DBRS Confirms Intact Rating Following Announcement of Jevco Acquisition

DBRS has today confirmed its existing A (low) senior debt rating and Pfd-2 (low) preferred share rating of Intact Financial Corporation (Intact or the Company) following its announcement on May 1, 2012, that it would be purchasing Jevco Insurance Company (Jevco) from The Westaim Corporation for cash proceeds of $530 million, representing approximately 1.3 times Jevco’s book value. The acquisition is to be initially funded through the issuance of $225 million of equity and a combination of debt and cash on hand for $305 million. Following the closing of the transaction, expected to occur in Q3 2012, the Company expects to use $100 million of Jevco’s excess capital to pay down the drawn bank line. Jevco had an MCT ratio of 326% to December 31, 2011, representing regulatory capital in excess of its 220% target of $130 million.

At year-end 2011, Intact’s financial leverage was 31.6%. Since the $250 million proceeds from the sale of the AXA Canada life insurance operation was used to pay down the Company’s bank debt in Q1 2012, estimated financial leverage at March 31 has been reduced to 28.0%. Giving credit for expected growth in retained earnings over the interim period, financial leverage is estimated to be lower again upon closing of the Jevco transaction despite the increase in debt, which continues the progress that the Company has been making in reducing its financial leverage, following the AXA acquisition and in line with DBRS expectations.

Jevco is expected to represent about 6% to 7% of the Company’s written premium and earnings, and will add approximately $1 billion to the Company’s existing $12 billion of invested assets. The acquisition is expected to be accretive to earnings-per-share within the next two years. The acquisition broadens the Company’s product offerings to include non-standard auto insurance and recreational products insurance, including one of the largest motorcycle insurance books in Canada. Jevco also has a number of specialty commercial lines, including surety. Personal lines account for about 75% of the premium, which is in line with the Company’s own product mix. The Company will also be able to extract a number of expense synergies related to administration and claims management. In 2011 Jevco reported a combined ratio of 95.5% and net income of $32.8 million, including favourable claims development and realized gains on AFS assets. The Ontario non-standard business, which accounts for over half of Jevco’s personal lines, has benefited from provincially-imposed auto insurance reforms.

Following the announcement of Intact’s $2.6 billion acquisition of AXA Canada in May 2011, DBRS confirmed the Company’s ratings with a Stable trend, despite a temporary increase in financial leverage to levels which are not necessarily consistent with the existing rating categories. The integration of AXA into Intact is proceeding smoothly and should not impair the Company from undertaking a new integration later in the year. While the Jevco transaction temporarily interrupts the otherwise expected reduction in financial leverage, DBRS remains comfortable that the Company’s profitability, its proven success in integrating its many acquisitions over the years, and its current elimination of share buybacks will help the Company to reduce its financial leverage to acceptable levels in relatively short order.

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.