Press Release

DBRS Confirms the Ratings on Intact Financial Corporation at “A” and Its Insurance Subsidiaries at AA (low), Stable Trends

Insurance Organizations
December 03, 2018

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Unsecured Debt rating of Intact Financial Corporation (Intact or the Company) at “A” and its Non-Cumulative Preferred Shares rating at Pfd-2. DBRS also confirmed the Issuer Rating and Financial Strength Rating (FSR) of Intact Insurance Company, Intact’s major operating subsidiary, both at AA (low). In addition, DBRS confirmed the FSRs of Intact’s various other operating insurance subsidiaries at AA (low). All trends are Stable.

DBRS’s assessment of the ratings on Intact incorporates the Company’s strong brand equity and operations that are well diversified by product and distribution channel, as well as its growing geographical diversification in North America. Intact maintains a dominant market position in the fragmented Canadian property and casualty industry, as indicated by its 17% aggregate market share (next-closest peer has 11%) based on 2017 direct premiums written. The Company has strong risk management capabilities that include a disciplined approach to insurance underwriting, pricing and claims management. These characteristics support its earnings resilience and good capitalization. Intact has consistently performed better than the industry average in terms of premium growth, underwriting profitability and return on equity (ROE).

Although upward rating movement is not expected over the medium term, DBRS sees potential for positive rating pressure from (1) higher market penetration in Canada and achieving dominant niche positions in the United States, (2) consistent improvement in key earnings metrics to the mid–double digits with combined ratios in the low 90s accomplished on a prudent basis and (3) improvement in leverage and coverage metrics and maintenance of higher sustained regulatory capital buffers.

Negative rating pressure could arise from (1) a persistent decline in underwriting results and profitability and material negative reserve development, (2) a material sustained decline in the Company’s capital buffers above regulatory capital target ratios and (3) maintenance of financial leverage above 30% over the long term.

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 imitate. Intact’s strong customer service ability allows it to build a loyal consumer and broker base. Product mix is approximately 60% personal (with personal auto insurance as the largest segment at 38% for the nine months ended September 30, 2018); 25% Canada commercial (property and liability); and 15% U.S. commercial (specialty insurance). The Company’s multi-channel distribution networks are managed with a high level of expertise and operational efficiency. Its two main distribution channels are the direct-to-consumer channel (company representatives, online and other direct channels) and the broker distribution channel.

The addition of OneBeacon Insurance Group, Ltd. (OneBeacon) enhances Intact’s franchise strength by adding product and geographic diversification in the North American market. OneBeacon underwrites specialty insurance contracts to small and mid-sized businesses in the United States and distributes its products through independent agencies, brokers, wholesalers and managing general agencies. The percentage of specialty insurance written is expected to grow for OneBeacon as Intact management executes its strategy. The OneBeacon acquisition has enabled Intact to expand its specialty products and services in the Canadian domestic market. Given Intact’s strong track record in successfully integrating past acquisitions, DBRS expects the Company to improve One Beacon’s profitability. For example, the Company aims to improve One Beacon’s combined ratio to the low 90s within the next two years.

DBRS sees Intact as having strong risk management capabilities that underpin the Company’s operational efficiencies in monitoring and managing its risk and claim exposures. Because One Beacon is Intact’s first international acquisition, it does present new challenges that include 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. DBRS expects the Company to proactively manage these new risks.

Earnings have proven strong and resilient over time, as demonstrated by its consolidated combined ratio that has remained below 100.0% (94.3% as at year-end 2017) for the last five years. The Company generally targets a mid-90s run rate for its combined ratio. The gradual upward trend in earnings in the last five years was supported by consistently good underwriting performance, good premium growth and expense control. Intact generally generates ROE that outperforms the industry, with a three-year average of 11.9% for 2015 to 2017. This performance was somewhat lower in the nine months ended 2018 with an ROE of 8.5% and a moderately higher combined ratio of 96.3%. One contributing factor has been the results in the Company’s largest business unit, Personal Auto, which has had elevated combined ratios above 100% for 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. Intact is performing well in other business lines, which compensates for the stress on Personal Auto, yielding good consolidated earnings results.

The Company’s excellent liquidity is supported by ample resources. Its investment portfolio comprises a high proportion of liquid assets, including marketable bonds and equities. Approximately 46% of the bonds are liquid (federal, provincial and municipal) government bonds. Cash and cash equivalents on hand, as well as a standby credit facility, provide additional liquidity.

Regulatory capital ratios at the Company’s major operating subsidiaries continue to be maintained well above the 150% supervisory target capital ratio for the Minimum Capital Test (MCT) and provide a cushion to handle reasonably adverse events. For its U.S. operating subsidiaries, regulatory Risk-Based Capital (RBC) is maintained well above the Company Action Levels of 200%. As of Q3 2018, its MCT ratio at the consolidated holding company level was 196%. Its U.S. subsidiaries reported a consolidated RBC ratio of 384%. DBRS views the Company’s capital cushion, which is above the established minimums, as an important factor in maintaining the operating subsidiaries’ FSRs of AA (low). Financial leverage is elevated at 31.9% as at Q3 2018 as a result of debt raised to fund the acquisition of OneBeacon. However, with the Company’s expected future profitability and future additional benefits from the OneBeacon acquisition, the elevated financial leverage ratio is expected to return to near 25% over the medium term.

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

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

The applicable methodologies are Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (January 2018) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (November 2018), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

Lead Analyst: Hema Singh, Vice President, Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer – Global FIG and Sovereign Ratings
Initial Rating Date: February 20, 2006
Last Rating Date: December 8, 2017

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

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