Many banks that once established insurance subsidiaries to generate fee income are now rethinking their strategy and selling all or part of their insurance operations. M&T Bank, Truist Financial, and Eastern Bancshares have already sold their insurance subsidiaries, and other banks, such as Cadence Bank, may soon follow suit. The decision to sell insurance businesses is driven by several factors, including skyrocketing valuations, the need to rightsize balance sheets, and a desire to focus on core banking businesses.
Banks are thinking about how and where to invest their resources in the face of higher interest rates that squeeze profitability. Insurance businesses require substantial investment to gain scale and compete, so some banks are choosing to sell rather than invest heavily in resources on the insurance side. However, there is a risk that banks may struggle to replace the lost revenue from insurance operations, especially when interest rates fall.
The pairing of banks and insurance agencies became popular after the passage of the Gramm-Leach-Bliley Act in 1999, which allowed banks to enter new lines of business. The rationale behind this strategy was to cross-sell financial products to a similar customer base. However, the theory that banks and insurance agencies share enough similarities for cross-selling opportunities to thrive has not always played out in practice.
Truist Financial, the successor of BB&T Corp., may be an exception as its insurance division has been successful in cross-selling products. The company has completed multiple insurance-related acquisitions since 2019 and recently sold a 20% stake in its insurance business to Stone Point Capital. While an additional sale might fill a temporary earnings hole, it could be viewed as short-sighted by investors in the long run.
The question now is whether more banks will deemphasize or abandon their insurance businesses. Some analysts believe that the recent sales are one-off transactions, while others predict that elevated valuations and the pressure to compete will drive more banks to sell. Ultimately, the decision to sell will depend on the price offered and the potential for future growth.
Cadence Bank, which relies heavily on its insurance division for noninterest revenue, may also consider selling. Executives have indicated that they will do what’s best for the company, and analysts believe that selling at the right price could be a smart move. Waiting too long to sell could result in banks missing out on a higher price and being stuck with the business for a longer period of time.
Overall, the trend of banks selling their insurance subsidiaries is expected to continue. This reflects banks’ need to focus on core banking businesses, the challenges of investing heavily in insurance operations, and the potential difficulties in replacing lost insurance revenue. The insurance landscape is changing, and banks are reevaluating their strategies to ensure long-term profitability and growth.