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Tokio Marine makes splash with latest deal

$7.5 billion HCC offer unlikely to be topped

Tokio Marine makes splash with latest deal

Tokio Marine Holdings Inc.'s $7.5 billion cash offer for U.S. specialty insurer HCC Insurance Holdings Inc. furthers the Japanese insurer's goal of expanding beyond Asia into noncorrelated risks at a price that appears to be high enough to forestall competing bids.

Japan's largest insurer by market value said this month that it will pay $78 per share in cash, a 35.8% premium on the Houston-based insurer's average share price over the past month, and expects the deal to be completed in the fourth quarter.

“We've been focusing on the international insurance bus- iness and have been expanding since 2000,” said Yosuke Sakamoto, assistant manager in the investor relations group for Tokio Marine Holdings, adding “we see insurance as a growth driver for our group.”

The company is looking to organic growth and mergers and acquisitions to build its insurance business, said Mr. Sakamoto.

“For M&A, we've been making a list of potential candidates, and out of the list that we have, we thought HCC was the best fit with our criteria,” said Mr. Sakamoto.

As a specialty insurer, HCC will help to further diversify Tokio Marine's risks, he said.

“We look forward to creating long-term synergies by combining HCC's expertise and Tokio Marine's global footprint,” said Mr. Sakamoto

HCC, which has 2,500 employees, had a 2014 profit of $458 million on revenue of $2.7 billion.

“HCC is a pretty strong franchise and a strong U.S specialty underwriter - those are pretty valuable these days,” said Ryan Byrnes, vice president of insurance at Janney Capital Markets, a unit of Janney Montgomery Scott L.L.C. in Hartford, Connecticut.

“Tokio Marine gets a high-quality franchise. That's what they're paying for,” said Mark Dwelle, an insurance analyst at RBC Capital Markets, a unit of RBC Securities Inc. in Richmond, Virginia.

“The unique part of the HCC franchise is that roughly 30% of revenue comes from (directors and officers) insurance and 30% comes from medical stop-loss in the accident and health business,” he said. “Those are good defensible niches in which Tokio Marine doesn't operate to any great extent.”

The $7.5 billion purchase would be Tokio Marine's largest acquisition to date and build its U.S. presence beyond its $4.7 billion acquisition of Philadelphia Consolidated Holding Corp. in 2008 and its $2.7 billion purchase of Delphi Financial Group Inc. in 2012.

“Tokio Marine has a well-established market presence in the U.S., mainly with Philadelphia and Delphi. The current deal represents the group's strategy on how to sustain growth going forward. The group aims to build a more stable earnings profile by diversifying earnings sources,” Seewon Oh, associate director of analytics at A.M. Best Co. Inc. in Hong Kong, said in an email.

“Tokio Marine has been focused on expanding its business outside its Asian territory, so this fits within that strategy of moving toward the U.S.,” said Neil Stein, director of the insurance rating group at Standard & Poor's Corp. in New York. “They've bought a few different companies in the U.S. over the last number of years.”

“It seems like a lot of foreign companies are interested in gaining more scale in the primary U.S. insurance market,” said Mr. Byrnes.

“We are not surprised that there are outside buyers looking into some of these mature markets (like the U.S.) and looking particularly for seasoned companies which are known to be doing well in their areas of expertise,” said Sid Ghosh, director of the insurance rating group at Standard & Poor's in New York.

A premium of 1.9 times book value is higher than typically paid, analysts said.

“Most of the deals we've seen in recent years have been more in the range of 1.2 times to 1.4 times book value,” said Mr. Dwelle.

“Tokio Marine pays for quality,” said Mr. Byrnes. “They have a track record of paying for quality, and again, that's something they're getting with HCC.”

“This is definitely a pretty high premium compared to other deals,” said Jim Auden, managing director of insurance at Fitch Ratings Inc. in Chicago. “I think it reflects on the historical underwriting performance of HCC and limited growth opportunities in Tokio Marine's home market. There may not be that many companies that would fetch this premium. HCC garnered a bit more because of their history.”

Given the strong premium, another bidder is unlikely.

“It's such a strong valuation. It's tough to see someone coming over the top,” said Mr. Byrnes.

“We ... expect very little probability of a competing bid emerging given the very satisfactory takeout premium,” analysts at Keefe, Bruyette & Woods Inc. said in a research note.

During an investor presentation, Tokio Marine said the “highly experienced HCC management team will continue to lead the business,” which had 2014 gross written premiums of $3 billion and a market capitalization of $5.5 billion.

Even run separately, HCC is likely to benefit from its new, well-capitalized parent.

“Having Tokio Marine's financial support should give HCC the ability to pursue business other insurance carriers would consider too large of a risk,” said Robert Raber, senior financial analyst at A.M. Best Co. Inc. in Oldwick, New Jersey. “Most importantly, HCC will gain the depth and breadth of Tokio Marine's enterprise risk management program. We have seen this program effectively implemented at the other U.S.-based insurance carriers that Tokio Marine has acquired over the years.”

“Certainly, from a financial perspective, the (return on equity) that HCC can generate is well above the ROE that most Japanese companies are achieving in their home market, and certainly, relative to investment yields, it's a better way to deploy cash if you have it,” said Mr. Dwelle.