With HCC Holdings Buy, Tokio Marine Enhances Already Top Commercial Lines Performance

By Finbarr Flynn and | June 17, 2015

Tokio Marine Holdings Inc. is using debt to expand a U.S. insurance business that’s beaten even Berkshire Hathaway Inc. for policy growth.

The Japanese insurer, which is taking over Houston-based HCC Insurance Holdings Inc. for $7.5 billion after at least $8.8 billion of U.S. acquisitions since 2008, has seen commercial policy premiums rise 90 percent to $3.4 billion in the seven years to 2014. That was the most among the top 15 providers, beating the 51 percent growth to $5.9 billion for Warren Buffett’s insurer, data compiled by Bloomberg Intelligence show.

Tokio Marine has higher credit ratings than the Japanese government and it plans to use them to fund its acquisition of faster growing HCC as an aging population at home saps demand for policies. The firm’s cash holdings rose 32 percent to 536.7 billion yen ($4.35 billion) in the year to March 31, while the parent company had no outstanding bonds.

“They are effectively debt free at the moment,” said David Threadgold, the Tokyo-based Asian research head at Keefe Bruyette & Woods, a boutique investment bank. “There isn’t a Japanese life insurance company who wouldn’t buy Tokio Marine paper in an instant.”

Tsuyoshi Nagano, the chief executive officer of the insurer, said last week it will finance the purchase of HCC with cash and debt, without giving details. Standard & Poor’s affirmed its AA- rating of the unit undertaking the acquisition the day it was announced. That’s the fourth-highest grade.

Purchase Premium

Tokio Marine is paying a 38 percent premium for HCC and 1.9 times the company’s book value, compared with an industry median of 1.14 times over the past five years, data compiled by Bloomberg show. HCC, which offers more than 100 different classes of specialty insurance, generated a return on equity of 12 percent in 2014, compared with Tokio Marine’s 7.9 percent.

A multiple of 1.7 times book value would have been a more appropriate level, Jefferies Group LLC said June 10. The higher premium “can be rationalized by the swapping of cash earning zero and very cheap debt for a 12 percent ROE company,” Jefferies analysts Makarim Salman and Ken Oiwa said.

The HCC acquisition will boost the share of profits generated overseas to 48 percent in the year started April 1, compared with a previous forecast of 38 percent, according to documents provided by Tokio Marine last week. Total premiums for the year will rise 9.9 percent compared with the prior estimate to 3.89 trillion yen, or about $31.5 billion, it said.

Berkshire Hathaway

Berkshire Hathaway earned $41.3 billion in premiums in 2014. Buffett has been expanding commercial insurance operations in recent years as competition increases in the reinsurance market, where his company is a global leader.

Before HCC, Tokio Marine’s biggest overseas deal was the 2008 purchase of Philadelphia Consolidated Holding Corp. for $4.6 billion. Dai-ichi Life Insurance Co., which competes with Tokio Marine in life insurance policy sales, spent $5.7 billion last year on its purchase of Birmingham, Alabama-based Protective Life Corp.

While Dai-ichi sold shares to fund its biggest overseas purchase, Tokio Marine’s Nagano ruled that out. U.S. dollar debt markets still offer funding costs less than 70 basis points above a record low of 2.65 percent in 2013, Bank of America Merrill Lynch data show.

The average yield on dollar-denominated bonds sold by financial companies from Asia with an AA level rating was 1.74 percent on June 15, while Tokio Marine & Nichido Fire Insurance Co.’s only outstanding yen note maturing in September 2020 yielded 0.3 percent, according to the data.

If Tokio Marine “issued long-term debt, given its high rating and the current interest environment, it probably wouldn’t be much of a burden for them,” said Reina Tanaka, a credit analyst at S&P in Tokyo.

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