Mr. Charles Brindamour reports

INTACT FINANCIAL CORPORATION AND RSA TO ACQUIRE DIRECT LINE INSURANCE GROUP PLC'S BROKERED COMMERCIAL LINES OPERATIONS

Intact Financial Corp. and its subsidiary RSA 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 pounds sterling ($884-million), with potential for up to a further 30 million pounds sterling ($51-million) contingent payment under earnout 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.

• Strengthening RSA's leading United Kingdom commercial lines platform;
• Enhances the profitability and growth profile of the U.K. and international (U.K.&I) business through increased focus on Royal & Sun Alliance Insurance Ltd.'s (RSA) outperforming commercial lines business;
• Increases RSA's presence in the attractive U.K. commercial lines market, where it will become the third largest player with an estimated 7-per-cent market share;
• Broadens RSA's broker distribution network and expands the company's current commercial lines product offering;
• Accretive to net operating income per share (NOIPS) (1) in 2024, with low single-digit accretion by year 3;
• Expected internal rate of return (IRR) (2) in excess of 15 per cent and immediately accretive to book value per share (BVPS) (3) by 2 per cent;
• Strategic options being explored for RSA's U.K. personal lines business.

Direct Line's brokered commercial lines generated written premiums (4) of 530 million pounds sterling in 2022, and delivered an average combined ratio (5) (6) of approximately 96 per cent 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 U.K. & I business, and is strongly aligned with our strategic and financial objectives," said Charles Brindamour, chief executive officer, Intact Financial. "The transaction enhances our position in the U.K. 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 outperformance ambition, Intact is also exploring strategic options in respect of RSA's U.K. personal lines business, including a possible sale. RSA had previously announced its exit from the U.K. personal lines motor market in March, 2023, as well as outlined plans to optimize its leading home and pet platforms.

(1) NOIPS is a non-IFRS (international financial reporting standards) ratio, which does not have a standardized meaning prescribed by IFRS and may not be comparable with similar measures used by other companies in the company's industry. It is calculated by dividing net operating income attributable to common shareholders, divided by the weighted-average number of common shares outstanding on a daily basis during a specific period. Net operating income attributable to common shareholders is a non-IFRS measure which represents the net income attributable to shareholders, excluding the after-tax impact of non-operating results, net of net income (loss) attributable to non-controlling interests (non-operating component), preferred share dividends and other equity distributions.

(2) IRR is the discount rate that makes the net present value of all cash flows equal to zero in a discounted cash flow analysis.

(3) BVPS is a supplementary financial measure, which does not have a standardized meaning prescribed by IFRS and may not be comparable with similar measures used by other companies in our industry. It is calculated by dividing common shareholders' equity by the number of common shares outstanding.

(4) Stated as gross written premiums (GWP), which is a supplementary financial measure, does not have a standardized meaning prescribed by IFRS, and may not be comparable with similar measures used by other companies in our industry. It is defined as the total premiums from insurance contracts that were incepted during the period.

(5) Combined ratio is a non-IFRS ratio, which does not have a standardized meaning prescribed by IFRS and may not be comparable with similar measures used by other companies in our industry. It is the sum of (i) claims ratio (which is a non-IFRS ratio which represents operating net claims divided by operating net underwriting revenues) and (ii) expense ratio (which is a non-IFRS ratio which represents operating net underwriting expenses divided by operating net underwriting revenues.

(6) Data provided by Direct Line. Average combined ratio is presented on an IFRS 4 basis.

Strong strategic fit

The acquisition is a unique opportunity to enhance the outperformance position of the U.K.&I platform.

• Strengthens the company's presence in the attractive small and medium-sized enterprises (SME) and mid-market segment of the U.K. market, improving the risk profile of the company's U.K.&I business.
• Acquisition of well-established and leading brands, including NIG and FarmWeb, given Direct Line's 125-year history in the U.K. commercial insurance market.
• Broadens the company's broker distribution network and expands its current commercial lines product offering.
• Drives outperformance through greater presence and focus on the company's U.K.&I commercial and specialty lines portfolios, which have delivered a 91-per-cent 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 the company's underwriting expertise.

