Morningstar DBRS Confirms Intact Financial Corporation at A (high) and its Operating Subsidiaries at AA; Stable Trends

DBRS Limited (Morningstar DBRS) confirmed its Issuer Rating on Intact Financial Corporation (Intact or the Company) at A (high) and the Financial Strength Rating of its main operating insurance subsidiaries at AA. The trends on all credit ratings are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations and Stable trends reflect the Company's resilient financial performance and notable growth in premiums through organic and inorganic channels. Intact's recent acquisitions have enhanced the franchise through increased product and revenue diversification, while exiting less profitable insurance lines in the UK and other markets positions the Company to focus on its strategic priority of growing its global commercial and specialty business. Additionally, Intact's enterprise-wide risk management processes are well designed, with a focus on advanced data analytics and loss modelling that is evident in industry-leading combined ratios. Nonetheless, Intact's exposure to catastrophe risk makes it vulnerable to potential earnings volatility which is somewhat mitigated with regulatory capital levels that are consistently well-above regulatory targets, as well as having ample liquid resources.

CREDIT RATING DRIVERS
Morningstar DBRS could upgrade the credit ratings if, over the long term, the Company demonstrated earnings growth supported by strong underwriting profitability while maintaining adequate capital ratios.

Conversely, Morningstar DBRS could downgrade the credit ratings if the Company experienced a persistent material decline in underwriting results or weakening in regulatory capital buffers.

CREDIT RATING RATIONALE

Franchise Building Block Assessment: Strong
Intact is the largest provider of property and casualty (P&C) insurance in Canada and is a leading player in the UK commercial insurance market following its acquisition of Direct Line Insurance Group plc's brokered commercial lines, which the Company completed in October 2023. Over the past couple of years, Intact has substantially strengthened its market position and diversification in terms of its product lines, geographies, and distribution channels while increasing its growth potential in the global commercial and specialty insurance lines.

Earnings Building Block Assessment: Strong
Intact's earnings ability reflects its strong underwriting and pricing discipline across its business segments and geographies, combined with solid revenue generation capabilities from investments and related businesses (e.g., brokerage ownerships and property restoration services). Over the past several years, the Company has doubled its direct written premium volume, primarily as a result of acquisitions but also through organic growth. Despite relatively lower earnings in 2023, reflecting higher insured losses from weather-related events, the Company's net earnings are resilient with a three-year weighted return on equity of 13%, as calculated by Morningstar DBRS.

Risk Building Block Assessment: Strong/Good
The Company's risk profile reflects its strong risk-management framework, including the successful integration of its many acquisitions. Morningstar DBRS views positively the Company's de-risking actions taken in 2022 and 2023, as well as its exit from personal insurance lines in the UK and other markets, while recognizing the Company's substantial exposure to underwriting earnings volatility. Nonetheless, reinsurance coverage sufficiently protects against the risks that could most adversely affect capital. Intact also has a strong risk appetite to expand its offerings of cyber risk insurance, which could be an effective means of achieving its strategic growth. While cyber insurance presents the Company with challenges related to systemic risk exposure, Morningstar DBRS views Intact's risk management framework as well placed to prudently manage this risk at the enterprise level.

Funding and Liquidity Building Block Assessment: Strong/Good
Morningstar DBRS views positively the Company's high proportion of marketable bonds and equities and access to external sources of liquidity in the various jurisdictions where it operates, as they help mitigate liquidity risk. Intact's liquidity stress testing capabilities and its focus on loss modelling and data analytics further enhance its liquidity risk management.

Capitalisation Building Block Assessment: Strong/Good
Intact maintains regulatory capital ratios with appropriate buffers across its regulated entities, allowing the Company to handle reasonably adverse events. As previously anticipated, Intact's financial leverage has been improved to its target level of 30%. On the other hand, the annual fixed charge coverage ratios have declined on the account of weaker 2023 earnings. Higher interest rates since mid-2022 have contributed significantly and positively to the Company's investment income but are also making it more expensive to service debt.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
Environmental concerns regarding Climate & Weather Risks are relevant to Intact's credit rating as a P&C insurer but did not affect the assigned credit rating or trend. As part of its P&C product offering, Intact is exposed to weather-related losses from natural catastrophic events such as wind, wildfire, hail, and flooding. These events can lead to earnings volatility and increased reinsurance cost, but the Company manages these risks through product and risk selection, reinsurance, pricing, and enhanced loss modelling.

There were no Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

Morningstar DBRS notes that this press release was amended on November 12, 2024, to incorporate the disclosure on Morningstar DBRS historical rates.

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

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (September 10, 2024), https://dbrs.morningstar.com/research/439195. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The following methodology has also been applied:

Morningstar DBRS Global Corporate Criteria (April 15, 2024)
https://dbrs.morningstar.com/research/431186

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

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 dbrs.morningstar.com

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed credit ratings:

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Nadja Dreff, Senior Vice President, Sector Lead
Rating Committee Chair: Michael Driscoll, Credit Rating Officer
Initial Rating Date: February 20, 2006

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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