Intact Financial Corporation (TSX: IFC) (Intact, IFC or the Company) and its subsidiary RSA announced that they have reached an agreement with Direct Line Insurance Group plc (Direct Line) to acquire Direct Line’s brokered Commercial Lines operations. The purchase price includes an initial cash consideration of £520 million (C$884 million), with potential for up to a further £30 million (C$51 million) contingent payment under earn-out provisions relating to the financial performance of the acquired business lines. The transaction will result in the transfer of renewal rights, brands, employees, and systems to RSA.
Direct Line’s brokered Commercial Lines generated written premiums[4] of £530 million in 2022, and delivered an average combined ratio[5][6] of approximately 96% across 2021 and 2022.
The transaction has been unanimously approved by the Boards of Directors of both Intact and Direct Line, and is subject to approval by Direct Line’s shareholders (Direct Line Shareholder Approval).
“This acquisition significantly strengthens our UK&I business, and is strongly aligned with our strategic and financial objectives,” said Charles Brindamour, Chief Executive Officer, Intact Financial Corporation. “The transaction enhances our position in the UK by doubling down on lines of business where we already outperform.”
Ken Norgrove, Chief Executive Officer, RSA, added: “We look forward to welcoming a team of experienced, highly talented and skilled colleagues from strong brands, including NIG and FarmWeb, to further enhance RSA’s strong Commercial Lines business.”
To accelerate its out-performance ambition, Intact is also exploring strategic options in respect of RSA’s UK Personal lines business, including a possible sale. RSA had previously announced its exit from the UK Personal Lines motor market in March 2023, as well as outlined plans to optimise its leading Home and Pet platforms.
Strong strategic fit
The acquisition is a unique opportunity to enhance the out-performance position of the UK&I platform.
- Strengthens our presence in the attractive small and medium-sized enterprises (SME) and mid-market segment of the UK market, improving the risk profile of our UK&I business
- Acquisition of well-established and leading brands, including NIG and FarmWeb, given Direct Line’s 125-year history in the UK commercial insurance market
- Broadens our broker distribution network and expands our current Commercial Lines product offering
- Drives out-performance through greater presence and focus on our UK&I Commercial and Specialty lines portfolios, which have delivered a 91% combined ratio[5] in the two years since the acquisition of RSA
- Opportunity to drive value creation through loss ratio improvement in the acquired business by leveraging our underwriting expertise
Financially compelling
- Internal rate of return (IRR)[2] is expected to be in excess of 15%
- Annual UK&I Commercial Lines (including Specialty) direct premiums written (DPW)[7] is expected to increase to approximately £2.3 billion on a pro forma basis from £1.8 billion in 2022
- The pro forma UK&I Commercial Lines combined ratio[5] is expected to be approximately 92% in 2024. By leveraging our price segmentation and risk selection capabilities, we expect this to improve to approximately 90% in the subsequent 12 to 24 months
- We expect to drive annual cost synergies of approximately £20 million by Year 3
- We expect the transaction to be accretive to NOIPS[1] in 2024, with low single-digit accretion by Year 3. The impact on Operating ROE[8] is expected to be largely neutral
- BVPS[3] is expected to increase by approximately 2% upon the issuance of common shares to finance the transaction
- Intact will maintain a strong capital position after financing the transaction, with all regulatory capital ratios remaining at or above target operating levels
- The pro forma adjusted debt-to-total capital ratio[9] is expected to be under 25% upon completion of the financing, and return to pre-transaction levels by the end of 2024. Intact does not expect that its external credit ratings will be impacted
Transaction details and approvals
The transaction is subject to Direct Line Shareholder Approval, with the vote expected to take place in October 2023.
The transaction will be effected through the combination of:
- An agreement to transfer the new business franchise and certain operations, brands, employees, contractors, data, renewal rights, third party contracts and premises to RSA, with the transfer expected to occur in Q2 2024
- A quota share reinsurance agreement relating to premiums written but not yet earned, whereby substantially all of the future economics of Direct Line’s brokered Commercial Lines portfolio will be transferred to RSA starting from 1 October 2023. If approved by the Court, this will be followed by an insurance business transfer
- Certain administration and transitional services arrangements
As part of the transaction, Direct Line will retain the pre-1 October 2023 economics in relation to the acquired portfolio. RSA is therefore not exposed to any development on prior-year reserves. However, RSA and Direct Line intend to enter into discussions regarding the potential transfer of those economics at a later date.
Any additional capital required to support the quota share reinsurance agreement and new business growth will be funded through excess capital in our UK subsidiary, as well as future capital generation.
RSA and Direct Line will work closely with brokers to ensure a smooth transition process.
Around 800 Direct Line employees will move to RSA to provide ongoing support and service delivery, which will allow RSA to continue to maintain its excellent relationships with brokers and provide outstanding service to customers.
Transaction financing
Following Direct Line Shareholder Approval, Intact will make a £520 million (C$884 million) payment to Direct Line as cash consideration for the acquired UK commercial lines business, with potential for up to a further £30 million (C$51 million) contingent payment under certain earn-out provisions relating to the financial performance of the business lines.
The purchase price, as well as expected integration costs of approximately £45 million, will be financed through a combination of:
- a C$500 million bought deal public offering of common shares;
- issuance of medium-term notes; and
- a new term loan facility
Intact has entered into an agreement with a group of underwriters, led by CIBC Capital Markets and BMO Capital Markets for the issuance of [●] common shares at C$[●] per common share (the Offering Price) for gross proceeds to Intact of approximately C$500 million (the Offering) pursuant to a bought deal public offering in Canada and in the United States in a private offering to qualified institutional buyers in reliance upon Rule 144A under the U.S. Securities Act of 1933, as amended (the U.S. Securities Act).
Intact has granted the underwriters an option, exercisable, in whole or in part, at any time and from time to time, until the date that is 30 days following the closing of the Offering, to purchase up to an aggregate of [●] additional common shares for additional gross proceeds of up to C$75 million. Closing of the Offering is expected to occur on 13 September 2023.
In support of the transaction, Caisse de dépôt et placement du Québec (“CDPQ”) intends to purchase common shares pursuant to the bought deal public offering, at the Offering Price, representing an aggregate purchase price of approximately C$50 million. As a result, CDPQ’s equity interest in Intact is expected to remain largely unchanged at approximately 10%.
The issuance of the common shares is subject to the approval of the Toronto Stock Exchange and other customary closing conditions.
Advisers
J.P. Morgan Securities plc is acting as financial adviser to Intact Financial Corporation. Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal adviser to Intact Financial Corporation in this transaction.
