Intact Financial Corp. (IFC.T), Canada's largest property and casualty insurer, said Tuesday it agreed to buy the Canadian division of France's AXA SA (CS.FR) for C$2.6 billion (US$2.66 billion) in a deal that combines two of the country's largest insurers.

The deal boosts Intact's direct premiums written by C$2 billion to more than C$6.5 billion, almost double that of its nearest competitor, Aviva Canada. Aviva, a unit of U.K.-based Aviva PLC, underwrote C$3.3 billion in direct premiums last year.

The deal also improves Intact's geographic footprint in Quebec and British Columbia. AXA Canada, which has 2,300 employees, is the sixth-largest home, auto and business insurance company in Canada, with a strong presence in Quebec, Ontario and British Columbia.

Toronto-based Intact will fund the purchase with C$500 million of its own excess capital and through the issue of about C$800 million of equity. It will also tap credit facilities of C$1.3 billion. The transaction is expected to close in the third quarter, the company said.

Late Tuesday, credit-rating agency Moody's Investors Service said it expects to lower Intact's senior unsecured debt rating and its "insurance financial strength" rating by one notch each, after the deal closes. It raised concerns over reduced financial flexibility through the use of debt to fund the acquisition.

The combination will result in annual after-tax cost savings and efficiencies of C$100 million, the company said. The acquisition is expected to generate an internal rate of return of 20%. It also expects book value accretion of 6%.

The deal lessens Intact's reliance on automobile insurance, and boosts its exposure to commercial lines, Chief Financial Officer Mark Tullis said on a conference call.

Personal auto insurance accounts for 49% of Intact's total earnings. That falls to 46% when the two companies merge. On a pro-forma basis, personal property will account for 22% of earnings, while commercial auto remains flat at 7%. Intact said the deal will also boosts its commercial property and casualty insurance business to 24% from 19%.

Intact also said it will look for a strategic partner for AXA Canada's life and health insurance business, which accounts for about 7% of direct premiums written.

AXA Canada parent, AXA SA, is expected Wednesday to outline details of an ambitious five-year strategic plan launched late last year. The French insurance giant aims to show investors it's on track to expand again in the aftermath of the financial crisis. AXA anticipates the sale to generate a EUR0.9 billion gain to earnings, it said in a statement.

Intact said it expects to increase its profitability and benefit from greater earnings stability resulting from a wider diversification of its activities across the country and business lines. On the call, Intact executives said they plan to find a strategic partner for AXA Canada's life and health businesses, which represent about 7% of earnings.

-By Caroline Van Hasselt, Dow Jones Newswires; 416-306-2023; caroline.vanhasselt@dowjones.com

(Carolyn King contributed to this article.)