DBRS Confirms Intact Financial Ratings at A (low)

DBRS has today confirmed the A (low) Issuer Rating and the Senior Unsecured Debt rating for Intact Financial Corporation (Intact or the Company). The trends are Stable. The Company’s operating subsidiaries continue to be among the stronger performers in the Canadian property and casualty (P&C) insurance industry. Nevertheless, the financial results for Intact and the entire industry have been adversely affected in recent years by escalating accident benefits and bodily injury claims in the large Ontario auto segment and by higher property claims related to water damage and extreme weather events, which has resulted in underwriting losses (i.e., a combined ratio in excess of 100%) in both 2008 and 2009.

The Company’s results have shown some improvement in recent quarters due to more benign weather conditions, price firming in the Ontario auto market, and an active campaign to improve profitability in its property lines through increased insured values, higher premiums and deductibles, and a review of the claims process. However, Intact does remain vulnerable to the unpredictable, cyclical and reactive nature of the industry. Investment results, which had been an additional source of earnings volatility in recent years, appear to have settled down as the worst of the financial crisis seems to have passed.

The Company’s consistent underwriting strength and industry outperformance reflect its relative scale and strong market position in the Canadian property and casualty insurance market, where it is the largest competitor, with more than an 11% share of net written premium, one-third larger than the number-two competitor (Aviva Canada Inc.) and twice the size of the number-three competitor (Co-operators General Insurance Company). Intact leverages its scale advantages through the application of superior underwriting capabilities, market segment pricing, technology, investment, claims and general expense management.

In recent years, Company earnings had been adversely affected by lower investment results as a consequence of its investment strategies. This left Intact exposed to the unprecedented decline in global capital markets in 2008 and in early 2009, as reflected in increased impairment charges on its common equity portfolio and higher realized losses as a result of the Company’s decision to actively reduce its exposure to common equity investments in financial service companies. Intact has reduced the market and credit risk in its investment portfolio by substantially cutting back on its exposure to the common equity market and to corporate bonds while increasing its holdings in Canadian government treasuries. These actions have helped shore up regulatory capital through the current uncertain market conditions. A more conservative portfolio will nevertheless put downward pressure on investment earnings.

Over the past year, the Company has chosen to add financial leverage to its balance sheet at the holding company level through the issuance of $500 million in senior debt, approximately $300 million of which has been used to fund share buybacks pursuant to a normal course issuer bid (NCIB). While the Company’s debt ratio increased to 14.6% as of the end of June 2010, the injection of a portion of debt proceeds into the operating subsidiaries contributed to a net strengthening in the regulatory minimum capital test (MCT) ratio to 217.6% at the end of June 2010, up from 211.1% for the prior-year period. At the current MCT ratio, the Company has about $585 million of excess capital above its 170% target level at the operating company level and an additional $181 million at the holding company level. In addition, the Company has additional debt capacity of $227.3 million, subject to a longer-term debt ratio target of 20%. This strong financial flexibility has allowed Intact to expand its NCIB by an additional 5% of outstanding shares (up to 10%), which would result in an incremental payout of over $225 million to the degree that the Company completes the NCIB. However, should an acquisition opportunity present itself, it is unlikely that the Company would complete its NCIB program as announced in favour of funding the acquisition.

The DBRS rating on the Company reflects its holding company status, which ranks its obligations below those of its operating subsidiaries. While these are very strong operating entities, their regulated nature and the structural subordination of holding company obligations result in a rating assignment for the parent which is at least one notch below where the operating subsidiaries might be rated in their own right.

Note:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Canadian Property and Casualty Insurance Companies, which can be found on our website under Methodologies.