Some comment from DRS after the RSA-Direct Line deal;
DBRS Limited (DBRS Morningstar) notes that Intact Financial Corporation’s (Intact or the Company) announcement of an agreement with Direct Line Insurance Group plc (Direct Line) to acquire Direct Line’s brokered Commercial Lines operations has no impact on the Company’s ratings, including its Issuer Rating of “A” with a Positive trend.
DBRS Morningstar views the agreement positively, given that the acquisition is not expected to adversely affect Intact’s business model in the near term, will likely improve its UK franchise through stronger market positions, has a limited impact on leverage, and is consistent with the Company’s international growth strategy.
Intact’s total annual UK and Ireland Commercial Lines (including Specialty) direct premiums written is expected to increase to approximately GBP 2.3 billion on a pro forma basis from GBP 1.8 billion in 2022. The acquisition gives the Company the opportunity to generate value by improving its overall performance in the UK, which has been a more challenging market compared with other jurisdictions where Intact operates. DBRS Morningstar notes that Intact has demonstrated good integration expertise in past acquisitions and commitment to pricing discipline in the UK market.
Under the agreement, Intact is paying GBP 520 million ($884 million), with the potential for an additional contingent payment of up to a GBP 30 million ($51 million). The transaction will result in the transfer of renewal rights, brands, employees, and systems to RSA, a subsidiary of Intact. The transaction is subject to Direct Line Shareholder Approval, with the vote expected to take place in October 2023.
Intact intends to finance the transaction with a $500 million bought deal public offering of common shares, issuance of medium-term notes, and a new term loan facility. With a Minimum Capital Test ratio of 201% and an adjusted debt-to-capital ratio of 22.5% at Q2 2023, Intact has the financial flexibility to proceed with this transaction without affecting ratings, especially considering the equity financing that lessens the capital and leverage impacts.
CREDIT RATING DRIVERS
The ratings would be upgraded if the Company continues to show strong earnings while maintaining a similar risk profile and appropriate capital buffers.
Given the Positive trend, a rating downgrade is unlikely. However, the Company would be downgraded if it experiences a persistent material decline in underwriting results or weakening in regulatory capital buffers combined with a sustained deterioration in financial leverage.