Tokio Marine to Pay $7.5 Billion for HCC in Its Biggest Deal

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Tsuyoshi Nagano
Tokio Marine Holdings Inc. President Tsuyoshi Nagano. Photographer: Akio Kon/Bloomberg

Tokio Marine Holdings Inc. agreed to buy HCC Insurance Holdings Inc. for about $7.5 billion in the biggest acquisition by a Japanese insurer, stepping up an overseas expansion to counter stagnation at home.

Tokio Marine will pay $78 in cash per share for Houston, Texas-based HCC, according to a statement on Wednesday. That’s a

37.6 percent premium to the latest closing price.

Japanese insurers are looking for ways to spread risks and increase revenues overseas as an aging population saps demand for policies and natural disasters lead to higher payouts. To that end, they’ve announced $27.5 billion of acquisitions abroad in the past five years, Bloomberg-compiled data show.

Before the latest deal, Tokio Marine had made $8.8 billion of purchases in North America, according to the data. The biggest was the 2008 purchase of Philadelphia Consolidated Holding Corp., valued at $4.6 billion.

“We like HCC and I think this fits in well with Tokio Marine’s existing business,” David Threadgold, Tokyo-based Asian research head at Keefe Bruyette & Woods, a boutique investment bank, said in an e-mail.

‘Not Cheap’

The deal, at 1.9 times HCC’s book value, is “not cheap but not necessarily unreasonable,” he said, adding that it’s in line with Tokio Marine’s history of paying a “full price” for high-quality businesses with low risk and decent growth. There is little overlap with the Japanese insurer’s existing U.S. businesses and will help it boost earnings per share and return on equity, he said.

The median multiple-to-book value in insurance takeovers globally worth $1 billion or more over the past five years is

1.14, Bloomberg-compiled data show.

“The company is indeed expensive,” Tokio Marine President Tsuyoshi Nagano said at a press conference in Tokyo. “The stock price from the start was high, so we put a premium so we can gain control.”

HCC, founded in 1974, has assets totaling $11 billion, according to its website. The firm sells policies that protect corporate officers against lawsuits, guard against aviation losses and pay out when crops are damaged. Chief Executive Officer Christopher J.B. Williams announced a deal in September to buy Producers Ag Insurance Group, which sells coverage to farmers.

HCC’s management team will continue to lead the business, Tokio Marine said in a slide presentation. Tokio Marine clients will be offered HCC products including accident-and-health insurance. The target company will benefit from investment managers at Delphi, a U.S. insurer that was acquired by the Japanese company in 2012, according to the presentation.

Currency Fluctuations

Nagano pushed forward with the HCC deal even after the yen dipped to a 13-year low earlier this month, making overseas purchases pricier. The dollar’s 18 percent gain against the Japanese currency in past year added almost $1.4 billion to the cost of buying HCC, based on the acquisition price.

“We are not worried about the foreign-exchange rate, we care only if the company is good and profitable,” Nagano said.

The premium Tokio Marine offered almost exactly matches what Japanese insurers have paid on average over the past five years, the data show. Globally, premiums in insurance takeovers averaged 23.7 percent in that period.

“They’re buying a really good company, so perhaps they didn’t have a choice” but to pay the premium, said Yuki Ishii, an analyst at Mitsubishi UFJ Morgan Stanley Securities Co Ltd. “It’s not exactly cheap.”

Credit Suisse, Evercore

HCC advanced 36 percent to $77 at 10:32 a.m. in New York. The buyer slipped 0.9 percent.

Tokio Marine got 71 percent of revenue from Japan in its latest fiscal year. The HCC purchase fits its long-term strategy of focusing on overseas deals rather than doing share buybacks, Ishii said. It topped Dai-Ichi Life Insurance Co.’s $5.5 billion deal for Protective Life Corp., announced last year, Bloomberg-compiled data show.

Dai-Ichi plans to build on its acquisition of Protective to further expand overseas, President Koichiro Watanabe said in an interview. It plans to give more authority to regional units overseas to accelerate decision-making and set aside dollar-denominated capital for M&A, he said.

The buyer’s bankers are Credit Suisse Group AG and Evercore Partners Inc., while Sullivan & Cromwell provided legal advice, according to the statement. The seller used Goldman Sachs Group Inc. and Willkie Farr & Gallagher.

HCC’s first-quarter profit increased 6 percent to $112.9 million, while revenue advanced 2 percent.

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