Once they’ve acquired a book, firms can turn their attention to driving value. Building on our guidelines for closed-book value creation, owners have six levers that can collectively improve ROE by up to four to seven percentage points (exhibit):

  • Investment performance: optimization of the SAA and delivery of alpha within the SAA
  • Capital efficiency: optimization of balance-sheet exposures—for example, active management of duration gaps
  • Operations/IT improvement: reduction of operational costs through simplification and modernization
  • Technical excellence: improvement of profitability through price adjustments, such as reduced surplus sharing
  • Commercial uplift: cross-selling and upselling higher-margin products
  • Franchise growth: acquiring new blocks or new distribution channels

Most PE firms view the first lever, investment performance, as the main way to create value for the insurer, as well as for themselves. This lever will grow in importance if yields and spreads continue to decline. Leading firms typically have deep skills in core investment-management areas, such as strategic asset allocation, asset/liability management, risk management, and reporting, as well as access to leading investment teams that have delivered alpha.

Capital efficiency is also well-trod ground, and for private insurers it presents a greater opportunity given their different treatment under generally accepted accounting principles, (GAAP), enabling them to apply a longer-term lens and reduce the cost of hedging. However, most firms have yet to explore the other levers—operations and IT improvement, technical excellence, commercial uplift, and franchise growth—at scale. Across all these levers, advanced analytics can enable innovative, value-creating approaches.

Author(s): Ramnath Balasubramanian, Alex D’Amico, Rajiv Dattani, and Diego Mattone

Publication Date: 2 February 2022

Publication Site: McKinsey

Forward Thinking on talent, state capacity, and being hopeful with Tyler Cowen

Mary Pat Campbell

Link: https://www.mckinsey.com/capabilities/people-and-organizational-performance/our-insights/forward-thinking-on-talent-state-capacity-and-being-hopeful-with-tyler-cowen

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Michael Chui: Fascinating. You mentioned talent. You recently coauthored a book with Daniel Gross entitled Talent: How to Identify Energizers, Creatives, and Winners Around the World. What was the central thesis of this book?

Tyler Cowen: That talent is remarkably important. That we’re doing a poor job, misallocating talent. And there are a variety of ways, outlined in the book, we can do better. This book tries to be “the” talent book: a one-stop shopping guide to how to think about identifying talent.

Michael Chui: What are the macro implications of [the] lack of good matching? Is this a potential for accelerating productivity, for instance?

Tyler Cowen: We have slower economic growth when we don’t match talent well. We have a lower level of per capita income. When a recession comes, as was the case in 2008, labor markets adjust much more slowly. The consequences for human welfare are considerable.

Author(s): Michael Chui, Tyler Cowen

Publication Date: 28 Sept 2022

Publication Site: McKinsey

The Great Attrition is making hiring harder. Are you searching the right talent pools?

Mary Pat Campbell

Link: https://www.mckinsey.com/business-functions/people-and-organizational-performance/our-insights/the-great-attrition-is-making-hiring-harder-are-you-searching-the-right-talent-pools

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Despite significant changes in the economy since the onset of the Great Attrition (or what many call the Great Resignation), the share of workers planning to leave their jobs remains unchanged from 2021, at 40 percent. That’s two out of five employees in our global sample who said that they are thinking about leaving in the next three to six months.

However, the past year has revealed nuances of the larger trend:

Reshuffling. Employees are quitting and going to different employers in different industries (48 percent of the job leavers in our sample). Some industries are disproportionately losing talent, others are struggling to attract talent, and some are grappling with both.

Reinventing. Many employees leaving traditional employment are either going to nontraditional work (temporary, gig, or part-time roles) or starting their own businesses. Of the employees who quit without a new job in hand, 47 percent chose to return to the workforce. However, only 29 percent returned to traditional full-time employment.

Reassessing. Many people are quitting not for other jobs but because of the demands of life—they need to care for children, elders, or themselves. These are people who may have stepped out of the workforce entirely, dramatically shrinking the readily available talent pool.

