In acquiring aig life Insurance Co. of Canada, Bank of Montreal has, in one fell swoop, positioned itself as a potential force in the Canadian insurance industry, particularly among its Big Five competitors.

Although the deal is not considered big relative to BMO’s size, industry observers agree that the acquisition represents a good strategic fit for the bank, especially if BMO can build wisely over the long term on what it has bought.

“It gives BMO a fully functioning traditional life insurance company,” says Byren Innes, senior vice president with Toronto-based NewLink Group Inc. and a consultant to the insurance industry. “But the real value here is in what AIG Life brings BMO in capability, as opposed to what [BMO] got from the acquisition on an as-is basis.”

On Jan. 13, BMO announced it had bought AIG Life — for $375 million in cash — from AIG Life’s U.S.-based parent, American International Group Inc. The parent company is currently selling off parts of its business in an effort to repay tens of billions of dollars in bailout funds to the U.S. government. Pending approvals, the deal is expected to close by June 1.

Analysts suggest that BMO was opportunistic in snapping up AIG Life from a motivated seller. “It appears BMO got AIG Life at a reasonable price,” says Robert Sedran, an analyst with National Bank Financial Ltd. in Toronto.

BMO has announced that the acquisition price represents just 15 basis points of its Tier 1 capital ratio — a bank’s core equity capital as a percentage of its risk-weighted assets — and that the deal would add to BMO’s earnings in the first year.

AIG Life, which had assets of $2.4 billion as of Oct. 31, 2008, offers a full range of life insurance, critical illness insurance and segregated funds. AIG Life was also planning to launch a guaranteed minimum withdrawal benefit product in 2009.

Although AIG Life is a mid-tier player in the Canadian insurance industry, the firm enjoys strong relationships with managing general agents and, to a lesser extent, investment dealers across the country. Through these relationships, AIG Life boasts a distribution network of 5,000 advisors and reports serving 400,000 customers. AIG Life also has a direct-to-consumer business and a group insurance business.

BMO has announced that it will merge AIG Life’s business, including its 300 employees, with BMO’s existing insurance operations over the next six to 12 months and will operate the firm under the BMO Life Insurance Co. name.

BMO sells Bank Act-authorized insurance products, including creditor and travel insurance, at the branch level, as well as a range of products, including term life and critical illness insurance, through its direct-to-consumer channels, which include direct mail, call centres and online.

Although BMO has provided few details, experts suspect it should be business as usual for AIG Life’s partners and customers in the advisor channel.

“BMO will keep [the advisor channel] largely intact and just change the name on the front door,” says Innes. “If today you’re buying an AIG Life product, tomorrow it’ll be a BMO Life product, but it’ll look and feel and smell the same.”

Innes believes most independent advisors who sell AIG Life’s products, as well their clients, will be happy with the stability and strength of the new owners.

A key benefit of the deal, Innes says, is that BMO acquires an entire new distribution channel, including all the administrative systems and staff to support advisor-based sales and the sale of complex products such as universal life. “BMO gets a complete infrastructure to sell any product line,” he says.

In addition, Innes says, AIG Life enjoys a strong direct-to-consumer business, which will add nicely to the size and strength of BMO’s own direct-to-consumer business. BMO has been aggressively building that business in recent years. “The deal gives BMO substantial capabilities in this area,” he says.

As a result of the acquisition, BMO will now have the capability to sell its own products through the 800 licensed investment advi-sors and insurance specialists at its brokerage arm, BMO Nesbitt Burns Inc.

“In terms of demographics, insurance is a growth area, the annuity product particularly,” NBF’s Sedran says. “Now, BMO has the ability to manufacture products for the brokerage distribution channel.”

So, will Nesbitt advisors be receptive to house-branded insurance products? Innes, for one, isn’t certain: “The brokerage is a pretty independent channel. Whether BMO will be successful through that channel — I’m not 100% sure. But, certainly, BMO will sell some product through that distribution channel.”

@page_break@Experts agree that BMO’s acquisition of AIG Life appears to be a strategic shift for the bank, in terms of the priority it places on its insurance business. From being a relatively low-profile player, the deal places BMO second only to Royal Bank of Canada among the Big Five, in terms of the size of its insurance business.

The key to the long-term success for BMO’s acquisition of AIG Life and its overall insurance line is whether BMO will be able to manage growth of a business that had previously been of relatively low importance to the bank.

“The life, annuity and illness business requires expertise and due diligence to manage effectively the risk and return profile of what are often extremely long-date assets,” notes a recent report fromTD Securities Inc. “BMO has some in-house personnel, and this transaction should bring with it additional expertise and experience. We expect the bank to move in manageable steps. However, to us, it will be critical to monitor developments in this business line over the coming years.”

The acquisition of AIG Life and the building of BMO’s insurance business could place the bank in a favourable position should the Canadian government alter the rules that restrict banks to selling and marketing a limited number of insurance products through their branches, Sedran says.

However, he also thinks that this consideration was not likely top of mind for BMO executives. “Setting your business up with the expectation that regulatory change is coming is always dangerous,” Sedran says. “Even if the government were to get on board in terms of giving banks more insurance powers, no one could guess now what the rules would look like.” IE