Intact Financial Corporation makes changes to RSA pension arrangements

Authored by RSA

Intact Financial Corporation, RSA UK Pension Trustees and Pension Insurance Corporation plc announce £6.5 billion UK pension buy-in agreement

• Removes pension exposure on Intact’s balance sheet by fully insuring its UK defined benefit pension liabilities with PIC
• Maintains the security of benefits to RSA UK pension scheme members
• Eliminates annual £75 million funding contribution and releases approximately £150 million of capital
• Intact to make contribution of approximately £500 million, using excess capital, debt and preferred shares to complete the buy-in
• Expected to improve Operating Return on Equity (OROE) by approximately 100 bps, with single-digit dilution to Book Value Per Share (BVPS)

Intact Financial Corporation has announced (27 February 2023) that the RSA UK Pension Trustees have entered into an agreement with Pension Insurance Corporation plc (PIC) for Bulk Purchase Annuities (or “buy-ins”) with respect to £6.5 billion of RSA UK pension plan liabilities. The buy-ins fully insure the defined benefit liabilities of the Royal Insurance Group Pension Scheme and the Sal Pension Scheme (the “Pension Schemes”) to PIC, a specialist insurer of defined benefit pension schemes.

“The current market environment provides an excellent opportunity to remove UK pension exposure on IFC’s balance sheet,” said Louis Marcotte, Executive Vice President and Chief Financial Officer, Intact Financial Corporation.  “This transaction represents a cost-effective de-risking, with the upfront payment approximately equal to the remaining annual funding contributions and the capital released. Meanwhile, the key metrics related to our RSA acquisition continue to be very strong, and the buy-ins strengthen our ability to pursue growth opportunities.”

Strategic rationale

The transaction fulfils several strategic objectives:

• Transfers substantially all remaining economic and demographic risks associated with the Pension Schemes to a strong and specialized insurance counterparty, removing balance sheet exposure to pension risks that are non-core to Intact’s business.
• Supports Intact’s ROE outperformance objective by improving capital efficiency.
• Eliminates Intact’s obligation to contribute £75 million per year to the schemes and releases approximately £150 million of capital, which in aggregate are approximately equal to the upfront contribution.
• Enhances the company’s ability to capture future strategic opportunities as Intact would not be constrained by the responsibility of managing £6.5 billion of pension liabilities. In part, this entails the removal of substantially all future funding needs and capital requirements related to the Pension Schemes.

Transaction financing

• IFC will facilitate this transaction through an upfront contribution to the Pension Schemes of approximately £500 million.
• The upfront contribution is expected to be funded using approximately $300 million of excess capital (which includes the aforementioned release of capital), $300 million of hybrid capital and/or preferred share issuance, as well as short term debt.

Financial impact

• Intact expects that net operating income per share (“NOIPS”) will decrease by approximately 1.5% in the first full year after closing due to the financing costs associated with the transaction.
• The transaction will temporarily increase the tax on non-operating income as the deductibility of the upfront contribution will be spread out over three years. This results in deferred tax assets being reclassified to Other Comprehensive Income from non-operating income, with a neutral net impact on shareholders’ equity.
• BVPS is expected to decrease by approximately 5% from December 31, 2022.  This reflects the payment of the upfront contribution, as well as the derecognition of the approximately £200 million accounting surplus related to the Pension Schemes, partially offset by the favourable adjustment resulting from the adoption of the IFRS 17 accounting standard on January 1, 2023.
• The transaction is expected to increase IFC’s OROE by approximately 100 bps in the first full year after closing. This reflects the release of capital held against pension risk and the elimination of the pension surplus, which were dilutive to OROE.
• Capital ratios in all jurisdictions will remain in line with our target operating levels, and well above regulatory requirements.
• The adjusted debt-to-total capital ratio is expected to increase by less than 2 points to under 23% at the end of Q1 2023, and return to pre-transaction levels by year-end 2023. Intact does not expect that its external credit ratings will be impacted.
• All key performance metrics related to the RSA acquisition are expected to remain consistent with guidance, including internal rate of return (IRR) above 20%, NOIPS accretion of approximately 20%, and at least $350 million of pre-tax annual run-rate synergies by 2024.
• Due to certain regulatory restrictions, approximately £0.6 billion of the Pension Schemes’ assets will be liquidated over the next 12-18 months and the proceeds transferred to PIC. Intact does not expect to have any additional financing requirements in relation to this transfer. As such, the earnings impact of this deferred payment is expected to be immaterial.