Rating agency, DBRS, says that Desjardins Group’s deal for State Farm Canada’s businesses is on strategy, but carries its share of execution risks.

DBRS says that it has assessed the transaction and concluded that its ratings for Desjardins and its related entities, Caisse centrale Desjardins and Capital Desjardins Inc., are unchanged; and, the rating trends remain stable. A key factor in leaving the ratings unchanged, DBRS says, “is the fact that Desjardins is protected from poor underwriting results in the initial years following the close of the transaction through downside protection arrangements.”

Overall, it finds that the transaction appears to be credit neutral for Desjardins. In the short term though, it says that integration risk “will be a concern”.

“The acquisition transfers a substantial Ontario-based workforce and distribution team to Desjardins, which will require material adjustments in order to improve the existing underwriting and operational infrastructure,” it says. “While Desjardins has appropriate expertise in the Canadian marketplace, the effort is much larger than any other undertaken in the past.” As a result, it says that the integration risks are “notable”.

DBRS says it will continue to monitor the deal and its impact on the firm’s credit profile. “This will include monitoring whether there are any sizeable departures from the network of more than 500 independent distribution agents or customers,” it says.

However, if the integration is successful, DBRS says that Desjardins “will benefit from a stronger presence outside of Québec, which is viewed as supportive of the organization’s current strong ratings profile.”

Indeed, it notes that the acquisition is consistent with Desjardins’ strategy, in that it improves its diversification outside of Québec, particularly in wealth management and insurance. It says that the deal essentially doubles Desjardins’ property & casualty insurance business, making it the number two P&C provider in Canada.

Additionally, it says that Desjardins expects that the new business will contribute to its earnings immediately.