There was a time when banks were scrambling to establish insurance subsidiaries as a way to generate fee income. But these days, many of those same banks are rethinking their strategy.
Last fall, M&T Bank in Buffalo, New York, agreed to sell its insurance agency for an undisclosed sum to Arthur J. Gallagher, a global insurance firm that's embarked on an agency buying spree. In February, Truist Financial in Charlotte, North Carolina,
Other banks may be considering similar moves. Just a few days after Eastern's deal was announced, industry publication Inside P&C reported that Cadence Bank in Tupelo, Mississippi, is
The decision by some banks to reduce their reliance on insurance revenue, or sell their entire insurance subsidiaries, is a reflection of skyrocketing valuations, banks' need to rightsize their balance sheets and a desire to focus on their core banking businesses, said Mark Crites, a partner at Reagan Consulting.
Against the backdrop of higher interest rates, which is squeezing profitability, banks are thinking about how and where to invest their resources, Crites said. And because insurance businesses require substantial investment to gain scale and compete, some banks are deciding to sell.
"I think what banks have found … is the investment required today to be relevant in the middle-market insurance landscape has changed and accelerated," said Crites, whose firm provides merger-and-acquisition advisory, valuation, and strategic consulting services to insurance agents, brokers, and financial institutions.
"There are lots of big players investing a lot to outcompete those who are not. So banks have to make a decision: Do I invest heavily in resources on the insurance side, or do I invest heavily in my core businesses?"
The risk for banks that choose to shake off their insurance businesses, which tend to be steady producers of fee income, is that they may not be able to replace the lost revenue. That could be a problem when interest rates fall, analysts warn. When rates are low, banks that lack reliable streams of noninterest income may find it difficult to generate earnings.
"If you have something that people highly desire, then you're in a good position to consider selling it," said John Rodis, an analyst at Janney Montgomery Scott, where he covers Cadence. "But ultimately, if you decide to pull the trigger, what else do you have to offset that lost revenue?"
The pairing of banks and insurance agencies took off after the passage of the Gramm-Leach-Bliley Act in 1999. That law, which permitted banks to enter new lines of business such as insurance and securities underwriting, spurred a great deal of merger-and-acquisition activity.
The rationale was straightforward: Banks and insurance agencies offer financial products to a similar group of customers, which theoretically opens the door for cross-selling opportunities.
But that theory hasn't always worked out, according to Crites.
"While the customers are similar, the business operation of a bank and an insurance brokerage are very different, and the sales tactics are very different," he said.
Truist may be the exception. Its insurance division, Truist Insurance Holdings, was established by BB&T Corp., the Winston-Salem, North Carolina, company that merged with Atlanta-based SunTrust Banks in late 2019 to form Truist.
Crites said that BB&T was more successful than other banks at cross-selling certain products, while at the same letting the insurance business operate without intrusion from the banking side of the company. Today, Truist's insurance division is one of the largest in the U.S. The company has
Late last year,
For Truist, an additional sale might "fill a temporary earnings hole," but over the long run it "may be viewed as a bit short-sighted among investors," said Terry McEvoy, an analyst at Stephens Research.
Still, McEvoy questioned whether Truist's stock price has historically benefited from what he called a very attractive, profitable insurance business. "Given where the stock is now, the answer over time is maybe no," McEvoy said.
Shares in Truist are down about 35% so far this year, a sharper decline than the industry average of 24%.
McEvoy said that the proceeds of a potential sale of its insurance unit could be used to reinvest into Truist's core business or to restructure its low-yielding securities portfolio.
Analysts expressed diverging views about whether more banks will deemphasize the insurance business, or abandon it entirely. Some described the recent deals as one-off transactions, but others said that elevated valuations and the pressure to compete will spur more banks to sell.
"I think anything could potentially be for sale at the right price," Rodis said.
The list of sellers may or may not eventually include Cadence. A spokesperson for the bank declined to comment. The insurance unit provided 34% of Cadence's noninterest revenue during the second quarter.
Cadence executives seem receptive to the idea of selling, according to Casey Haire, an analyst at Jefferies. While they like the business overall, CEO Dan Rollins and other Cadence executives have indicated in recent calls that they will "do what's best for the company," Haire said.
"Like Dan Rollins has said, it's a very nice option to have, and he's right," Haire said. "He's basically saying, 'If you want it, throw me a big number,' which is a smart thing to say."
Mark Fitzgibbon, an analyst at Piper Sandler, said banks that "wait too long" to sell might miss out on a higher price and then be "stuck with the business" for a longer period of time.
He predicts that the number of bank-owned insurance agencies will continue to dwindle.
"I think it was a mad dash to get into it and now, a slow bleed to get out," he said.
