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RBC gives thumbs up to Intact's deal for AXA Canada

RBC Capital Markets analyst Andre-Philippe Hardy has put out a note to clients arguing that Intact Financial Corp.'s $2.6-billion acquisition of AXA Canada will be good for the insurer's "financial prospects," countering Moody's Investors Service, which said it plans to lower Intact's credit rating by one notch if the deal goes through because it will reduce the insurer's financial flexibility.

"We believe the transaction is appealing to Intact strategically and financially, while the acquisition risk is in our view manageable," Mr. Hardy, an equity analyst, wrote. He is raising his 12-month target from $58 to $65.

The deal will cement Intact's spot as the largest property and casualty insurer in Canada, and reduce the company's reliance on the troublesome Ontario automobile insurance market, Mr. Hardy wrote. AXA Canada, like Intact, has historically been more profitable than the industry average and the financial benefits are attractive, he added.

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When Intact announced the deal less than two weeks ago, Moody's said that it intends to cut the company's debt rating, which currently stands at Aa3, if the deal closes as expected later this year. The benefits that come from expansion and diversification "will be more than offset by the decrease in financial flexibility given the proposed funding structure," Alan Murray, a senior credit officer at the rating agency, said.

Intact's adjusted leverage after the deal would likely top 30 per cent, Moody's said, compared with about 23 per cent currently, because it will be drawing down capital and taking on new debt.

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