DBRS Confirms Intact Financial Corporation Following Announced Agreement to Acquire AXA Canada

DBRS has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Intact Financial Corporation (Intact or the Company) at A (low) with a Stable trend following the announcement by Intact of its intention to acquire the Canadian affiliate of AXA Group (AXA Canada). The confirmation of the ratings is underpinned by the strong operating track record of both Intact and AXA Canada, Intact’s track record of successful acquisitions, and the intention of Intact to reduce its leverage to acceptable levels over the near term. Failing to reduce leverage to acceptable levels, as planned, could result in negative rating action.

Intact is paying a total cash consideration of $2.6 billion, or approximately 1.8 times book value (as at December 31, 2010). Although a not-insignificant premium, the multiple being paid is in line with precedent comparable transactions and DBRS acknowledges the quality of the entity being purchased. Intact is financing the acquisition with a combination of equity and debt issuance. AXA Canada is the sixth largest property and casualty insurance company in Canada, with a 4.2% market share. AXA Canada has a strong presence in Québec, representing 43% of its direct written premium in 2010, and in Ontario, with 27% of direct written premium. AXA Canada has grown by more than 7% over the past five years, with an average combined ratio of 92.2%, which has contributed to solid profitability.

DBRS anticipates some integration risk; however, Intact is an experienced acquirer with 11 successful acquisitions made since 1988. If successfully integrated, DBRS believes the transaction will have a slightly positive impact on Intact’s business risk profile. On a combined basis, the Company will have better geographic and product diversification across Canada and will have approximately double the market share of its nearest competitor. In 2010, Intact generated about 45% of its direct premiums written in Ontario; after the acquisition, Ontario will represent approximately 40% of direct written premium. Relative to Intact, AXA Canada has lower exposure to the higher-risk Ontario auto insurance market and higher exposure to commercial property and other commercial insurance. As a combined entity, the Company will have approximately a 24.9% market share in Québec, 13.2% in Ontario and 13.7% nationwide. The Company has stated that it expects the proposed acquisition of AXA Canada to be accretive within two years.

About 50% to 55% of the purchase price will be funded through common equity (dependent on the exercise of the overallotment on the concurrently announced subscription receipt issue) and the release of excess capital on the balance sheet ($500 million, reducing the Company’s minimum capital test ratio (MCT) to 200%). The balance of $1.18 billion to $1.3 billion will be financed by debt. The Company has indicated its intention to partially refinance this debt through the issuance of medium-term notes and preferred shares.

As structured, the proposed transaction will increase Intact’s debt plus preferred share-to-total capitalization ratio to 30.9% (28.8% if the overallotment on the subscription receipt issue is exercised). This is above the 15% to 25% range for the “A” rating category as defined in DBRS’s “Rating Canadian Property and Casualty Insurance Companies” methodology. Although financial leverage increases substantially at closing, DBRS notes that Intact has presented a plan through internal capital generation, likely by halting share repurchases, for reducing the leverage to levels expected for an “A”-rated company in this industry. At the same time, the projected coverage ratios are very strong.

The transaction, expected to close in fall 2011, is subject to provincial and regulatory approvals.

Notes:
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.