Fitch Affirms Intact's Ratings; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Intact Financial Corporation's (Toronto: IFC) (Intact) Issuer Default Rating (IDR) at 'A' and senior unsecured debt at 'A-'. Fitch has also affirmed the Insurer Financial Strength (IFS) ratings of Intact's property/casualty insurance subsidiaries at 'AA-'. The Rating Outlook for all ratings is Stable. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

Intact's ratings reflect its large market share and scale, very strong reserve position, and solid capitalization. Balanced against these strengths is a company with reported above average premium growth, which will likely continue to grow through acquisitions and has the potential to add goodwill to the balance sheet.

Intact is the largest private property/casualty insurer in Canada and the number one writer in British Columbia, Quebec, Alberta, Ontario, and Nova Scotia. This size and scale is consistent with the 'AA' rating category and has helped Intact generate strong profitability. For full year 2015, Intact had a GAAP calendar year combined ratio of 91.7% and a prior full year-end four year average of 94.6%. Full year 2015 combined ratio benefitted from 6.3 pp of favorable reserve development. Fitch believes the company is prudent in setting reserve levels and is aided by the use of a Provision for Adverse Development (PfAD) margin that is used in setting reserve levels.

The company's pretax operating income for full year 2015 was CAD939 million an approximate CAD155 million increase over prior year due mainly to better underwriting margin. Fitch notes net income was lower to due to higher recognition of impairments for full year 2015 primarily on common stocks that totaled CAD$124 million, almost double prior year. Therefore, full year 2015 return on equity (ROE) was 13.6% compared to 16.3% in prior year.

Intact's traditional capital metrics are strong and have been stable for several years. Operating leverage was 1.4x at year-end 2015. From a risk based perspective, Intact's regulatory Minimum Capital Test (MCT) score was 203% at year-end 2015 above managements stated target of 170% implying an excess capital level of CAD625 million. Fitch believes management will maintain capital metrics in line with historical results.

Intact's financial leverage ratio was 16.8% at year-end 2015 in line with year-end 2014 and below management's stated target of 20%. Fixed charge coverage was 10.4x which was higher than prior year. Due to the history of acquisitions Intact has almost CAD1.2 billion in goodwill on its balance sheet with CAD573 million being generated from the 2011 purchase of AXA Canada. Favorably the acquisition has had time to mature; however, the large goodwill balance is a credit negative and makes tangible financial leverage, excluding goodwill, 20% at year-end 2015. Fitch does note that the company currently trades at 2.1x book value and had debt/EBITDA of 1.1x as of year-end 2015.

RATING SENSITIVITIES

Key rating triggers that could lead to a downgrade include:

--A MCT below 170%;

--Sustained adverse reserve development of more than 3% of prior year shareholder's equity;

--A material acquisition outside of the Canadian insurance market;

--Sustained GAAP fixed charge coverage ratio below 7.0x or financial leverage above 25%.

Key rating triggers that could lead to an upgrade include:

--Improvement in capital adequacy and leverage measures consistent with 'AA' sector credit factors;

--Consistent and sustained financial performance with return on equity in the low to mid-teens;

--Sustained favorable reserve trends;

--Sustained financial leverage below 20%.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings with a Stable Outlook:

Intact Financial Corporation

--IDR at 'A';

--CAD250 million unsecured senior debt 5.41% due Sept. 3, 2019 'A-';

--CAD300 million unsecured senior debt 4.70% due Aug. 18, 2021 'A-';

--CAD250 million unsecured senior debt 6.40% due Nov. 23, 2039 'A-';

--CAD250 million unsecured senior debt 5.16% due June 16, 2042 'A-';

--CAD100 million unsecured senior debt 6.20% due July 8, 2061 'A-';

--CAD250 million 4.2% non-cumulative class A series 1 preferred stock 'BBB;'

--CAD250 million 4.2% non-cumulative class A series 3 preferred stock 'BBB.'

Fitch has affirmed the following ratings with a 'AA-' IFS Rating and a Stable Outlook:

--Intact Assurances Agricoles Inc.;

--Intact Insurance Company;

--Jevco Insurance Company;

--La Compagnie d'Assurances Belair Inc.;

--Nordic Insurance Company of Canada;

--Novex Insurance Company;

--Trafalgar Insurance Company of Canada.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=999799

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999799

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Gerald B. Glombicki, CPA
Director
+1-312-606-2354
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
James B. Auden, CFA
Managing Director
+1-312-368-3146
or
Committee Chairperson
Donald F. Thorpe, CFA, CPA
Senior Director
+1-312-606-2353
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Gerald B. Glombicki, CPA
Director
+1-312-606-2354
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
James B. Auden, CFA
Managing Director
+1-312-368-3146
or
Committee Chairperson
Donald F. Thorpe, CFA, CPA
Senior Director
+1-312-606-2353
or
Media Relations:
Hannah James, +1 646-582-4947
hannah.james@fitchratings.com