Author(s): Aaron De Smet, Bonnie Dowling, Bryan Hancock, and Bill Schaninger

Publication Date: 13 July 2022

Publication Site: McKinsey

Why private equity sees life and annuities as an enticing form of permanent capital

Mary Pat Campbell

Link: https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/why-private-equity-sees-life-and-annuities-as-an-enticing-form-of-permanent-capital

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Permanent capital—investment funds that do not have to be returned to investors on a timetable, or at all—is, according to some, the “holy grail” of private investing.1 Permanent capital owes its exalted status to the time and effort that managers can save on fundraising, and the flexibility it provides to invest at times, like a crisis, when other forms of capital can become scarce.

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The trend is not new: private investing in insurance dates back more than 50 years to Berkshire Hathaway’s acquisition of National Indemnity in 1967. As that example shows, many forms of insurance beyond life and annuities can serve as permanent capital, including specialty and property and casualty (P&C). In this article, however, we’ll focus on the reasons why many PE firms have concluded that life insurance and annuities represent a once-in-a-generation opportunity. We’ll also look at the requirements for PE firms on the sidelines that want to enter the market, discuss some overlooked ways that PE owners can create value, and highlight some implications for life insurers as they consider either selling a portion of their book of business or emulating and competing with this potent new industry force.

Author(s): Ramnath Balasubramanian, Alex D’Amico, Rajiv Dattani, and Diego Mattone

Publication Date: 2 Feb 2022

Publication Site: McKinsey

The impact of COVID-19 on capital markets, one year in

Mary Pat Campbell

Link: https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-impact-of-covid-19-on-capital-markets-one-year-in?cid=other-eml-alt-mip-mck&hdpid=4b564a38-09f9-4528-824d-dee252ee7885&hctky=9138280&hlkid=e8b6bdb00522438aa9fd35e51c54635b#

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The same forces widening the gap between sectors are also amplifying differences within sectors, mostly because the winners are pulling ahead. In every single sector, including those facing significant industry headwinds, some companies increased their market value during the course of the crisis (Exhibit 4).

For example, while the restaurant industry has struggled mightily during the pandemic, Domino’s Pizza delivered total returns to shareholders (TRS) of 26 percent, thanks to its technologically advanced business model and its ability to quickly ramp up delivery. Likewise, Peloton, maker of internet-enabled exercise bikes, saw its shares’ value increase more than fivefold even as most traditional gyms have struggled under lockdowns. And while it may not be surprising that many online-first retailers did very well over the past year, some traditionally brick-and-mortar operators such as Target (TRS of 64 percent) managed to adapt and outperform even as the pandemic hammered the retail sector.

Author(s): Chris Bradley, Peter Stumpner

Publication Date: 10 March 2021

Publication Site: McKinsey

States Pressure Drugmakers After McKinsey’s $600 Million Opioid Settlement

Mary Pat Campbell

Link: https://www.wsj.com/articles/states-pressure-drug-makers-after-mckinseys-600-million-opioid-settlement-11612476966

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State attorneys general intensified pressure on drug companies to settle claims over the opioid crisis, following consulting firm McKinsey & Co.’s agreement to pay nearly $600 million over its advice to pharmaceutical companies to rev up sales.

McKinsey’s settlements, reached with every state but Nevada, are an unexpected first source of revenue to stem from yearslong investigations into drug-industry players that states say helped exacerbate an opioid epidemic. It has killed at least 400,000 people in the U.S. since 1999.

“We do not want to be in litigation for years on this, spending money and resources while people are dying,” Colorado Attorney General Phil Weiser said Thursday. “We want to get fair settlements now. Others need to follow suit.”

States have been negotiating since 2019 with the nation’s three largest drug distributors, McKesson Corp., AmerisourceBergen Corp., Cardinal Health Inc., as well as drugmaker Johnson & Johnson. The companies have publicly disclosed that they have set aside a collective $26 billion for the deal, most of it to be paid over 18 years, but no final agreement has been reached.

Authors: Sara Randazzo and Jonathan Randles

Publication Date: 4 February 2021

Publication Site: Wall Street Journal