Financially compelling

• Internal rate of return (IRR) (2) is expected to be in excess of 15 per cent.
• Annual U.K.&I commercial lines (including Specialty) direct premiums written (DPW) (7) is expected to increase to approximately 2.3 billion pounds sterling on a pro forma basis from 1.8 billion pounds sterling in 2022.
• The pro forma U.K.&I commercial lines combined ratio (5) is expected to be approximately 92 per cent in 2024. By leveraging the company's price segmentation and risk selection capabilities, the company expects this to improve to approximately 90 per cent in the subsequent 12 to 24 months.
• The company expects to drive annual cost synergies of approximately 20 million pounds sterling by year 3.
• The company expects the transaction to be accretive to NOIPS (1) in 2024, with low single-digit accretion by year 3. The impact on operating ROE (return on equity) (8) is expected to be largely neutral.
• BVPS (3) is expected to increase by approximately 2 per cent 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 per cent upon completion of the financing, and return to pretransaction levels by the end of 2024. Intact does not expect that its external credit ratings will be impacted.

(7) Direct premiums written (DPW) is a supplementary financial measure, which does not have a standardized meaning prescribed by IFRS and may not be comparable with similar measures used by other companies in the company's industry. It is composed of the total amount of premiums for new and renewal policies written during the reporting period, excluding industry pools, fronting and exited lines.

(8) Operating ROE is a non-IFRS ratio, which does not have a standardized meaning prescribed by IFRS and may not be comparable with similar measures used by other companies in our industry. It is calculated by dividing net operating income attributable to common shareholders by the adjusted average common shareholders' equity (excluding accumulated other comprehensive income).

(9) Adjusted debt-to-total capital ratio is a non-IFRS ratio, which does not have a standardized meaning prescribed by IFRS and may not be comparable with similar measures used by other companies in our industry. It is calculated using debt outstanding (excluding hybrid debt) divided by adjusted total capital.

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 Oct. 1, 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-Oct. 1, 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 financed through excess capital in the company's U.K. 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 continuing 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-pound-sterling ($884-million) payment to Direct Line as cash consideration for the acquired U.K. commercial lines business, with potential for up to a further 30 million pounds sterling ($51-million) contingent payment under certain earnout provisions relating to the financial performance of the business lines.

The purchase price, as well as expected integration costs of approximately 45 million pounds sterling, will be financed through a combination of:

• A $500-million bought deal public offering of common shares;
• Issuance of medium-term notes;
• 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 2,666,000 common shares at $187.60 per common share (the offering price) for gross proceeds to Intact of approximately $500-million 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 399,000 additional common shares for additional gross proceeds of up to $75-million. Closing of the offering is expected to occur on Sept. 13, 2023.

In support of the transaction, Caisse de depot et placement du Quebec (CDPQ) intends to purchase common shares pursuant to the bought deal public offering, at the offering price, representing an aggregate purchase price of approximately $50-million. As a result, CDPQ's equity interest in Intact is expected to remain largely unchanged at approximately 10 per cent.

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. Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal adviser to Intact Financial in this transaction.

Additional information

For more details on this transaction, a pre-recorded audio webcast, transcript and presentation slides have been posted to the corporate website. Please visit the events and presentations section under investors at the Intact website to access these supplementary materials.

About Intact Financial Corp.

Intact Financial is the largest provider of property and casualty (P&C) insurance in Canada, a leading provider of global specialty insurance, and, with RSA, a leader in the U.K. and Ireland. The company's business has grown organically and through acquisitions to over $21-billion of total annual premiums.

In Canada, Intact distributes insurance under the Intact Insurance brand through a wide network of brokers, including its wholly owned subsidiary BrokerLink, and directly to consumers through belairdirect. Intact also provides affinity insurance solutions through the Johnson Affinity Groups.

In the United States, Intact Insurance Specialty Solutions provides a range of specialty insurance products and services through independent agencies, regional and national brokers, and wholesalers and managing general agencies.

In the U.K., Ireland and Europe, Intact provides a range of personal, commercial and specialty insurance solutions through a wide network of brokers, third party partners and directly to customer under the RSA brands.

About RSA Insurance

RSA Insurance is a multinational insurance group. The company is one of the world's oldest general insurers, providing peace of mind to individuals and protecting small businesses and large organizations from uncertainty. The company uses its capabilities to anticipate and improve outcomes for customers via its direct channel, its strong broker relationships or partner organizations. The company has established businesses in the U.K., Ireland and continental Europe.

In 2021, the former RSA Group PLC came under new ownership and is now a wholly owned subsidiary of Intact Financial.

About Direct Line Insurance Group PLC

Direct Line Insurance Group is a retail general insurer with leading market positions in the United Kingdom. The group operates under highly recognized brands such as Direct Line and Churchill, and consists of five primary segments: motor, home, rescue and other personal lines, and commercial.

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