Why the banks fight for insurance
Canada's banks are facing repeated broadsides as they slowly, ponderously invade the insurers' turf.
Insurance agents, well organized and supremely connected politically, have waged successful battles against sales of insurance products in bank branches and via the bank's websites. However, a few wins on the marketing front shouldn't distract anyone from the eventual outcome to this struggle - the banks will be major players in Canadian insurance. And a look at Bank of Montreal's numbers yesterday shows why this is a war worth fighting.
Bank of Montreal is a relative latecomer to insurance. In the past, the bank's executives steered clear of actually acquiring insurers, preferring alliances with life companies as a way to get products such as annuities on the shelves. Chief executive officer Bill Downe raised eyebrows in his first year at the helm by dropping $375-million in January, 2009, for AIG Life Insurance Co. of Canada, an acquisition done in the worst days of the market meltdown. A whole lot of people consider anything associated with AIG to be toxic, despite the discount valuation on the business that BMO bought.
Mr. Downe and his team shaped their strategy from the customer's side of the table. Wealthy individuals, such as business owners, want one adviser who can solve all their personal finance issues, with succession planning, loans, insurance and savings products all wrapped up in one tidy package. In shifting strategy last year, Mr. Downe said: "This [AIG] acquisition is a perfect extension of our existing wealth management offering and our goal to become the one-stop location for all our clients' financial and investment needs."
It's worth noting that insurance companies are ramping up their offerings and their agent training to better compete for these same clients.
Stellar performance from BMO's wealth management unit in Wednesday's financial results show the bank is a quick study at the game of life (insurance). Stronger-than-expected results included a 64 per cent year-over-year jump in profit from what's known as the private client group, which includes wealth management and insurance division BMO Life Assurance - the rebranded AIG unit. The division contributed $118-million to the bank's overall quarterly profit of $745-million.
Early results back up the logic for this deal. The insurance division turned in a $45-million profit in the most recent quarter, and $8-million of that profit came from newly integrated BMO Life Assurance unit. Those are decent results for an expansion strategy that's in its early days.
Bank of Montreal's overall wealth management profits were up 79 per cent to $73-million - this excludes results from the insurance division. The rise in profits reflects a 20 per cent increase in assets under management, which are now at $45-billion. The rising fortunes of this division should get favourable reviews, as wealth management earnings tend to command a premium multiple from investors, due to their reliability.
While BMO is successfully expanding in a key sector, its insurance sales and wealth management platform are far smaller than rivals Royal Bank of Canada and Toronto-Dominion Bank. Both of those banks acquired small insurance subsidiaries long before BMO got in this game, and both have been more aggressive in marketing insurance products to customers - RBC's decision to open insurance outlets next door to its existing retail branches has been particularly galling for the insurance agents. Watch for Mr. Downe to quietly build his insurance franchise.
And with profits clearly available in this space, all the big banks will continue nibbling away at their insurance rivals, willing to endure rear-guard fights with insurance agents as they expand. The banks are making insurance a key component of their wealth management strategy. In a mature sector filled with deep-pocketed players, there's a strong possibility we'll see more bank-buys-small-insurer deals.
See Andrew Willis's Streetwise Blog at ReportonBusiness.com
