Fitch Ratings has affirmed the Insurer Financial Strength (IFS) ratings of Intact Financial Corporation's (Toronto: IFC; Intact) insurance subsidiaries at 'AA-' (Very Strong).

Fitch has also affirmed Intact's senior unsecured debt at 'A-', preferred shares at 'BBB,' and Issuer Default Rating (IDR) at 'A'. All of the ratings have a Stable Rating Outlook.

Key Rating Drivers

The affirmations reflect Intact's very strong business profile, capitalization and financial performance. The ratings also reflect the integration of RSA Insurance Group (RSA), the current inflationary environment, and impact of weather events on results.

Intact's financial performance is consistently very strong. The company is the largest private P/C insurer in Canada, and this size and scale advantage has helped the company generate above industry average profitability. The company reported a combined ratio of 89% for full year 2021 and combined ratio of 92% for 1Q22. Fitch expects the near-to-intermediate term combined ratios will likely trend in the low-to-mid 90% range.

Intact's financial leverage as of March 31, 2022 was approximately 24%, which is above management's stated goal of 20%, due to the acquisition of RSA, which closed on June 1, 2021. However, several subsequent events have occurred, most notably on May 2, 2022, the sale of RSA Scandinavian business, the proceeds of which were used to pay down debt. Financial leverage is now in line with management's long-term targets, ahead of schedule.

In March 2021 the company issued a $250 million 4.125% fixed-to-fixed rate issuance due March 31, 2081. Initially, Fitch assigned 100% equity credit to this instrument, but has since revised it to give this instrument no equity credit, as theoretically it is possible under extreme circumstances that this debt could become accelerated. The change to financial leverage is negligible and below Fitch's rating tolerance.

Fitch has revised the status of RSA to 'Core' from 'Very Important' under our group rating criteria. This has no impact on current ratings as RSA's standalone credit profile of 'a+' allowed for a one notch uplift to the parent ratings.

Intact has demonstrated both willingness and ability to inject capital into RSA including capital ratio commitment to regulators, separate Ancillary Own Funds of GBP 250 million, a parental guarantee of UK pension schemes, and providing equity capital to deleverage RSA. Intact has also transferred several key members of management to RSA to ensure proper integration. RSA represents approximately 25% of direct premiums written for Intact, and earnings are profitable.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Sustained combined ratio in the low 90's;

A change to capital navigator factor of 'aa' or better.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Sustained increase in financial leverage of 28% or higher;

Sustained reduction in fixed-charge coverage below 5.0x.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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