Royal Bank of Canada is selling its home and car insurance business to Aviva Canada Inc. for $582 million inside a deal that includes a 15-year distribution arrangement allowing the financial institution to continue selling a “full suite” of insurance products.
RBC leader Dave McKay indicated last year the bank was not necessarily dedicated to long-term ownership of RBC General Insurance Co., which holds about two per cent market share.
Thursday’s sale seems to acknowledge the abandonment of a long-held hope that Canadian banks would be permitted to sell insurance within their branches, said Rob Sedran, a bank analyst at CIBC World Markets.
“The bank was sub-scale in P&C (property and casualty) insurance partly owing to the fact that it is prohibited from selling insurance through its vast branch network,” the analyst wrote in a note to clients.
“It appears that hope gave way to the reality that those regulations are unlikely to alter anytime soon.”
RBC pushed difficult to win access to one-stop looking for banking and insurance products within the bank’s extensive network of branches. After losing an offer in 2006, the bank began opening separate insurance sales offices right next door to some of its branches. Bank of Quebec followed suit, though on a smaller scale.
Aviva Canada develops first insurance plan for ride-sharing services like UberManulife strikes deal in Asia to market insurance through bank branches
Neil Skelding, the main executive of RBC Insurance, said Thursday’s sale, including the arrangement with Aviva to continue to sell the insurance products, allows the financial institution to purchase other locations where there is “the greatest potential for growth, including – life, health and wealth insurance offerings.”
Aviva becomes the amount two property and casualty insurer in Canada, moving in front of TD Insurance, based on figures from MSA Research Inc. Paul Holden, a diversified financials analyst at CIBC World Markets, said Aviva’s share of the market will sit around 11 per cent once the deal closes.
In a note to clients Thursday, Holden said the transaction represents a missed opportunity for rival insurer Intact, the largest P&C insurer in the country, which has set an objective of growing share of the market to between 25 and 30 percent. About $7.3 billion in direct premiums designed in 2014, Intact’s market share sits around 17 per cent.
“RBC General Insurance represents roughly two points of share of the market, so it’s not a huge miss, but considering the period of time since Intact last completed a meaningful transaction, it may be viewed as a miss in terms of executing around the M&A strategy,” Holden wrote.
With Aviva upgrading to buy the RBC unit, “it seems even less likely that Aviva Canada could be acquired by Intact any time soon,” he added.
Shubha Khan, an analyst at National Bank Financial, said it is “somewhat surprising” Intact handed down the RBC insurance unit, particularly after creating other recent deals. In a note to clients, he wrote that Aviva’s purchase at 1.9 times book value was “well short of the 2.5 times IFC (Intact) might have paid.”
Khan speculated that another, better deal might be within the pipeline for Intact, and suggested TD Insurance will be the probably target.
“TD hasn’t publicly stated that it promises to sell its insurance subsidiary and, in fact, they’ve suggested it remains strategically important,” he told the Financial Post. “However, In my opinion TD may consider selling its insurance arm in order to reduce earnings volatility and also to redeploy capital into higher strategic priorities, such as the bank’s U.S. operations.”
Khan added that TD Insurance has “struggled with underwriting profitability recently, which can be another reason to market.”
The deal between RBC and Aviva, which will come after years of consolidation within the property and casualty insurance sector, is expected to close within the third quarter. The bank anticipates recording an after-tax gain of $200 million.
“This partnership is an excellent addition to Aviva Canada, diversifying our distribution alongside our highly-valued 1,500 independent brokers,” said Greg Somerville, Aviva Canada’s leader.
As area of the agreement, about 575 RBC employees will move to Aviva, though RBC will continue to be the insurer and provide assistance and claims settlement services for existing policyholders until the transaction closes.