Steven Wevodau - Insurance Mergers & Acquisitions

Bank of Montreal’s AIG Acquisition Favorable but Not Transformational - Steven Wevodau

Calling Bank of Montreal’s (BMO) C$375-million cash purchase of AIG’s Canadian insurance business “a bit of a steal,” Dundee Securities analyst John Aiken highlighted the fact that management’s calculated price to book was under 1.1 times. That compares to an average price to book multiple of 1.3x for Canada’s four publicly traded insurers.

More importantly given the current environment, however, is the fact that the acquisition of AIG Life of Canada will only have a modest impact on BMO’s capital ratios, Mr. Aiken told clients. The bank’s management anticipates a less than 15 point decline in its Tier 1 ratio. On a pro forma basis including recent capital issues and changes in risk-weighted assets, the analyst said BMO’s Tier 1 capital is above 10.2%, “still above the market’s apparently mandated 10% minimum threshold.”

Mr. Aiken said:

We view the acquisition favourably as it will benefit BMO by diversifying its revenues, gaining access to additional customers and add to earnings. However, this is not a transformational acquisition but does put the bank in good stead if the Canadian Bankers Association can lift the restriction of branch sales of insurance at some future point.

Nor does it change the analyst’s position on BMO, which he said has been leading the charge in credit deterioration among the Big 6 banks so far in the current downturn. So while this deal may help explain why BMO issued common equity in December, Mr. Aiken said it still does not justify the bank issuing shares below book value. He continues to rate BMO at “neutral” with a C$28 price target.

Desjardins Securities analyst Michael Goldberg notes that bank investments in insurance subsidiaries are not consolidated under Basel II rules. However, those rules will change in 2011 when 50% of an investment would be deducted from Tier 1 capital, which he said would produce a further 10 basis point reduction.

“BMO’s intent is to become a one-stop shop for its clients, allowing it to expand its insurance and wealth management offerings,” Mr. Goldberg said in a research note.

He views the acquisition as immaterial to near-term earnings but positive for optics. “For BMO, optics are relatively more important as its uncertain outlook is reflected in the stock’s 8.5% yield,” the analyst said. Nonetheless, he thinks the near-term impact will be positive, as optics should outweigh the small near-term fundamental impact. Mr. Goldberg rates BMO at “hold” with a C$44.50 price target.

He also believes that markdowns and the losses incurred aside, earnings in the Canadian banks are prolific. “The question remains: how large are the holes that are to be filled.”

RBC Capital Markets analyst Andre-Philippe Hardy noted that AIG’s life insurance business is small with earnings of C$48-million in 2009 and a loss of C$17-million in the last 12 months. This compared to BMO’s annual earnings of more than C$2-billion.

He told clients:

AIG’s range of individual life and annuity products allows BMO to broaden its range of insurance products, which has primarily been credit life and disability insurance, but the small scale will not have a large impact on the growth outlook.

Since Canadian banks cannot sell life insurance in their branches nor share databases with their life insurance subsidiaries, revenue synergies will be limited, Mr. Hardy said. However, BMO intends to offer insurance products as an extension of existing wealth management offering and can sell through its brokerage channel, he added.

RBC maintained its “underperform” rating on BMO. It views the bank’s stronger capital position positively but believes the bank has more exposure to “potentially problematic off-balance sheet assets” and to U.S. lending.

Tags: AIG, Bank of Montreal, Steve Wevodau AIG, Steve Wevodau Bank of Montreal, Steven Wevodau AIG, Steven Wevodau Bank of Montreal

Bank of Montreal: AIG Deal Confirms Dividend’s Safety - posted by Steven Wevodau

The news is out about AIG’s (AIG) Canadian Life Insurance business, and despite the rumors on Bloomberg, BMO Financial Group (BMO) wound up as the winning bidder.

I was in a TV studio in mid-December, and one of folks sitting beside me asked me what I thought would “happen” with the BMO dividend. The premise of his question was understandable: with a 9% handle, won’t BMO management have to cut the dividend? Isn’t that what the market is telling us?

I suggested that he separate the actual implied yield from what is most likely to happen. The market might be pounding both the Bank of Montreal and the Bank of Nova Scotia (BNS) for a variety of reasons, but the fact that the dividend at BMO had hit 9% as a result, was an afterthought - if any PMs were thinking about it, at all. If BMO had to cut the dividend, it would be due to future unforeseen financial problems, not the simple fact that the stock was at $30 and the implied yield was 9%.

A short time later, BMO raised $1 billion of equity at $30, which confirmed that 1), the market hadn’t given up hope on the business, and 2), that BMO management must have known that selling stock, only to cut the dividend a few quarters later, would potentially be a potentially career limiting move, and were comfortable with where it stood.

Two more weeks have passed, and BMO is spending $375MM of that $1 billion on an important new business thrust. This is not the act of an institution, which is worried about free cash flow, or its ability to continue to pay the $2.80 dividend (now yielding 8.5%).

That’s why it is in the Decade of Daddy Mirror Fund.

Disclosure : I own BMO.

Tags: AIG, BMO Financial Group, Steve Wevodau AIG, Steve Wevodau BMO Financial Group, Steven Wevodau AIG, Steven Wevodau BMO Financial Group

AIG to sell AIG Life Insurance Company of Canada to BMO Financial Group

posted by Steven Wevodau

Contact:

American International Group, Inc.
David Monfried, Restructuring Communications, 212-770-7205
david.monfried@aig.com
or
Teri L. Watson, Investor & Rating Agency Relations, 212-770-7074
teri.watson@aig.com
or
AIG Life of Canada
Peter McCarthy, 416-596-2901
peter.mccarthy@aig.com
or
BMO Financial Group
Ralph Marranca, Director, Media and Public Relations, 416-867-3996
ralph.marranca@bmo.com

Tags: AIG Life of Canada, American International Group, BMO Financial Group, Steve Wevodau AIG Life of Canada, Steve Wevodau American International Group, Steve Wevodau BMO Financial Group, Steven Wevodau AIG Life of Canada, Steven Wevodau American International Group, Steven Wevodau BMO Financial Group