Tokio Marine Paying a Premium for Delphi as Japanese Insurers Look Abroad

Tokio Marine Holdings Inc. (8766) agreed to pay a 71 percent premium in its $2.7 billion cash bid for the U.S.’s Delphi Financial Group Inc. as Japanese insurers face waning demand from an aging population at home.

Japan’s second-largest casualty insurer’s bid for the Wilmington, Delaware-based company that sells workers’ compensation and group-life insurance is the industry’s third- biggest bonus for a cash takeover of more than $1 billion since at least 1995, according to data compiled by Bloomberg. Shares of Tokio Marine fell 1.7 percent to 1,713 yen at the close in Tokyo, while Delphi soared 73 percent in New York.

Japanese insurers are looking overseas as they grapple with an aging society and declines in returns on securities holdings in the aftermath of the nation’s record earthquake and tsunami in March. The acquisition will boost Tokio Marine’s overseas profit contribution to 46 percent of earnings from 37 percent, the company said yesterday when it announced the bid.

“The prospect for revenue and business growth within the domestic non-life insurance and life insurance businesses has strengthened as Tokio Marine expands overseas,” Standard & Poor’s analysts including Reina Tanaka said in a report yesterday. “The acquisition of Delphi (DFG) is also in line with its aggressive expansion overseas including in emerging markets.”

Local rivals have said they are also looking to boost assets outside Japan. NKSJ Holdings Inc., Japan’s third-largest non-life insurer, may increase the amount it will spend for acquisitions abroad to counter declining demand at home, President Masatoshi Sato said in an interview in August.

Paying a Premium

Tokyo-based Tokio Marine will pay $43.875 for each of Delphi’s Class A shares and $52.875 for every Class B share, the two insurers said in a statement yesterday. Delphi shareholders will also receive $1 in cash through a special dividend, according to the statement.

The purchase value marks a premium of 71 percent, based on the 20-day average price of Delphi’s publicly traded Class A shares and accounting for the one-time payout to existing Delphi investors after the deal closes, according to data compiled by Bloomberg. Tokio Marine paid an 81 percent premium for Philadelphia Consolidated Holding Corp. in 2008, according to the data.

“The premium paid in this acquisition may have a negative impact on the company’s shares in the short term,” said Wataru Otsuka, a research analyst at Nomura Securities Co. in a report.

Spending Spree

Tokio Marine has spent more than $6 billion since 2002 on purchases from the U.K. to China as a shrinking population weighs on growth at home. The latest acquisition is the largest since it paid $4.7 billion for Philadelphia Consolidated.

The company said it will fund the latest purchase through its own cash and debt. Tokio Marine cut its full-year earnings forecast by 89 percent to 10 billion yen ($129 million) earlier this month, after estimating 100 billion yen of payouts linked to the floods in Thailand.

“This merger is a plus for Tokio Marine,” said Takashi Hiroki, Tokyo-based chief strategist of Monex Inc., an online securities company. “We will probably see more mergers and acquisitions as the market in Japan shrinks.”

S&P maintained its ratings for Tokio Marine’s units, adding that it will monitor the acquisition process.

Delphi shares had dropped 12 percent in 2011 before the acquisition was announced. The shares surged $18.57, or 73 percent, to $44 in New York trade yesterday, the biggest jump since 1990 and to the highest close since April 2007.

“Tokio Marine Group has been seeking continued expansion of its international insurance business as a major driving force of its mid to long term growth strategy,” Shuzo Sumi, president of the company, said in the statement. “The acquisition of Delphi is an important step in this development, serving to further diversify our business mix in the United States.”

Life Insurance

The purchase of the 24-year-old company will strengthen its existing property and casualty insurance in the U.S., and also gives it a foothold in the country’s life insurance market, according to the statement. The U.S. insurance industry is estimated at 89 trillion yen, the world’s largest.

The transaction will give Delphi “access to substantial resources to take advantage of acquisitions and other new business opportunities,” Robert Rosenkranz, chairman and chief executive officer of the U.S. company, said in the statement.

Tokio Marine is buying more overseas assets as the Japanese currency strengthened. The yen climbed 4.4 percent against the U.S. dollar this year, the best performer among 16 major currencies tracked by Bloomberg.

The insurer agreed in December 2007 to pay 442.2 million- pound ($880 million) for Lloyd’s of London insurer Kiln Ltd.

Tokio Marine was advised by Macquarie Capital, while Sullivan & Cromwell LLP provided legal counsel. Lazard Ltd. was the financial adviser to Delphi’s special committee of independent directors, along with law firm Cravath Swaine & Moore LLP, while Morris, Nichols, Arsht & Tunnell LLP provided legal counsel to the company.

To contact the reporters on this story: Kathleen Chu in Tokyo at kchu2@bloomberg.net; Katsuyo Kuwako in Tokyo at kkuwako@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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