Intact Financial Corp. , Canada's biggest property and casualty insurer, has struck a $2.6-billion deal to buy AXA Canada from Paris-based AXA Group.
The agreement concludes Intact's lengthy hunt for a major acquisition that will help it to boost the amount of commercial insurance it sells to Canadian companies. But it came about as a result of AXA Group's decision to focus on higher-growth markets, such as those in Asia, in the wake of the financial crisis.
While the move will significantly increase and diversify Intact's business, credit rating agency Moody's Investors Service said it plans to lower the company's credit ratings by one notch if the deal goes through as currently planned, because it would reduce the company's financial flexibility.
AXA Canada has 2,300 employees and is the sixth-largest home, auto and business insurer in the country, with a market share of 5.2 per cent.
The deal will increase Intact's direct premiums written by $2-billion, to more than $6.5-billion per year. In comparison, Aviva, the second-largest property and casualty insurer in Canada, stood at $3.3-billion in direct premiums written in 2010, followed by TD Assurance at $2.4-billion.
In addition to strengthening Intact's commercial insurance lineup, the deal will improve the company's ability to support insurance brokers, expand its distribution platform and deepen the quality of its management team, said chief executive officer Charles Brindamour.
"This is the right deal for [Intact's]shareholders as it provides a very strong strategic fit and is financially compelling," he told analysts on a conference call Tuesday.
Currently, about 19 per cent of Intact's business is commercial insurance, compared with 36 per cent of AXA's.
Importantly, the proposed deal will also help to reduce Intact's reliance on personal auto insurance, a business that has been a money pit for all car insurers in Ontario, the most populous province, because of fraud and price regulations. About 49 per cent of Intact's business is personal auto insurance, compared with 38 per cent at AXA.
Across its business lines, AXA is strong in Quebec and will also give a boost to Intact's presence in British Columbia.
But Moody's said it intends to cut the company's debt ratings and financial strength rating, which currently stands at Aa3, if the deal closes as expected later this year.
That's because the benefits that come from expansion, diversification, and a reduced reliance on Ontario auto business "will be more than offset by the decrease in financial flexibility given the proposed funding structure," said Alan Murray, a senior credit officer at Moody's.
Intact's adjusted leverage after the deal would likely top 30 per cent, compared with about 23 per cent currently, because of the draw down in capital and the new debt that it will take on.
Intact, which earned $419.8-million last year, plans to issue $800-million of equity to help pay for the deal. It will also use $500-million of its own excess capital, and $1.3-billion in credit. By combining the two companies, Intact hopes to benefit from at least $100-million annually in synergies or cost savings.
AXA Group announced the divestiture one day before the French insurer, a giant in the industry, was to outline a major new strategic plan, a spokesman for the company said. It will address how the company plans to push forward with growth in the wake of the financial crisis.
"The sale of our Canadian operations comes after several similar transactions and represents a further step in our strategy of redeploying capital towards geographies with higher long-term growth prospects," said AXA chief executive officer Henri de Castries. The company disposed of a major part of its U.K. operations last year. At the same time, it has been taking steps to improve its platform in countries like China.
AXA's Canadian operations posted 2010 underlying earnings of €149-million ($207.7-million), the French insurer said.
"We are pleased to see the patriation of another major insurer in Canada," said Steve Masnyk, a spokesman for the Insurance Brokers Association of Canada, which represents about 30,000 brokers. "Although we are never pleased when there are fewer insurers to chose from in the marketplace, the industry as a whole is still very competitive."
Intact Financial (IFC)
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