Truist Financial Corporation (TFC) Earnings Call Transcript & Summary

Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation Strategic Update Conference Call regarding Truist Insurance Holdings. As a reminder, this event is being recorded. It is now my pleasure to introduce your host, Mr. Ankur Vyas, Head of Investor Relations for Truist Financial Corporation. Please go ahead, sir.

Thank you, Jennifer, and good morning, everyone. With us today are our Chairman and CEO, Bill Rogers; our CFO, Mike Maguire; and our Chief Insurance Officer, John Howard. During this morning's call, they will discuss a strategic transaction with our Truist Insurance Holdings business that also highlights its significant value to our shareholders. The presentation that accompanies our call this morning is available on the Truist Investor Relations website, ir.truist.com. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on Slides 2 and 3 of the presentation regarding these statements and measures as well as the Appendix for appropriate reconciliations to GAAP. Lastly, Truist is not responsible for and does not edit or guarantee the accuracy of transcripts provided by third parties. The only authorized live and archived webcast are located on our website. With that, I'll now turn the call over to Bill.

Ankur, thanks, and good morning, everyone, and thank you for joining our call on a little bit of short notice this morning. Today, we're very excited to announce an important forward-focused transaction in the evolution of Truist Insurance Holdings. This development paves the way for future growth and enhances the competitiveness of our insurance business in a highly dynamic industry. Specifically, we're announcing the sale of a 20% minority stake in Truist Insurance Holdings, that's excluding premium finance to Stone Point Capital and co-investors at an aggregate value of $14.75 billion. This investment is expected to close in the second quarter of the year. We're really pleased to welcome Stone Point as a partner with Stone Point's significant expertise and proven track record in financial services, which spans insurance brokerage and banks, we'll be even better positioned to accelerate purposeful growth and drive efficiencies in our insurance business. Truist and Stone Point have a long-standing relationship characterized by trust, mutual respect and we're both highly aligned in our vision and strategy for the insurance business. We've also strengthened our incentive program and structure to enhance our ability to attract, incent and retain top insurance talent and to create additional value for our stakeholders. Our goal ultimately is obviously to make Truist Insurance Holdings a compelling employer of choice in the insurance brokerage industry. The transaction by its nature, highlights the value of Truist Insurance Holdings and more precisely addresses a wide, multiple differential between insurance brokerage and traditional banking. We considered many options, but we believe this approach maximizes our long-term, strategic and financial flexibility and preserves some future upside in Truist Insurance Holdings. Importantly, because we're only selling a minority stake, Truist will continue to own and consolidate Truist Insurance Holdings, which will remain a strong contributor for our company. Financially, investment is expected to increase our consolidated CET1 ratio and be accretive to tangible book value per share. It will also enable earnings per share growth over time as capital is deployed to support both Truist and Truist Insurance Holdings, all of which is a win-win for our company and our stakeholders. And now let me hand it over to our Chief Insurance Officer, John Howard, to discuss the brokerage industry in a little more detail and our leading position within it. John?

