Attractive insurance unit valuations drive more US banks to cash out

US banks continue to sell their insurance businesses as they capitalize on attractive insurance valuations.

Four banks have announced sales of their insurance subsidiaries in the year through June 3, compared with 10 in all of 2023, according to S&P Global Market Intelligence data. By contrast, only one bank has acquired an insurance business this year, putting such deals on their slowest annual pace in years.

For insurance sales, "I have been less concerned with the specific number of sales than with the simple idea that the market remains receptive to such transactions," R. Scott Siefers, senior research analyst at Piper Sandler, said in an interview, noting that the decision to sell a business line typically is very company-specific.

To the extent that more banks are looking to make strategic changes, "the door certainly seems open for more activity in coming periods," Siefers said.

Valuations gap drives sales

Several banks are selling insurance businesses with the goal of monetizing a high-value asset, bolstering capital as market and regulatory expectations change, or providing flexibility to invest back into their traditional banking businesses, Siefers said. The payout from insurance unit sales is particularly attractive to banks because insurance businesses carry higher valuations than banks in the current environment.

The most recent deal, German American Bancorp Inc.'s sale of German American Insurance Inc. to Hilb Group LLC, "capitalizes on favorable market valuations for insurance brokerage businesses, and creates the strategic opportunity for redeployment of capital into core banking and wealth management franchises," Keefe Bruyette & Woods analyst Damon DelMonte wrote in a note.

The $40 million purchase price for German American Insurance represented roughly four times the business's 2023 revenues or 24 times its 2023 net income. German American Bancorp said the deal enables it to redeploy capital into its core banking and wealth management businesses, though analysts noted that there are likely other uses of the proceeds.

The company "already had ample capital, so the proceeds do not necessarily unlock previously out of reach strategic directions," Hovde Group analyst Brendan Nosal wrote in a note, adding that the newfound capital "does offer optionality," with potential uses including organic loan growth, M&A, repayment of borrowings and investment in the company's wealth platform.

The roughly $27 million after-tax gain from the transaction gives German American Bancorp an opportunity to restructure its securities portfolio, Raymond James analyst David Long wrote in a note.

Alternatively, German American Bancorp could buy a bank with roughly $1.5 billion in assets, leading to meaningful earnings per share accretion and limited tangible book value dilution aided by its strong currency, Janney Montgomery Scott analyst Brian Martin wrote.

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Biggest sales

Eleven of the 20 largest bank insurance business sales made public since 2017 have been announced in 2023 and 2024. The German American Bancorp deal is the 13th-largest insurance business sale by a bank since the start of 2017.

The five largest transactions during the period are all from 2023 and 2024, led by Truist Financial Corp.'s sale of its insurance unit. Truist sold a 20% minority stake in the business in 2023 for $1.95 billion and sold the remaining 80% stake this year for $7.60 billion.

Cadence Bank's and Eastern Bankshares Inc.'s sales of their insurance operations to Arthur J. Gallagher & Co. in 2023 rank as the third- and fourth-largest sales.

The two remaining 2024 deals — Trustmark Corp.'s sale of its insurance unit to Marsh & McLennan Cos. Inc. for $345.0 million and Financial Institutions Inc.'s sale of its insurance subsidiary to NFP Corp. for $27.0 million — are the fifth and 18th largest sales since 2017, respectively.

Strategy shift

Selling insurance businesses marks a strategy shift for many banks, with several of the most active bank buyers of insurance operations since 2017 — including Truist and Eastern Bankshares — having divested their insurance units recently.

TowneBank has been the most active net acquirer of insurance brokers since 2017, with 10 acquisitions and one sale. Wells Fargo & Co. ranks as the most active net seller over the period, with three sales and zero acquisitions. In the first quarter, TowneBank logged $30.2 million in insurance commissions and fees, and Wells Fargo recorded $42.0 million.