A study published by Pitchbook (10/4/2025), a trade publication and data source for private equity, showed that private equity buyouts improve portfolio outcomes by 0.64% in annualized excess returns for the last 25 years. However, once the returns were adjusted for leverage, they did not provide much of an advantage.
In other words, the extra return–and that is an important point, that this is the “extra” return–goes from 0.64% to nearly nothing if it were not for private equity taking on a lot of debt.
Many firms do not improve after being sold to private equity. Quite often, as seen in numerous insolvencies, these firms deteriorate. This is an essential reason that regulators should only allow private equity to buy insurance companies with strict limitations on their debt loads. An additional restriction should be that regulators do not allow private equity to mine investment portfolios for winners to be removed and placed into private equity’s other portfolios, leaving a higher proportion of losers in the insurance companies themselves, deteriorating the quality and quantity of surplus. (Author’s note: “These are the Plunderers,” by Gretchen Morgenson, is an excellent book describing how private equity does this to insurance companies.)
Extra debt means a lighter balance sheet. In other words, a company can support operations with fewer assets. Amounts identified as “extra” assets can be returned to shareholders. In theory, this makes sense, and indeed, if a corporation has millions not being used, those millions’ best use is being returned to shareholders.
However, private equity can take this to extremes when so many assets are returned to shareholders and replaced with debt that the operating company cannot function. Whether this is greed or incompetence, employees and policyholders lose.
Light Balance Sheets
A light balance sheet, meaning fewer assets relative to income and debt, is gaining momentum throughout the industry. This is likely a factor in why so many buyout firms are laying people off. (Their AI is likely not quite ready to replace that many people, and based on personal experience, they aren’t laying off the incompetent people who most likely would be replaced by AI.) This means these firms are not going to grow materially organically (high debt loads are negatively correlated with growth), distributors will pressure carriers to pay them more, and competitors without huge debt loads can obtain better employees more easily if they are proactive.
This is somewhat easy to measure at the carrier level. How much surplus does a company have relative to premiums? Carrying extra surplus is expensive. It costs money relative to the return on investment to shareholders. This is easiest to see in banking and why after the credit crisis, banks were forced to improve their balance sheets, but they did not want to carry more assets. It causes their ROI to decrease.
In insurance, Berkshire Hathaway is resisting the balance sheet lite trend because as of December 31, 2024, they had around 350% more surplus than premiums. Their balance is heavy, in a good way. On the other hand, Progressive was around 40%.
Progressive, however, likely can function quite well with a light balance sheet, whereas very few other carriers can. This is because Progressive’s underwriting profit margins are so high. The higher the profit margin, the more a company can manage successfully with a light balance sheet. Extremely few carriers can match Progressive’s profit margins, but they want to write as much business as Progressive relative to surplus. This is not a smart strategy but a desperate strategy for most.
At the carrier level, this is evident in reinsurance strategies, too. A large international carrier decided about eight years ago to go from buying a lot of reinsurance to buying relatively little. Their surplus to NPW (net premium written) ratio has gone from 1.6 to 0.8 as of year-end 2024. Their surplus has increased by around 25% during this time, but their premiums have more than doubled. In other words, they are writing far more premium with minimally more surplus. This is a balance sheet lite approach. This company, too, has huge profit margins, so they can likely make this approach work.
As with any business, if I can make $1 million of widgets by only using $200,000 of investment versus a competitor who must have $500,000 of investment for the same $1 million, the first company will almost always win. Companies like these two carriers are putting a lot of pressure on other carriers using this balance sheet lite approach, and few carriers have the operating profit margins to make it work.
‘A light balance sheet, meaning fewer assets relative to income and debt, is gaining momentum throughout the industry. This is likely a factor in why so many buyout firms are laying people off.’
Impact on Agents
Whether it is private equity or not, the emphasis on possessing fewer assets to support the same revenue is a force. This is going to impact agents because to achieve those high profit margins, those two companies pay some of the lowest commissions in the insurance world. Their models are quite different, but the net commission rate is usually no more than 11%, and that is at the high end barring a spectacularly good loss ratio year where contingencies are high.
It’s impossible to achieve a balance sheet lite approach and pay 18% commission because it is impossible to pay 18% commission and achieve an adequate profit margin to offset lower assets. And, having the least amount of assets possible may create the best ROI for shareholders, at least in the short term.
Berkshire thinks long-term, which explains the entire difference as to why they have so much surplus (more than 25% of all surplus–for all carriers in the entire industry).
Combine the lack of growth generated by debt heavy distributors and their need for carriers to pay them more with carriers that cannot afford to pay them more, and fallout is inevitable.
Surplus lite means more volatility in the market. It means many carriers will not survive. Beyond what I’ve described, running a company successfully with a lite balance sheet requires far better financial and operating acumen. Based on my deep research and interviews with these executives, many do not have the necessary knowledge. It’s not even a gray-area assessment.
I’d love the opportunity to work with a few enlightened carriers to improve their futures. I can also provide education on how this will impact the futures of carriers and distributors, as well as how to take advantage of the opportunities this provides. Tune in to Insurance Journal’s Academy of Insurance podcast in December for my insights on this topic.
And with a touch of luck, maybe regulators–who are otherwise unaware of what is happening with private equity buying insurance companies–will sharpen their approach to protect policyholders.
Burand is the founder and owner of Burand & Associates LLC based in Pueblo, Colo. Phone: 719-485-3868. E-mail: chris@burand-associates.com.
