Is It Time to Eat the Golden Goose?
It was ten years ago in these very pages of Bank Watch that we wrote an article entitled “Is It Time for Banks to Rethink Insurance?” The year was 2014. Interest rates were near zero, the S&P 500 was in the neighborhood of 1,600, and Bitcoin finished the year at a mere $300.
The narrative at the time was that the lingering effects of the great recession, higher capital requirements for banks, and frothy valuations for insurance agencies driven by private equity bidders had firmly crowded out the banks from the agency M&A market. Indeed, bank acquisitions of insurance agencies had been declining for several years at that point. We suggested at the time that banks could still benefit from the recurring revenue stream offered by an insurance subsidiary, not to mention the higher growth and diversification in non-interest income.
In the decade since, a few banks did invest in their insurance agency operations, though mostly through organic means as opposed to M&A. At the same time, market multiples and private equity’s appetite for insurance agencies only increased. The net effect has led to some very favorable outcomes for banks willing to part with their insurance units.
Just last month, Trustmark (TRMK) announced an agreement to sell Fisher Brown Bottrell Insurance to Marsh McLennan Agency for approximately $316 million in cash, resulting in after-tax proceeds to TRMK of $228 million. The reported deal value implies a multiple of 5.4x revenue, 18.6x earnings-before-interest-taxes-depreciation-and- amortization (EBITDA), and 25.7x net income. TRMK intends to use proceeds from the deal to reposition lower-yielding securities to higher-yielding, market-rate securities, and meaningfully improve its capital ratios.
So how did we get to this point? And what is the next step in this cycle? ...
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