Intact Financial Corp IFZZF

RBC

[retiredcf]

February 27, 2023

Intact Financial Corporation
Announces RSA U.K. pension buy-in agreement to remove pension liability

TSX: IFC | CAD 198.06 | Outperform | Price Target CAD 231.00

Sentiment: Positive

Our initial take: We think the transaction makes a lot of sense as Intact is taking advantage of the significant increase in interest rates to more cost-effectively remove its RSA U.K. pension liability. We can't help but wonder if this transaction is also being done as the first step of making the non-Canadian RSA business (particularly the non-Specialty Lines RSA business outside of Canada) "cleaner" by not having the pension liability overhang and therefore allowing IFC to be in a position to monetize (e.g., asset swap, sale) that segment if the right opportunity presents itself.

Summary: Intact announced that the RSA U.K. Pension Trustees entered into an agreement with Pension Insurance Corporation plc ("PIC") for bulk purchase annuities (or "buy-ins") regarding £6.5B of RSA U.K. pension plan liabilities. The transaction fully insures the defined benefit liabilities of the Royal Insurance Group Pension Scheme and the Sal Pension Scheme to PIC.

The transaction eliminates IFC's £75MM/year contribution to the RSA U.K. pension plan and releases ~£150MM of capital. IFC will finance the transaction via an upfront payment to the pension plans of ~£500MM by using $300MM of excess capital, $300MM of hybrid capital and/or preferred shares as well as short-term debt.

IFC's comments regarding the financial impact (see Exhibits 1 and 2 for details):

• Operating EPS: IFC estimates that Operating EPS would decrease by ~1.5% in the first full year after closing due to the financing costs for the deal;

• BVPS: BVPS is expected to decline by ~5% from December 31, 2022 due to the upfront payment contribution and also the de- recognition of ~£200MM of accounting surplus related to the pension plans, but partially offset by the favorable adjustment resulting from the transition to IFRS 17 accounting standard.

• Operating ROE: IFC expects the deal to increase Operating ROE by ~+100bps in the first full year after closing due to the release of capital held against pension risk and the elimination of the pension surplus, which had been dilutive to ROE.

• Leverage: Debt-to-capital is expected to increase <200bps to under 23% at the end of Q1/23 and return to pre-transaction levels by the end of 2023.

• The deal temporarily increases the tax on non-operating income as the deductibility of the upfront contribution will be spread out over 3 years resulting in deferred tax assets being re-classified to Other Comprehensive Income (from non-operating income) with a neutral impact on shareholders' equity.