DBRS Morningstar Confirms Intact Financial Corp. at “A” and Its Insurance Subsidiaries at AA (low)

DBRS, Inc. (DBRS Morningstar) confirmed Intact Financial Corporation’s (Intact or the Company) Issuer Rating and Senior Unsecured Debt rating at “A” and its Non-Cumulative Preferred Shares rating at Pfd-2. DBRS Morningstar also confirmed Intact Insurance Company’s Financial Strength Rating and Issuer Rating at AA (low) and confirmed the Financial Strength Ratings of Intact’s various other operating insurance subsidiaries at AA (low). The trends on all ratings are Stable.

KEY RATING CONSIDERATIONS
The ratings confirmation reflects Intact's excellent franchise strength, which is supported by a well-diversified product mix and broad distribution network. Intact maintains a dominant market position in the fragmented Canadian property and casualty (P&C) insurance industry, as indicated by its 16% aggregate market share. Earnings continue to benefit from consistently good underwriting profitability and favorable prior-year development. The Company has consistently performed better than the industry average in terms of premium growth, underwriting profitability and return on equity (ROE). The ratings also take into account Intact's relatively high financial leverage, exposure to catastrophe losses and integration-related risks from acquisitions. However, DBRS Morningstar notes that Intact has a solid integration track record in successfully integrating and adding value from past acquisitions.

RATING DRIVERS
Positive rating pressure could arise from the strengthening of Intact’s market positions, sustained profitability with combined ratios in the low-to-mid 90s, maintenance of financial leverage below 30% and strengthening of buffers above regulatory solvency and internal capital target ratios.

Negative ratings pressure could arise if there is a persistent decline in underwriting profitability and material unfavorable reserve development. Moreover, a material decline in buffers above regulatory capital target ratios or a sustained deterioration in financial leverage over 30% could also have negative rating implications.

RATING RATIONALE
Intact is the largest provider of P&C insurance in Canada and a leading provider of specialty insurance in North America. Overall, the Company’s strong brand recognition and diversified product offerings in both personal and commercial lines, coupled with multi-channel distribution, afford the Company a competitive advantage in terms of franchise strength that is difficult for competitors to match. Intact continues to make good progress in realizing benefits from its strategy of growth through acquisitions. The Company has expanded its specialty insurance segment through the acquisition of OneBeacon Insurance Group (OneBeacon). OneBeacon establishes the Company as a leading specialty lines insurer in the North American market, provides growth opportunities in the United States and Canada and facilitates cross-border business.

Through the acquisition, the Company has the opportunity to offer new specialty products and further diversify its Canadian product mix. Moreover, the recent proposed acquisitions of The Guarantee Company of North America and Frank Cowan Company will enhance the Company’s position in the specialty insurance segment and its distribution strength.

The ratings also benefit from the Company's comprehensive and well-developed risk-management framework that underpins the Company’s operational efficiencies in underwriting and pricing discipline and claims management. The Company faces residual risks as a result of the valuation and integration risks associated with growth by acquisition strategy, but it has demonstrated a strong track record in successfully integrating and deriving value from past acquisitions. DBRS Morningstar expects the Company to proactively manage these risks. As OneBeacon is Intact’s first international acquisition, it presents new challenges, including the higher product risk associated with U.S. specialty insurance lines, integrating cultures, managing a cross-border business (which operates in a different litigation and competitive environment) and compliance with the regulatory requirements of a foreign jurisdiction.

Positively, the Company earnings have proven strong and resilient over time, as demonstrated by its consolidated combined ratio that has remained below 100.0% (95.1% as at year-end (YE) 2018) for the last five years. The Company generally targets a mid-90s run rate for its combined ratio. Sound earnings are supported by consistently good underwriting performance, premium growth and expense control. Intact typically generates ROE that outperforms the industry, with a three-year weighted average of 10.6% for 2016 to 2018. However, DBRS Morningstar notes that quarterly results typically vary with the seasonality of severe weather, such as spring and summer hail and flooding events or winter storm damages. As of Q3 2019, ROE was 9.2% with a moderately higher combined ratio of 96.9%. One contributing factor has been the results in the Personal Property business unit, which has had elevated combined ratios from non-catastrophe weather-related loss. Meanwhile, the Personal Auto segment combined ratios improve to 98.2% from above 100% in the last two years. This unit faces regulated premium rates and benefits in an environment of competitive pricing that diminishes the Company’s ability to quickly adjust pricing for negative-claim trends. Nevertheless, Intact’s positive performance in other business lines compensates for the stress in Personal Auto, yielding good consolidated earnings results in the last two years.

In DBRS Morningstar’s view, the Company has excellent liquidity supported by ample resources. Its investment portfolio comprises a high proportion of marketable bonds and equities with about 92% of its portfolio consisting of cash, public bonds and equities. Approximately 46% of the bonds are liquid (federal, provincial and municipal) government bonds. A standby credit facility provides additional liquidity.

Regulatory capital ratios at Intact’s major operating subsidiaries are well in excess of internal and external regulatory solvency requirements. Accordingly, the subsidiaries are expected to cope with reasonably severe adverse events and continue writing new business. As of Q3 2019 and YE2018, the Company’s regulated P&C insurance subsidiaries were well-capitalized on an individual basis with capital levels in excess of regulatory supervisory minimum levels, as well as U.S. Company Action Level Risk-Based Capital (RBC). As of Q3 2019, the Minimum Capital Test (MCT) for the consolidated company was 195%. For its U.S. operating subsidiaries, Company Action Level RBC is maintained above 200%. As of Q3 2018, Intact’s MCT ratio at the consolidated holding company level was 196%. DBRS Morningstar views the Company’s capital cushion, which is above the established minimums, as an important factor in maintaining the operating subsidiaries’ Financial Strength Ratings of AA (low). The financial leverage ratio (including preferred shares) improved to 29.4% as of Q3 2019 from 32.3 % as of YE2018. The elevated leverage since 2016 is primarily a result of the financing raised for the acquisition of OneBeacon. Management remains committed to reducing debt, and DBRS Morningstar expects the leverage ratio to remain below 30%.

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

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

The principal methodology is the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (September 2019), which can be found on our website under Methodologies & Criteria.

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.dbrs.com.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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.

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

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