Tokio Marine to Buy High Net Worth Insurer Pure for $3.1 Billion

Tokio Marine Holdings Inc. has agreed to buy U.S. high net worth insurer Privilege Underwriters Inc. and its specialty insurance subsidiaries, known as Pure Group, for $3.1 billion (approximately JPY 325.5B).

Tokio Marine will acquire 100% of Privilege Underwriters Inc.’s shares from existing shareholders that include Stone Point (51%), KKR (34%), AXA XL (10%), Pure management and others (5%).

The acquisition will be through Tokio Marine’s subsidiary, HCC Insurance Holdings, and is expected to close in the first quarter of 2020 subject to regulatory approvals. Tokio Marine said it will finance the acquisition using cash-on-hand and external financing.

For 2018, Pure reported fee income of $229 million, a before-tax profit of $73 million and $963 million premiums under management. Its business profile is composed of homeowners (57%), auto (23%), inland marine (9%), and other lines for high-net worth clients.

White Plains, New York-based Pure Group’s insurance contracts are written by the Privilege Underwriters Reciprocal Exchange. However, the reciprocal exchange is owned by policyholders and is not itself part of the acquisition. The exchange cedes the majority of its risk to the reinsurance market, and also shares with the insurance subsidiary of Pure Group. The capital of the reciprocal exchange is primarily contributed by the policyholders.

Pure Group’s major business is managing operations of the reciprocal exchange (including underwriting, claims and marketing). The management fees received in return for these services is the primary source of income for the Pure Group. Pure Group’s other income sources are fees from brokerage, fine arts claim services, and income/losses from the reinsurance business in which the insurance subsidiary assumes reinsurance premium from the reciprocal exchange.

Ross Buchmueller, founder, president and CEO of Pure Group, has more than 30 years of experience in the high net worth insurance market. He and all key management will continue in their positions after the acquisition closes, according to the announcement.

Tokio Marine Group said the deal will allow it to further expand and diversify its international business in both scale and profit. The insurer said there is limited overlap and that Pure’s business is highly complementary with its own.

The insurer said that it has plans to create synergies with Pure Group under its umbrella by providing reinsurance to Pure Group to increase its capacity and retain profit within Tokio Marine Group and cross-selling of specialty insurance products developed by its existing U.S. group companies to Pure Group customers.

In July, Satoru Komiya, who had just begun as Tokio Marine president, said in an interview with Bloomberg that the insurer was interested in acquisition opportunities in Asian emerging markets in particular but he also left open the possibility of large-scale acquisitions in the U.S. and Europe.

At a press conference on the Pure Group announcement, Komiya said that the $3.1 billion price is high given that it is 33-times Pure’s forecasted 2020 profit. “We are paying for PURE’s big potential growth,” he said.

Tokio Marine is no stranger to U.S. deals. It acquired speciality insurer HCC Insurance Holdings for $7.5 billion in 2015. It paid $2.7 billion in 2011 for Delphi Financial and in 2008 it bought Philadelphia Insurance for $4.7 billion.

Following the announcement, rating agency A.M. Best placed under review with positive implications the Financial Strength Rating of A (Excellent) and the Long-Term Issuer Credit Ratings of “a” for both members of the PURE Group of Insurance Companies: Privilege Underwriters Reciprocal Exchange and PURE Insurance Co.

Estimates of the high net worth market, also called the private client market, range from $27 billion to as high as $80 billion. It is an attractive target for insurers looking to grow, especially since the 2015 Chubb acquisition of ACE consolidated the two leading high net worth competitors into one. That still left AIG, Pure Group, Nationwide (Crestbrook), Allstate, Cincinnati Financial, USAA, and State Farm among others. Since the Chubb-ACE marriage, W.R. Berkley Corp. has launched a high net worth personal lines brand, Berkley One, and several former AIG executives have started another reciprocal for the market called Vault.

Definitions of who qualifies as high net worth vary but tend to encompass those with high-valued homes who are likely to have additional valuable assets and be interested in buying additional insurance coverages.

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