Too small, no scale. That's the best way to explain why Royal Bank of Canada is selling its property and casualty insurance business to Aviva Canada.
Despite RBC being the country's biggest bank, and despite having 1,275 branches from coast to coast, its P&C insurance arm never really benefited from this footprint.
Ever since the politically connected insurance industry raised a stink during the 1990s about Canadian banks selling insurance through the massive branch networks, the lenders have been banned from doing so. For a while, they got creative, with RBC opening insurance branches right next to personal banking ones, but they largely target new customers using other channels, such as the Internet or snail mail.
Asked about the P&C insurance business roughly one year ago, RBC chief executive officer Dave McKay drove this point home. "We can't build off scale of our retail bank, therefore distribution is difficult and costly," he said.
RBC's P&C division was also small to begin with, estimated to have less than a 2-per-cent market share, so it didn't have much of a critical mass. For that reason, Mr. McKay said, the arm is "under scale and we're not sure where we're going to be in that business for the long term."
Today, investors got their answer: RBC won't be directly in it any more – which, truthfully, isn't all that surprising, considering the bank barely ever talked about the arm.
There's more to it. P&C insurance is a tough business to be in right now because severe weather-related losses are becoming more common. Toronto-Dominion Bank suffered badly in 2013, when it got hit with a tidal wave of claims after the Alberta floods and storms in the Greater Toronto Area. That summer, the bank incurred a $173-million after-tax provision.
But from a strategy standpoint, RBC appears to believe that it can get much more out of its wealth arm than it could from P&C insurance. Beefing up wealth management is one of the bank's big priorities, and it isn't lost on anyone that the Big Six banks have a huge leg up in this market by being able to sell their proprietary funds through the branch networks.
Better yet, the banks earn better margins when they sell their own in-house funds to their retail clients. That is why you see them building out more and more of their own fund products, so that they control everything from fund manufacturing to distribution.
The P&C deal with Aviva doesn't mean that RBC has scrapped insurance altogether. Before the sale, roughly two-thirds of the bank's business came from underwriting creditor insurance for mortgages and credit cards, and the bank will also continue to offer life and health insurance products.
But unlike its biggest rival, TD, which has stressed a commitment to its entire insurance business, RBC is happy to part ways with one aspect of its own.