DBRS Morningstar Confirms Intact Financial Corporation at “A” and Assigns Financial Strength Ratings of AA (low) to Canadian Operating Companies Acquired from RSA; Stable Trends

DBRS Limited (DBRS Morningstar) confirmed all ratings of Intact Financial Corporation (Intact or the Company) and its operating insurance subsidiaries, including Intact’s Issuer Rating at “A” and the Financial Strength Rating (FSR) of its main operating insurance subsidiaries at AA (low). DBRS Morningstar also assigned FSRs of AA (low) to the acquired Canadian operating companies of RSA Insurance Group Plc (RSA). All trends are Stable.

KEY RATING CONSIDERATIONS
The confirmations and Stable trends reflect the Company's strong franchise, which is supported by a well-diversified product mix and extensive distribution network that is further enhanced by the acquisition of RSA. The ratings also consider Intact's relatively high financial leverage, exposure to potential catastrophe losses, and integration-related risks associated with the recent acquisition of RSA. The Company maintains ample liquidity resources to deal with potential cash demands under reasonably severe stress scenarios. Intact also maintains regulatory capital ratios with appropriate buffers above required solvency levels, allowing the Company to handle reasonably adverse events. The assigned FSR ratings on the acquired Canadian operating companies of RSA are aligned with those of Intact’s Canadian operating subsidiaries. This takes into account recent organizational restructuring after the intermediate holding company for RSA’s Canadian businesses became a wholly owned subsidiary of Intact.

RATING DRIVERS
The Company would be upgraded if there is material improvement in financial leverage and strengthening of the risk profile, together with the successful integration of the recent acquisition while maintaining strong earnings and regulatory capital levels.

Conversely, the Company would be downgraded if there are material adverse integration issues, or if Intact experiences a persistent material decline in underwriting results or significant unfavourable reserve developments. The ratings would also be downgraded if Intact experiences a material decline in capital buffers above regulatory target ratios combined with a sustained deterioration in financial leverage over 35% (as calculated by DBRS Morningstar).

RATING RATIONALE
DBRS Morningstar views Intact’s franchise as strong, which reflects the size and diversity of its business model. Intact's strong brand recognition and diversified product offerings in both commercial and personal lines of insurance, supported by its well-established multichannel distribution strategy, gives the Company a competitive advantage that is difficult for its Canadian competitors to match. Intact continues to make good progress in realizing benefits from its strategy of growth through acquisitions. The Company is the largest provider of property and casualty (P&C) insurance in Canada and a leading provider of specialty insurance in North America. Through the acquisition of RSA’s Canadian, UK, and International businesses, Intact aims to broaden and diversify its franchise and expects to achieve economies of scale by extending its operating model and digital platforms across its global commercial and personal portfolios. The acquisition should enhance Intact’s distribution capacity and strengthen its position in the specialty insurance sector. In the UK, RSA is among the top five providers of P&C insurance and enjoys strong brand recognition. Its international operations include Ireland, continental Europe, and the Middle East.

The Company’s growth strategy, large size, and diverse product offering present a wide range of business risks to its risk profile. DBRS Morningstar notes that there is significant execution and integration risk with the acquisition of RSA because of its material size and geographic diversity. DBRS Morningstar expects that the integration of the Canadian business of RSA will be relatively uneventful given both companies offer similar products, have a comparable distribution strategy, and are regulated by the same prudential regulator. However, the full integration of RSA’s UK & International business could be challenging as this is Intact’s first international expansion outside of North America. To date, Intact has been able to manage the complexities of operating in varied jurisdictions well.

The Company’s strong earnings ability reflects its consistent strong underwriting performance across its diverse business segments combined with good investment portfolio returns. Intact has reported positive net earnings in the last five years. The Company generally targets a mid-90s combined ratio run rate; however, DBRS Morningstar notes that quarterly results typically vary with the seasonality of severe weather events, such as spring and summer hail and flooding events or winter storm damages. Intact's premium growth trend is positive and DBRS Morningstar anticipates that this is likely to continue as a result of business growth initiatives and recent acquisitions.

Intact maintains a very high level of liquid or marketable assets and has additional liquidity support from its extensive reinsurance coverage program. The Company's reinsurance programs limit the impact of losses by paying out on claims that exceed Intact's insurance risk retention thresholds. In addition, Intact has established a commercial paper program that provides short-term liquidity and also benefits from a committed revolving term credit facility. On June 1, 2021, the credit facility was increased to $1.5 billion from $750 million in order to provide additional liquidity and the maturity was extended to May 20, 2026.

DBRS Morningstar views Intact’s level of capitalization as strong/good. The 9M 2021 regulatory capital ratios for the Company's major operating subsidiaries are above regulatory solvency requirements. The higher capital ratios provide capacity to withstand reasonably severe adverse events while supporting the underwriting of new business. The Minimum Capital Test (MCT) ratio for the consolidated company was 204% as at 9M 2021 (224% as at YE2020), which is above the supervisory target MCT ratio of 150% set by the Canadian regulators.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Intact are as follows: Franchise Strength – Strong; Risk Profile – Strong/Good; Earnings Ability – Strong; Liquidity – Strong/Good; Capitalization – Strong/Good.

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

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (July 16, 2021; https://www.dbrsmorningstar.com/research/381667). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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