Thanks, Bill. This is truly an exciting day for Truist, Truist Insurance Holdings and for our stakeholders. Personally, I'm thrilled about today's announcement and our new partnership with Stone Point. Today's announcement reaffirms the value Truist Insurance Holdings brings to Truist and its shareholders recognizes the quality of our various businesses and the deep relationships we've developed with our clients and most importantly, our purpose-driven teammates who help our clients solve some of their most challenging risk management problems. It also accelerates our ability to grow and realize our long-term potential. With Stone Point's resources and deep industry experience, we will be even better positioned to take advantage of the compelling industry trends highlighted on Slide 5. And this is truly one of the most exciting times in my career to be in the insurance brokerage industry. Insurance brokers continue to benefit from a firm pricing environment and rising insurance premiums. These trends are being sustained by increased loss activity due to large catastrophic events like storms and wildfires, and more subtle factors such as social inflation. Meanwhile, the industry is consolidating rapidly. Announced acquisitions have grown at a 10% compound annual growth rate from 2012 to 2022. Global insurance brokerage M&A volumes remained strong this past year, even against the backdrop of significantly lower M&A volumes in other industries. Supported by this favorable backdrop, multiples for insurance brokers have increased steadily over the past decade, both absolutely and on a relative basis. As you can see on the right, the multiple differential between insurance brokers and regional banks is near a 10-year high at approximately 15x, with insurance brokers trading at 25x and regional banks trading at 10x. Moving to Slide 6. Truist Insurance Holdings operates coast-to-coast with over 250 offices and 9,000 teammates. We have deep expertise across a wide range of industries, and there's a strong alignment between McGriff's industry coverage model and Truist's corporate and investment banking specialties. We facilitate approximately $45 billion in premiums and generate over $3 billion of revenue annually. Our revenue mix is 60% wholesale and 40% retail. And as an insurance broker, we don't take any underwriting risk. Given the scale of our operations, we're a meaningful contributor for Truist, generating 13% of total revenue, 35% of fee income and 8% of net income. We've built an exceptional financial track record by delivering value-added risk advisory solutions for our clients. Since 2018, we've achieved 8% average annual organic revenue growth and 600 basis points of margin expansion. And the investment we're announcing this morning will create additional opportunities to drive growth and enhance efficiency. Let's turn to Slide 7. We're proud to be the sixth largest insurance broker in the United States, but even more significant is our strong performance. [ In the past ] 12 months, we've delivered superior organic revenue growth relative to peers, reflecting new business, firm pricing and strong client retention. We also generated higher margins, reflecting ongoing realization of acquisition-related synergies and the strong benefits from our internal insurance holdings optimization program or IHOP initiatives. Additionally, Truist Insurance Holdings is 60% wholesale compared to 24% for the pure median. This favorable business mix provides us with a more stable growth profile in varying insurance market conditions. We also have plenty of levers for growth, including Integrated Relationship Management or IRM; multiple organic growth initiatives that will drive the next phase of our growth, such as investments in talent, our delivery model and technology; and lastly, future M&A. We believe these factors will propel growth, enhance efficiency and help us achieve scale, which is so critical in our industry. And now I'll turn it over to our CFO, Mike Maguire, to discuss key terms and financial details of the transaction.

Thank you, John. Let's begin with the key terms on Slide 8. Pursuant to the agreement, Stone Point will purchase 20% of Truist Insurance Holdings from Truist for $1.95 billion, representing a common equity valuation of $9.75 billion. In connection with the investment by Stone Point, Truist Bank will provide leverage to Truist Insurance Holdings in the form of a $5 billion intercompany, debt-like preferred equity investment. Together, these investments result in an aggregate valuation of approximately $14.75 billion for Truist Insurance Holdings. Stone Point will also receive 3.75% warrant coverage struck at today's valuation. While these warrants have no intrinsic value today, they will increase in value as the value of Truist Insurance Holdings increases, creating strong alignment with our shareholders. The transaction includes the core insurance brokerage businesses but excludes premium finance, which will remain fully owned by Truist Bank given the balance sheet and capital associated with its lending operations. Proceeds from the sale will be received by Truist Bank, the parent of Truist Insurance Holdings. In terms of governance, Truist will designate 4 of 5 seats on the Truist Insurance Holdings Board and Stone Point will designate 1 seat. Stone Point will also have certain minority investor rights that provide long-term flexibility. Similarly, Truist will maintain flexibility through its majority ownership and certain governance provisions. Most importantly, we have a strong partner in Stone Point. Stone Point is a seasoned investor with significant expertise in financial services and has made over $10 billion in insurance-related and bank investments. Like us, Stone Point has a long-term focus and is committed to working with best-in-class operators to build outstanding businesses. They've also demonstrated a deep respect for our strategy and purpose-driven culture. Moving to Slide 9. One of the motivations for the sale is to highlight the value of Truist Insurance Holdings for our shareholders. From Truist's perspective, the $5 billion of intercompany preferred equity value and the $9.75 billion of common equity value in the new structure effectively marked the value of Truist Insurance Holdings at $14.75 billion. If one were to then value Truist, excluding the insurance businesses using our trading multiple today, the implied value would be a little more than $59 billion. This may even be conservative given Truist's growth potential and profitability profile. Together, these components imply a sum of the parts valuation of $74 billion, which is 15% higher than Truist's current market capitalization. Turning to Slide 10. The transaction is expected to increase our consolidated CET1 ratio by 32 basis points and be 6% accretive to tangible book value per share. It will be initially neutral to earnings per share as the minority interest expense will be offset by the reinvestment of the sales proceeds into securities. Over time, our EPS growth potential will increase as we deploy capital to support growth initiatives. From an accounting perspective, we're going to continue to consolidate Truist Insurance Holdings with no above-the-line impact to the key P&L line items other than, of course, interest income earned on the reinvestment of the cash proceeds from the sale. Below the line, the transaction will result in a noncontrolling interest attribution that is 23% of the earnings of Truist Insurance Holdings business. After the sale closes in the second quarter, we will update our segment reporting structure to reflect our 80% stake in Truist Insurance Holdings and the realignment of premium finance into another reporting segment. And now I'll turn it back over to Bill to conclude.

