The Royal Bank of Canada branch in Old Montreal.Ryan Remiorz
Royal Bank of Canada is selling off some of its insurance business to a larger competitor in a move to offer customers more coverage while reducing risk.
Aviva Canada Inc. is acquiring an RBC division of home and auto insurance through a $582-million deal for RBC General Insurance Co. About 575 employees from RBC Insurance that handle underwriting, adjudicating claims and other activities will become part of Aviva under the agreement.
The two former rivals have also struck a 15-year arrangement allowing RBC to continue selling products under its existing brand name. RBC said its direct-to-consumer home and auto insurance business is growing, meaning more people are seeking insurance online and by phone, rather than calling a broker. This trend has been on the rise, particularly among younger customers, as the Internet and mobile phones play a greater role in the research and purchases of insurance.
The deal also represents how critical scale is for property and casualty (P&C) insurance providers' profits, where higher volumes of business can make a big difference in underwriting results. As RBC sheds some of that risk, it will also be able to interact with customers in more ways by adding Aviva's existing insurance products to its lineup. "We had a more limited product set that was designed more for the mass market. This will enable us to offer products beyond that," said Neil Skelding, chief executive officer of RBC Insurance. There were categories of insurance products such as second homes and recreational vehicles that RBC hadn't insured in the past.
"Our strategy at the retail level is to do all the insurance needs of our clients. We bring them in on an auto policy and then move to a home policy, perhaps a travel policy ... our ultimate goal is to have six, seven, eight products with a client through cross selling," Mr. Skelding said. The two companies said there will not be any change for customers at this time.
For Aviva, the subsidiary of international insurance giant Aviva PLC, the deal gives customers more choice and "meets the insurance needs of more Canadians," said Greg Somerville, CEO of Aviva Canada, adding that the partnership would diversify "distribution alongside our highly-valued 1,500 independent brokers."
Aviva said the deal will boost the number of premiums written by about $800-million, before deductions. The insurers' number of gross written premiums was nearly $4-billion in 2014. Based on premiums written, Aviva would rank as the country's second-largest P&C insurer.
London-based parent company Aviva PLC has praised the Canadian division in recent months for generating among the best returns of its businesses and posting improving underwriting profits. The company's global CEO Mark Wilson has been restructuring the business since he took the helm in 2013.
RBC will now turn its focus to its life, health and wealth insurance offerings, where it has been launching new products. Target areas include new health and dental plans for small to medium-sized employers, and it has invested in its existing disability and life insurance business. Another plan is to build up a pension plan "de-risking" business, where a sponsor could pay an insurer such as RBC to assume the risk that retirees will live longer than expected.
Other Canadian insurance companies have also been consolidating. Co-operative player Desjardins Group bought the Canadian arm of U.S. mutual insurer State Farm Life Insurance Co. in 2014 and U.S. insurer Travelers Cos. Inc. bought the historic Dominion of Canada General Insurance Co. in a $1.13-billion deal before that. Intact Financial Inc., the country's largest P&C insurer, has also expressed plans to look for and pursue acquisitions using excess capital and has already done some deals.
This acquisition could pave the way for other insurance acquisitions for Intact, according to Meny Grauman, an analyst at Cormark Securities Inc. "We also believe that an insurance sale would be in the interests of TD shareholders (especially if it includes a long-term distribution agreement) as the bank gets rid of a unit that has been a source of much earnings volatility over the past few years and frees up excess capital to deploy in areas such as U.S. wealth," he said in a note to clients.
RBC had been mulling a sale of this business for many months and will receive about $200-million in after-tax gains when the deal closes later this year, pending regulatory and other approvals.
In March last year, RBC CEO Dave McKay said the bank was "trying to decide which direction we go" with the P&C insurance division, which he called costly to distribute and a "very volatile business." RBC's market share is estimated to be about 1.7 per cent, according to Mr. Grauman.