After several months of speculation about its spinoff plans, large super-regional lender Truist Financial (TFC 0.53%) went ahead and sold a 20% stake in its insurance business to Stone Point Capital for $1.95 billion.
The deal values Truist Insurance Holdings -- the sixth-largest insurance brokerage in the U.S. -- at an aggregate value of $14.75 billion. The deal is unique because not many banks like Truist have such a large insurance business. Is this the right move for the bank?
Understanding the deal
Truist's insurance business has more than 250 offices across the U.S. and took in more than $45 billion in premiums in 2022. Roughly 60% of the unit's clients are wholesale, which is more than normal, while 40% are retail. The insurance business is also a material contributor to the bank's finances, providing 13% of its total revenue, 35% of its fee income, and 8% of its adjusted earnings.
The minority investment values Truist Insurance Holdings at 27.4 times its 2022 earnings. This is important because Truist's stock doesn't even trade at half of this valuation, and both investors and management have long said that the full value of the insurance business was not being realized. A sum-of-the-parts valuation with this new value for Truist Insurance Holdings would be greater than Truist's current market cap by about $10 billion.
Note: Market data as of Feb. 10, 2023. Footnote 1 = Represents TIH valuation based on minority stake investment. Footnote 2 = Represents the median multiple among several regional banks. Footnote 3 = Implied value of Truist excluding TIH based on current Truist price divided by 2022 EPS multiple of 9.7x applied to Truist 2022 adjusted earnings less TIH earnings. Image source: Truist Financial Corp.
After 6-1/2 years, Stone Point will have the right to ask Truist to explore a full sale or an initial public offering for Truist Insurance Holdings. If it does not engage in some kind of exit event at that time, Truist will have the right to buy back the minority stake at fair market value.
In the near term, the deal will be neutral to earnings because Truist is planning to invest the proceeds into short-term securities for the time being. This will boost Truist's common equity tier 1 (CET1) capital ratio -- a key regulatory ratio that measures a bank's core capital as a percentage of its risk-weighted assets -- by 0.32% to about 9.3%. It will also boost the bank's tangible book value per share, or its net worth, by about 6%.
Why is Truist doing this deal?
Because Truist Insurance Holdings is one of the unique differentiators for the bank and delivers a healthy stream of revenue to it, you might be asking yourself why Truist is even bothering to do a complicated deal like this.
Well, for one thing, its executives have long wanted the market to realize just how valuable the insurance unit is. Now they really have set a valuation for the business, and a good one at 27 times earnings.
The other thing management discussed on a conference call following the deal is that it will be able to use the capital this sale raises to better grow the business. This might sound counterintuitive because Truist is essentially giving up a piece of the business, but the insurance industry is rapidly consolidating. It's common for insurance brokerages to grow by acquiring smaller brokerages, a strategy that Truist has also employed in the past. The bank can use this nearly $2 billion of fresh capital to make small bolt-on acquisitions, and management has not ruled out a more "transformational" deal, either.
Is it the right move?
As mentioned, the insurance business is a unique differentiator and definitely is a big reason that Truist trades at a strong valuation of 255% of its tangible book value. Bank investors like to see healthy streams of fee income. And the insurance business isn't capital intensive, which is another bonus.
Given all that, I think it's great to hear Truist's management team say that it likes insurance, and wants to make more deals and grow that business, perhaps in a transformational way.
What concerns me is what will happen at the end of the 6-1/2-year period. If Truist sells its insurance unit outright or spins it off via an IPO, it would likely make a good return. But how would it replace the unit's consistent revenue and earnings streams?
Truist first needs to use this new capital to successfully grow the insurance business. But from where I sit today, I wouldn't be a big fan of any eventual exit from the business. But I guess we'll cross that bridge when we come to it.