Great. Thanks, Mike. This morning, we've announced an important next step in the growth and evolution of Truist Insurance Holdings. Strategically, we're creating more opportunities for Truist insurance holdings to grow organically and inorganically and remain a leader in a rapidly consolidating industry. It also establishes a mutually beneficial partnership with an investor who has a proven track record of strategic and operational expertise and its long-term aspirations for Truist holdings aligned with our own. In addition, we've highlighted the significant value of Truist insurance holdings and maintain flexibility and optionality for future avenues of growth and value creation. Financially, this investment will generate capital and be accretive to tangible book value and improve our long-term earnings growth outlook. Truist will continue to consolidate Truist Insurance Holdings and will remain a key contributor to our performance. In summary, it's a win-win for Truist, Truist Insurance Holdings and our shareholders as we continue our journey towards executional excellence and purposeful growth. So thank you for your interest in Truist. And Ankur, let me turn it back over to you for Q&A.

Thanks, Bill. Jennifer, at this time, if you would explain to our listeners how they can participate in the Q&A session. [Operator Instructions]

[Operator Instructions] And we'll go first to Betsy Graseck with Morgan Stanley.

Okay. So 2 questions. First, just for Mike on the reinvestment of the cash. I think you indicated that you expect the transaction to be initially neutral and accretive over time. Can you help us understand what you're doing there? I know you had yields that you were assuming in the deck. But help us understand how the cash is likely to get reinvested, does it make you more asset sensitive and how you migrate that accretion during deferring interest rate environments.

Yes, sure, Betsy. Yes, I think the way we thought about it is, initially, we are going to invest in short-term securities. We made an assumption of 4% as we think about the neutral earnings impact. I think the idea here, though, is that over time, we have an opportunity to leverage the capital, right, whether that's, frankly, back into another acquisition in Insurance Holdings, whether that's through organic initiatives that we're interested in better serving our clients at Truist. So hopefully, that helps.

And then the other follow-up question I had is insurance business clearly has been growing both organically and inorganically. And I would -- from the comments that you're making, it sounds like the inorganic path, the acquisition path is still going to be a key sleeve of growth in the strategy of Truist Insurance Holdings. So I wanted to understand, is that incremental capital that goes for those incremental acquisitions coming entirely from Truist? Will there be a deal-by-deal decision-making that Stone Point has as to whether or not to invest? Or does this minority stake suggest that they will keep their investment interest insurance holdings at 20% as you grow inorganically as well as organically?

Yes. I think your question, Betsy, actually is highlighting the importance of the strategic flexibility of this entire transaction. So the first part of your question, yes, I mean, clearly, the inorganic part of insurance will continue rapidly consolidating industry. I'll let John talk a little bit about that in a second. But I think this also just increases the aperture for insurance deals and actually makes us even more attractive. So yes on the inorganic side in addition to all the organic opportunities we have. And then it would be a sort of a deal-by-deal kind of opportunities. Small deals, we can do within the cash that's generated within the insurance business. Larger deals, we would go through a type of consideration that you just outlined. We may do something pari passu with our partners. We may -- partners may want to increase their ownership. They will all be sort of contingent upon what creates the most value for the insurance business and what creates the most value for Truist on the long-term capacity. But the key point is we just have the strategic and financial flexibility that has sort of expanded a lot of -- all of our options. And John, you just might want to talk quickly about the consolidation and opportunity.

