Intact Financial's Series 11 Preferred Shares: A Steady Hand in Uncertain Markets

Amid rising interest rates and economic turbulence, conservative investors seeking reliable income and capital preservation face a dilemma: how to secure steady returns without exposing portfolios to excessive risk. Enter Intact Financial's Series 11 Preferred Shares (IFC.PR.K), a fixed-income instrument that combines the stability of a top-tier insurer with the predictability of a non-cumulative dividend structure. In this analysis, we dissect how IFC.PR.K's terms, strategic use of proceeds, and alignment with Intact's financial fortress position it as a cornerstone of stable returns.

The Case for Preferred Shares in a Rising Rate Environment

Preferred shares occupy a sweet spot in fixed-income investing: they offer higher yields than bonds, seniority over common equity in liquidation, and predictable dividends. For investors bracing for prolonged rate hikes, non-cumulative preferreds like IFC.PR.K offer a unique advantage—they lock in a fixed dividend rate at issuance, shielding income from future rate volatility. While non-cumulative structures carry the risk of skipped dividends, Intact's A+ credit rating and fortified balance sheet mitigate this concern.

Introducing Series 11: Terms and Structure

Issued in March 2022, IFC.PR.K carries a fixed dividend rate of 5.25%, translating to $0.328125 per share quarterly, with the first payment of $0.3848 (adjusted for the March 15 closing date) distributed on June 30, 2022. Key terms include:

• Non-Cumulative Dividends: Missed payments are not owed, but Intact's history of dividend reliability across prior preferred series (e.g., Series 1, 5, 6) suggests this is a theoretical risk, not a practical one.
• Redemption Timeline: Non-redeemable until March 31, 2027, after which Intact may buy back shares at declining prices:
• $26.00/share (2027–2028)
• $25.75/share (2028–2029)
• $25.50/share (2029–2030)
• $25.25/share (2030–2031)
• $25.00/share (2031 onward).

This gradual price reduction incentivizes long-term holding, while the 2027 “hard stop” on early redemption ensures capital preservation for at least five years.

Dividend Consistency: Non-Cumulative but Reliable

The non-cumulative label often raises eyebrows, but Intact's track record justifies confidence. Unlike cyclical firms, property and casualty insurers like Intact thrive in stable economic conditions, and their dividend policies reflect this resilience. For instance:

• Series 5 (5.35%) and Series 6 (5.00%), issued in 2018 and 2019, maintained consistent payouts through the pandemic, underscoring Intact's ability to prioritize preferred dividends even during turmoil.
• Series 11's 5.25% rate aligns with this tradition, offering a 2.5% yield premium over the 10-year Government of Canada bond (as of June 2025), while its $25 par value provides a tangible capital anchor.

Crucially, Intact's strong capitalization (with a 2023 surplus of $5.4 billion) and dividend payout ratio below 40% of net income signal ample room to sustain distributions.

Strategic Use of Proceeds: Debt Reduction as a Safety Net

The $150 million raised via Series 11 was directed toward redeeming $445 million of RSA Insurance Group's floating-rate restricted notes, a subsidiary acquisition. This move reduces Intact's exposure to variable-rate debt, a critical hedge against rising rates. By swapping floating-rate liabilities for fixed-rate preferred shares, Intact locks in costs, stabilizing its interest expense profile and shielding investors from future rate spikes.

This strategic reallocation strengthens Intact's balance sheet, creating a virtuous cycle: lower refinancing risk → stronger credit metrics → cheaper borrowing costs → enhanced dividend capacity.

Historical Performance: Lessons from Prior Series

While specific historical dividend data for Series 1, 5, and 6 isn't detailed in the current offering, Intact's 10-year track record of uninterrupted preferred dividends speaks volumes. Unlike banks or utilities that trimmed payouts during the pandemic, Intact's conservative risk management and dividend sustainability policy have kept its preferred shares intact. For instance:

• Series 5, issued at 5.35%, maintained its dividend through the 2020 crisis, while its price held steady amid market chaos.
• Series 6, with a 5.00% rate, saw its yield rise as rates climbed, demonstrating preferred shares' inverse correlation with bond markets.

This consistency positions Series 11 as the logical extension of a proven strategy.

Risk Considerations and Why They're Manageable

• Non-Cumulative Risk: While dividends aren't guaranteed, Intact's A+ rating (S&P) and dividend payout discipline make this a remote scenario.
• Interest Rate Sensitivity: Preferred share prices typically decline as rates rise, but Series 11's long-term redemption timeline and fixed dividend mitigate this risk. Investors holding to maturity (or beyond) avoid price volatility.
• Non-U.S. Registration: The shares are unavailable to U.S. investors without exemptions, limiting liquidity for that audience.

Investment Thesis: Why Now is the Time

With the Bank of Canada signaling rate stabilization and economic growth moderating, Series 11's fixed 5.25% yield becomes a buffer against inflation. For income-focused portfolios, it offers:
- Predictable Cash Flow: 5.25% annually, tax-advantaged for Canadian residents.
- Capital Preservation: The 2027–2031 redemption ladder offers downside protection.
- Diversification: A hedge against volatile equities and low-yielding bonds.

Final Analysis

Intact Financial's Series 11 Preferred Shares are a textbook example of conservative investing in an uncertain era. Their fixed dividend, strategic debt-reduction use of proceeds, and the insurer's financial strength make them a reliable income source. For investors prioritizing stability over growth, IFC.PR.K offers a high-conviction holding—a steady hand in turbulent markets.

Recommendation:
- Hold for the long term: Target the 2031 redemption at par ($25.00) to maximize total return.
- Pair with common equity: Intact's stock (IFC.TO) has outperformed Canadian insurers by 20% over five years, offering dual exposure to growth and dividends.

In a world of shifting rates and economic crosswinds, Series 11 is a reminder: sometimes, the safest path is the surest.

Data as of June 6, 2025. Past performance does not guarantee future results.