After several months of speculation about its spin-off plans, major multinational lender Truist Financial (TFC -2.78%) 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 broker in the US — at $14.75 billion. The deal is unique because not many banks have such a large insurance business as Truist. Is this the right move for the bank?
Understand the deal
Truist’s insurance business has more than 250 offices across the United States and earned more than $45 billion in premiums as of 2022. About 60% of the unit’s customers are wholesale customers, which is more than normal, while 40% are retail. The insurance business is also a significant contributor to the bank’s finances, providing 13% of its total revenues, 35% of its fee income and 8% of its adjusted revenues.
The minority stake values Truist Insurance Holdings at 27.4 times its 2022 earnings. That’s important because Truist’s stock doesn’t even trade at half that valuation, and both investors and management have long said it’s full value of the insurance business was not realized. An overall valuation at this new value for Truist Insurance Holdings would be approximately $10 billion higher than Truist’s current market cap.
Note: Market data as of February 10, 2023. Footnote 1 = Represents the TIH valuation based on a minority stake. Footnote 2 = Represents the median multiple of several regional banks. Footnote 3 = Implied value of Truist excluding TIH based on current Truist price divided by 9.7x 2022 EPS multiple applied to Adjusted Truist 2022 earnings minus TIH earnings. Image Credit: Truist Financial Corp.
After 6 1/2 years, Stone Point has the right to ask Truist to consider an outright sale or IPO for Truist Insurance Holdings. If an exit event does not occur at that time, Truist has the right to repurchase the minority interest at fair market value.
In the short term, the deal is net of income as Truist plans to invest the proceeds in short-term securities for the time being. This will increase Truist’s Common Equity Tier 1 (CET1) ratio — a key regulatory metric that measures a bank’s Tier 1 capital as a percentage of its risk-weighted assets — by 0.32% to about 9.3%. It will also increase the bank’s tangible book value per share, or net worth, by about 6%.
Why is Truist making this deal?
With Truist Insurance Holdings being one of the unique differentiators for the bank and providing it with a healthy revenue stream, you might be wondering why Truist bothered to complete such a complicated deal in the first place.
Well, for one thing, executives have long wanted the market to recognize the value of the insurance entity. Now they really have a valuation for the company, and it’s a good one at 27 times earnings.
The other thing that management discussed on a post-transaction conference call is that it will be able to use the capital raised through this sale to better grow the company. That might sound counterintuitive given that Truist is essentially going out of business, but the insurance industry is rapidly consolidating. It’s common for insurance brokers to grow by acquiring smaller brokerage firms, a strategy Truist has also used in the past. The bank can use that nearly $2 billion in fresh capital to make small bolt-on acquisitions, and management hasn’t ruled out a more “transformational” deal either.
Is it the right move?
As mentioned, the insurance business is a unique differentiator and definitely a big reason Truist trades at a strong valuation of 255% of its tangible book value. Bank investors are happy about healthy fee income. And the insurance business isn’t capital intensive, which is another bonus.
Given all of this, I think it’s great to hear the Truist management team say they like insurance and want to do more business and grow that business, maybe in a transformative way.
I’m interested in what will happen at the end of the 6 1/2 years. If Truist sold its insurance unit outright or spun it off via an IPO, it would likely see a decent return. But how would it replace the unit’s consistent revenue and earnings streams?
Truist must first use this new capital in order to successfully expand the insurance business. But from my current vantage point, I wouldn’t be a big fan of an eventual exit from the business. But I guess we’ll cross that bridge when we get there.
Bram Berkowitz does not hold any of the shares mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