Yes, I'd love to, Bill. It is an industry that continues to consolidate rapidly. We are often viewed as being a preferred partner. The relationship that we're describing today significantly enhances our position. It provides a new currency that will be really attractive to existing teammates in terms of incenting for performance because they'll be so well aligned with value creation in insurance holdings. It'll be valuable for recruiting, and it will be a valuable tool with these acquisition opportunities. It gives us a currency for them participate in the value creation of Insurance Holdings. We have a broad acquisition appetite across Insurance Holdings. We have a diversified business model for both wholesale and retail. And we're interested in high-quality brokers and teams that fit culturally and strategically. We are very selective. We choose fewer than 1 out of 10 of the opportunities that we consider, but I do think that we're going to have some really attractive opportunities as a result of this announcement.

Next to Ryan Nash with Goldman Sachs.

So maybe as a follow-up to Betsy's question. So Bill and John, you guys have been doing a handful of deals in insurance per year. Does this accelerate the pace of acquisitions for Truist Insurance Holdings. And then given outside capital on the smaller stake, does this at all change your appetite to do something transformational in the business from an M&A perspective?

I think the answer to both of those is yes. So yes, I think it does increase the opportunity. I mean John highlighted, I think while we're today, I think, a consolidator of choice, I think the partnership with Stone Point, they're creating a different currency, sort of putting this very public stake in the ground, I think actually just increases those opportunities. And whether they're incremental or transformational, over time, this business is transforming and consolidating. So I think on a collective basis, yes, I think we are talking about transforming and growing and creating additional incremental value in Truist Insurance Holdings.

Got it. And then, Bill, I think in your prepared remarks, you mentioned that Stone Point brings operational expertise that could help drive efficiencies. John, I know the insurance business had several initiatives for a handful of years where you took EBITDA margins in the low 20s to the high 20s. But can you maybe just help us understand, does this at all change the -- where you think margins in the business can head? And can you maybe just talk a little bit about how you think they will drive operational efficiency?

Yes. So we know Stone Point well. I think very highly of them. They have a fantastic reputation and a lot of experience within this space. They have partnered with other insurance brokers and have helped to create exceptional platforms. And I'm confident that, that will be the case here. We do have a good track record, as you mentioned. We have delivered strong organic growth, strong total revenue growth, strong margin expansion, strong bottom line performance. I expect all of those things will continue going forward. I look at this announcement as being the path and the framework that give us the ability for that continued growth and continued improvement. And our new partners at Stone Point know the industry as well as anybody and will be very valuable advisers.

We'll go next to Mike Mayo with Wells Fargo.

So you're getting proceeds equal to 3% of your market cap and your tangible book value goes up by 6%, so I guess that math is good. So why not double what you're doing? Why not get 6% of your proceeds and increase your book value by 12% or even beyond that? Why 20%?

Yes. There was no magic to the 20%, Mike. I mean this wasn't a capital or liquidity play. This is a strategic, long-term play. So the goal was to create a partnership, create financial flexibility and strategic flexibility going forward. So might that increase relative to another large opportunity? Sure. So I think the goal was not a specific percentage to achieve a specific goal, the goal was to create the financial flexibility and the platform for future growth.

And to your earlier comment, you said this will position you better for acquisitions. I guess you've already had the desire, but maybe this gives you a greater ability to pursue deals and you said would consider a transformational insurance deal. I mean I guess once you prove that you have a 25 PE or so currency versus a 9 PE, maybe it makes it that much easier. Can you elaborate on some of the -- even the blue sky scenario, I know you want to get insurance larger as a percentage of your total revenues like you had in -- like BB&T had before the merger, elaborating on that thought, transformational is a supercharged word.

Yes, whether it's a capital T or a small T in terms of how you think about transformational. But as John highlighted, I mean, this is a rapidly consolidating industry. And we want to make sure that we're highly competitive and be the consolidator of choice in that industry. So to say that as the primary framework. Whether transformation happens one deal at a time or whether it happens with a larger deal, I don't know. Those will be things that we'll consider. We've got a great partner. We'll think through those things. And then as you highlight, we have currency, not only currency to attract talent. So they have currency, as John, I think, highlighted really specifically that aligns talent with the overall value creation in Truist Insurance Holdings, but also capital to raise and the structure that we've created to do things that are more transformational and wouldn't be significantly dilutive to Truist. So it's a combination of all those things, and that's why I really gave the same answer about the percent. The announcement today is about the platform. The announcement today is creating the launching pad and the currency and the optionality for where we go in the future.

