Eastern Bankshares’ $528 million, all-stock deal to acquire Cambridge Trust Co. would create what Chairman and CEO Bob Rivers described as a “powerhouse” Boston-area banking company, but the merged institution won’t include Eastern’s biggest fee-based business line — Eastern Insurance Group.
On Tuesday, the same day it announced the acquisition of the $5.5 billion-asset Cambridge Trust, the $21.6 billion-asset Eastern agreed to sell the insurance subsidiary to Arthur J. Gallagher & Co. in Rolling Hills, Illinois, for $510 million in cash. Funding generated by the insurance sale “provided us with the opportunity to partner with Cambridge Trust,” Rivers said Wednesday on a conference call with investor analysts.
The deal with Arthur J. Gallagher, which is expected to close in the fourth quarter, would end a two-decade business odyssey that began in 2002, when Boston-based Eastern acquired Allied American Insurance Agency. Since then, Eastern has acquired 36 additional agencies, building a business that generated commissions totaling $99.2 million in 2022; it is on pace to produce $104 million of commissions in 2023.
The same earnings power that bolstered its bottom line led to a valuation headache for Eastern.
Based on Tuesday’s deal, Eastern Insurance Group is valued at 35 times earnings, compared with 11 times earnings for Eastern Bankshares. “That valuation premium is why we initiated the transaction and are very pleased with the outcome,” Chief Financial Officer Jim Fitzgerald said on the conference call. “Eastern hasn’t been able to fully take advantage of Eastern Insurance Group’s value under our ownership. Unlocking this value through the sale is important to our shareholders.”
A number of banks have been selling insurance subsidiaries lately. The biggest such deal came in February, when Truist Financial said it planned to sell a 20% stake in Truist Insurance Holdings to Stone Point Capital, a private equity firm based in Greenwich, Connecticut, for $1.95 billion. That sale was completed in April. Several transactions have been announced since then, including the Defiance, Ohio-based Premier Financial’s sale of its insurance unit to Risk Strategies in Boston on June 30. The $8.5 billion-asset Premier reported a $36.5 million gain on sale in the 10-Q report filed with the Securities and Exchange Commission Aug. 5.
While Rivers characterized Eastern Insurance Group as a “fantastic business over the last 20 years,” bringing Eastern and Cambridge Trust together “will create a bigger, better opportunity than either of us could have had on our own,” he added. According to Eastern, acquiring Cambridge Trust would be 20% accretive to 2024 estimated earnings, pushing profits to $295 million. Projected return on average tangible common equity would be 13.5%, instead of 10% without the deal.
Eastern would also gain Cambridge Trust’s highly regarded wealth management business, with $4.4 billion of assets under management. Adding Eastern’s $3.2 billion of assets under management would create the largest bank-owned investment advisory in Massachusetts, Rivers said. The combined subsidiary would retain the Cambridge Trust brand “and be an important source of diversification going forward,” he said.
Eastern and Cambridge Trust reported a combined $28 million of wealth management revenues through the first six months of 2023, still significantly less than the $59 million of commission revenue generated by Eastern Insurance Group.
The merger, expected to close in the first quarter of 2024, would make Eastern “a better, more flexible bank, more heavily reliant on spread lending,” Jake Civiello, who covers Eastern for Janney Montgomery Scott, wrote Wednesday in a research note. However, Civiello added, it “creates more questions than answers.” Beyond the loss of the “differentiating” insurance business, “for those investors who thought [Eastern Bankshares] was a potential seller, this deal takes that off the table,” Civiello wrote.
Eastern investors seemed decidedly cool to the deal. The company’s shares closed down nearly 6% Tuesday at $12.64.
Cambridge Trust opened its doors in 1890, but Eastern’s roots date back to 1818, when it was founded as Salem Savings Bank. A depositor-owned mutual throughout most of its history, Eastern converted to stock ownership in 2020, raising $1.8 billion in an initial public offering.
Chris DeMuth, a portfolio manager at Rangeley Capital in New Canaan, Connecticut, applauded the Eastern Insurance Group sale, which he described in an email to American Banker as “at the high end of the expected price range.” DeMuth, who took a position in Eastern at the time of its IPO, characterized Cambridge Trust and its wealth management arm as a “trophy asset.” But DeMuth called the $528 million price tag too high and lamented the fact the deal would likely take Eastern out of play as a seller.
“I’m disappointed that Eastern Bankshares bought it,” DeMuth wrote. “It isn’t a horrible combination, but Eastern is overpaying. Eastern shareholders would do better if instead Eastern sells itself after its upcoming third anniversary of its conversion. … It is an unforced error but a reversible one.”