Truist selling last chunk of insurance business. Now what?

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Truist Financial is selling its majority stake in the regional bank's insurance brokerage unit after a year of speculation about its intentions in what was once a priority business line.

The Charlotte, North Carolina, company said Tuesday that it has agreed to sell the remaining 80% of Truist Insurance Holdings to two private-equity firms and other investors. CEO Bill Rogers said on a call with analysts that the transaction — which values the overall unit at $15.5 billion — and a recent agreement to sell an asset-management subsidiary are part of a strategy to make Truist more efficient and pad its capital.

"You've heard me talk a lot recently about the work being done at Truist to simplify our organization and to better control our expenses in our core businesses to drive improved performance in the future." Rogers said. "By selling [Truist Insurance Holdings], we'll have capital capacity to play more offense. … In addition, our significantly stronger balance sheet will be positioned to weather an even wider range of economic environments."

Stone Point Capital in Greenwich, Connecticut — which bought 20% of the insurance unit in February 2023 — and Clayton, Dubilier & Rice in New York led the all-cash purchase of Truist Insurance Holdings. Other investors, including Abu Dhabi's sovereign wealth fund, Mubadala Investment, are participating in the deal, which is slated to close in the second quarter, pending regulatory approval.

The agreement is the latest example of financial institutions' selling their insurance units, as companies opt for big payouts to boost capital instead of the steady revenue those businesses provide. Eastern Bankshares, Cadence Bank, Evans Bancorp and CB Financial all fetched premium prices for their insurance subsidiary sales last year. 

Truist expects the latest deal to generate $10.5 billion in after-tax cash proceeds, $9.5 billion of capital and 230 basis points in Common Equity Tier 1 capital. The company had previously estimated that the sale of its remaining 80% stake in the insurance unit would offer more than 200 basis points of capital.

Saul Martinez, head of U.S. financials research at HSBC Global Research, wrote in a note that the significant capital benefit of the deal is positive, "although exiting the insurance brokerage business does have a price."

The latest deal isn't a surprise to Wall Street, as rumors of an insurance deal have floated since Truist sold a chunk of the business last year, Scott Siefers, an analyst at Piper Sandler, wrote in a research note Tuesday. The "wild card," he added, is what Truist will do with the proceeds.

"Now, we have a much better capitalized company with plenty of flexibility to address what has been a lingering issue for investors (large unrealized losses)," Siefers wrote in the note. "However, we're giving up presumably the highest-value portion of the earnings stream to get there." 

Chief Financial Officer Mike Maguire said on the analyst call that the sale would allow Truist to evaluate a variety of capital-deployment alternatives, including shifting its balance sheet away from low-yielding securities and growing its core banking franchise, like loans.

"While we recognize that there are trade-offs with any decision, we think it's timely to increase Truist's financial strength," Maguire said. "Truist's stronger relative capital position creates capacity for growth, allows us to maintain our earnings, gives us an opportunity to also improve our interest rate risk profile by reducing the duration of our balance sheet and, of course, capitalizes on historically high insurance-broker valuations."

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Maguire added that the company could replace the insurance unit's earnings through a $23 billion balance-sheet repositioning, in which it would reinvest the securities into a mix of cash, shorter-duration securities and off-balance sheet hedges, while still maintaining "substantial capital to play offense." He added the deal also increases Truist's ability to resume share repurchases.

Rogers also said on the analyst call that Truist's growth has been affected by its desire to conserve capital due to economic uncertainties and potential regulation, such as the Basel III endgame proposal. The bank has been working on a $750 million cost-cutting plan that it announced in September, which entails streamlining lines of business, slashing head count and reducing its branch network. In the fourth quarter of 2023, the bank reported a net loss of $5.2 billion, largely due to high expenses.

The CEO has expressed multiple times in the last year that the remaining stake in the insurance business provided flexibility for Truist to create capital. He said on the Tuesday analyst call that the company chose to sell now, as opposed to another time while insurance businesses are still highly valued, due to consolidation of the insurance industry. 

"We've been able to support it in the past, but it's consolidating at an accelerating pace that would require additional capital, and that just isn't the place where we're in a position to support that long term," Rogers said on the call.