We'll come next to Erika Najarian with UBS.

So this transaction has been out sort of being in the press for some time now and a lot of investors are sort of asking the why, right? And it seems like you've answered that question, the why seems to be the ability to not just unlock the value but accelerate the growth in this high-multiple business. I guess I'm wondering how we then -- as we think about the long-term transformational benefits of this transaction, which I think the market would agree with, help us think through that 6.5-year right that Stone Point has to request a sale or IPO. Because you would have built up this great business and then you would monetize it, but what -- like then you get high-multiple capital back and most of the other businesses that you could expand in after you get the capital be a lower multiple than an insurance business. I guess that was just the one part of the transaction that would give me pause.

Yes. I think, again, sort of going back to this concept of strategic and financial flexibility. So I don't sit, thinking about there's a 6.5-year time line. That's not sort of how we think about this. That's just a deal term that's sort of, I think, customary in these type of deals. You've got to provide a liquidity avenue for your partners. I -- so more when I think about it is we've got a great partner who's really aligned and continuing to help us grow this business and we're not sort of focused on a specific time line and all the gates that go through that. And we each have financial flexibility related to them. So there is no sort of one certain path that we go down. We've got a lot of different paths we can go down. And then to your other point, the -- and creating this financial flexibility, it's not only for Truist Insurance Holdings, but for Truist. So as we think long term strategically about where we want to position the company and where we want to go and where the growth opportunities might be, those are also going to evolve and change. Some of those may be at traditional bank value, some of those may be at higher values. Maybe other businesses that grow faster and a really good complement to the things that we're doing at Truist and enhance our overall value. So again, flexibility within Truist Insurance Holdings, flexibility within Truist, not a specific time line or deadline and we've got the flexibility to navigate all of those and an aligned partner in that forward look.

Jennifer, we've got time for one more question.

We'll go next to Ken Usdin with Jefferies.

I wanted to just ask you a question about the structure of the deal. Can you walk through this preferred dividend structure and explain just how it [ relates ] dividends that offset the noncontrolling interest? And just -- what's the -- how does that work? Like the purpose of setting it up that way, whose funds -- I know it's an internal transaction, but just kind of like how that just fits into the neutrality calculation of the EPS. I'm just getting a bunch of questions on that.

Yes, sure. Ken, it's Mike. I mean a couple of things. One, I think just at the highest level, our view was that a transaction like this certainly deserve to have some form of leverage in the structure. And our perspective was that, that was leverage that we wanted to provide internally versus seeking leverage from a third party. So the way the preferred is structured is essentially, obviously, intercompany between the bank and insurance holdings. The -- it's in obviously a senior position relative to the common and we'll earn a dividend of 8.25%. As far as the -- from a tax perspective, it will still continue to be treated as equity from a GAAP perspective within Truist Insurance Holdings, it will be considered debt. And I think the way to think about the consolidation is, is that there will be a noncontrolling interest that's created below the line to the tune of, call it, $70 million or so. And I mentioned in my remarks, that's roughly 23% of the postdividend earnings of Truist Insurance Holdings. And that $70 million of income available to common will be offset by really 2 components: the first would be the income that we'll earn on the proceeds, we note that we sort of conservatively assumed a 4% reinvestment rate; and then there will be some modest improvement in taxes as well, just based on the fact that we'll have less earnings attributable to Truist.

Okay. So -- and then just something -- down the road, if there's further transactions, does that preferred convert into anything else? Is it permanent? Like how does that work in the context of the big -- the entity, the TIH entity.

Yes, sure. No, it's a long-dated security. The way you should think about it is, it is, in fact, still part of our equity capitalization for Insurance Holdings, which is why it was important to note that it coupled with the equity value in the sub, add to the aggregate value of the company. What I'd suggest is the value of the preferred is going to accrete back to Truist at an 80% rate, if that makes sense.

Great. Thanks, everyone. That completes our call. If you have any additional questions, please feel free to reach out to the IR team. Thanks for your interest in Truist. We hope you have a great day. Jennifer, you can now disconnect the call.

Thank you. This does conclude today's conference. We thank you for your participation.