Bank of Montreal's Lucrative Insurance Move

| About: Bank of (BMO)

By Andrew Willis

Bank of Montreal (NYSE:BMO) is a relative latecomer to insurance. Stellar performance from the unit in Wednesday’s financial results show the bank is a quick study at the game of life insurance.

Stronger-than-expected results from Bank of Montreal included a 64% 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 division contributed $118 million to the bank’s overall quarterly profit of $745 million.

CEO Bill Downe raised eyebrows by dropping $375 million in January, 2009 for AIG Life Insurance Company of Canada, an acquisition done in the worst days of the market meltdown.

While other banks were attacking what used to be exclusive turf of the insurers, Mr. Downe’s predecessors steered clear of actually acquiring insurers, preferring alliances with life companies as a way to get these products on Bank of Montreal’s shelves. In shifting strategy, Mr. Downe said: “This [AIG] (NYSE: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.”

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 was directly related to the 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% to $73 million – this excludes results from the insurance division. The rise in profits reflects a 20% increase in assets under management, which are now at $45 billion. The rising fortunes of this division should get favourable reveiws, as wealth management earnings tend to command a premium multiple from investors, due to their reliability.

While Bank of Montreal 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. 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. In a mature sector filled with with deep-pocketed players, there's a strong possiblity we'll see more bank-buys-insurer deals.