DBRS Assigns Provisional Pfd-2 (low) Rating to Intact Financial Corporation

DBRS has today assigned a provisional rating of Pfd-2 (low) with a Stable trend to the Non-Cumulative Rate Reset Preferred Shares (the Preferred Shares) to be issued by Intact Financial Corporation (Intact or the Company). The rating is underpinned by the strong operating performance 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. The provisional rating is based on the preliminary term sheet dated June 22, 2011, and information provided by Intact to DBRS as of June 22, 2011. The assignment of a final rating is subject to receipt by DBRS of final documentation that is consistent with that which DBRS has already reviewed.

Intact intends to use the net proceeds of the Preferred Shares issuance as part of the financing for its acquisition of AXA Canada, the Canadian subsidiary of AXA Group. Intact is financing the acquisition with a combination of equity and debt issuance. The Preferred Shares are expected to reduce the required size of the previously arranged acquisition credit facilities. Given the subscription receipt offering is fully subscribed, including the over-allotment, DBRS estimates that the acquisition will increase Intact’s debt plus preferred shares-to-total capitalization ratio to approximately 30%. 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 will increase substantially at closing of the AXA Canada acquisition, DBRS notes that Intact has presented a plan for reducing the leverage to levels acceptable for an “A”-rated company in this industry through internal capital generation, likely by halting share repurchases. At the same time, the projected coverage ratios are very strong.

AXA Canada is the sixth-largest property and casualty insurance company in Canada, with a 4.2% market share. 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. 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 46% of its direct premiums written in Ontario; after the acquisition, Ontario will represent approximately 41% of direct written premiums. 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 16% market share nationwide, based on direct premiums written.

In the event the acquisition is not completed, the net proceeds would be used for general corporate purposes. In this instance, the debt plus preferred shares-to-total capitalization ratio would be less than 20% and the Preferred Shares would be approximately 8% of common equity, which is well within the levels acceptable for an “A”-rated company in this industry.

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.