Japanese insurer Tokio Marine Holdings said last week that itwill acquire Philadelphia Consolidated Holding Corp. for $4.7billion, marking the biggest deal value for a U.S. specialtyproperty-casualty insurance operation reported in the lastyear.

The companies said Tokio Marine will acquire all outstandingshares of Philadelphia Consolidated, for $61.50 per share in cash,through Tokio Marine Holdings wholly owned subsidiary, Tokio Marine& Nichido Fire Insurance Co.

The deal eclipses Munich Re's $1.3 billion acquisition of TheMidland Company Insurance, which the Cincinnati-based specialtyinsurer's shareholders approved in March.

It also tops Tokio's latest mega-deal, the acquisition of KilnLtd. for nearly $900 million announced in December last year, whichalso closed in March 2008. Kiln is a Lloyd's of London operationthat redomiciled to Bermuda last year.

Falling between those deals was one that was also announced inDecember by ACE Ltd. for a specialty accident and health insurer,Combined Insurance Company of America, coming in at $2.4billion.

Bala Cynwyd, Pa.-based Philadelphia Consolidated Holding Corp.,through insurance operating subsidiaries that include PhiladelphiaIndemnity Insurance Company and Philadelphia Insurance Company(collectively known as Philadelphia Insurance Companies),participates in a wide array of specialty insurance niches.

Among its specialty product offerings are liability and propertypackage coverages for mental health organizations, hotels, boatdealers, accountants and nonprofit directors and officers, as wellas collector car insurance.

Analysts said the Tokio deal was a good one for both parties,noting that it was done at a price that should make Philadelphiastockholders happy and that the acquisition will provideopportunity for Tokio Marine to expand its presence in Europe andthe United States.

Robert Farnam, an analyst with Keefe, Bruyette & Woods, saidhe had seen Philadelphia Consolidated as an acquisition target, butthe sale was for more than he had expected. He said he had guessedit would go for 2.4- to 2.7-times book "and they went for2.75."

He and other analysts said it appeared that PhiladelphiaConsolidated would be able to operate in a relatively autonomousfashion and there would be no layoffs involved, basing theirassessment on what the companies said in a briefing.

Michael Grasher of Piper Jaffray said based on what managementsaid that Philadelphia Consolidated executives had "done theirhomework and looked into other suitors and came away with TokioMarine as the best fit."

He noted that risks are always involved with integratingcompanies, but it sounded as though Philadelphia Consolidated wouldbe left alone to do its business while "ratcheting up their productin other markets."

South America and Canada are markets that Tokio Marine wouldlike to use Philadelphia Consolidated to enter and the U.S.company's products "may play well in Europe," he said.

In the United States, the most recent additions to thePhiladelphia's product line-up include adoption agencies, homehealth care and hospice services, substance abuse rehabilitationfacilities, museums and a business auto fleet product.

In March, Philadelphia itself made an acquisition, buyingColorado-based Gillingham & Associates, a program managerspecializing in the outdoor recreation and hospitalityindustries.

After the Tokio deal was announced, Standard & Poor's andMoody's affirming the Tokio Marine & Nichido Fire InsuranceCo.'s financial strength ratings--S&P at "double-A" with astable outlook and Moody's at "Aa2," stable.

S&P said that given the recent acquisition of Kiln Ltd.--aLloyd's of London operation that redomiciled to Bermuda lastyear--the Japanese firm is "challenged to promptly consolidate theacquired companies...and establish group-wide management and riskmanagement systems. If Tokio Marine's overseas business progressesas planned, S&P said the firm could be due for an upgrade.

Moody's, which affirmed Philadelphia Insurance Group at "A1,"said the affirmation reflected the likelihood that the insurerwould continue to be run as a standalone U.S. operation. Putting apositive outlook on the rating, Moody's said, benefits could berealized from being part of a larger group, and explicit orimplicit support from Tokio could prompt an upgrade.

While noting that the deal is the largest in Tokio Marine'shistory, Moody's said that given Philadelphia's small size andmodest profile relative to Tokio Marine, the acquisition is notlikely to change the Japanese insurer's overall businessprofile.

Presenting its own analysis of the deal impact in conjunctionwith announcement, Tokio Marine estimated that the two companiestogether would write 740 billion Japanese Yen for fiscal year 2008(the year ending Mar. 31, 2009), or about $6.5 billion at year-end2007 exchange rates, with $1.7 billion coming fromPhiladelphia.

Philadelphia Consolidated has 47 offices and approximately 1,400employees across the United States. The companies said thetransaction would combine Tokio Marine's financial strength andinternational market knowledge with Philadelphia Consolidated'sproduct development capabilities and multi-channel distributionexpertise.

Shuzo Sumi, president of Tokio Marine, said in a statement,"Expansion of revenue and profits from international business isthe driving force of Tokio Marine's mid-to-long term growthstrategy. The acquisition of Philadelphia Consolidated isconsistent with our aspirations of expanding globally and realizinga well-balanced business portfolio."

He called Philadelphia Consolidated "an excellent strategic fitfor us."

"When opportunities to acquire a premier organization arise, thebest response is to act," Mr. Sumi said.

James J. Maguire, Philadelphia Consolidated's chairman, said, "Ifounded this company in 1962. This is a great opportunity for us totake the company to the next level, and as a demonstration of ourcommitment, the executive management team and I will be making asubstantial investment in Tokio Marine Holdings's stock promptlyafter closing of the transaction," adding that he will also becomea member of the International Strategic Committee of TokioMarine.

James J. Maguire, Jr., Philadelphia Consolidated's chiefexecutive officer, said, his company's management is "committed tothe successful growth of the business and delivering a performancewhich will continue our superior level of achievement.

"Joining the Tokio Marine Group with its international reachwill fuel the next stage of our growth and will provide numerousbenefits for our customers, brokers, agents and employees."

The Pennsylvania firm will provide a platform for Tokio Marine,while Tokio Marine's "credit quality and overall financial strengthwill open up additional avenues of expansion further enabling thecombined company to generate enhanced returns," he said.

Mr. Sumi said the firms believe they "share common fundamentalvalues and a business philosophy" that will produce a long andsuccessful partnership.

The companies said profits and losses of PhiladelphiaConsolidated will be consolidated into Tokio Marine Holdings'financial statements from fiscal year 2009 and will deliver greaterearnings consistency throughout the insurance pricing cycle.

The boards of directors of both companies have unanimouslyapproved the transaction, and key family shareholders, representingapproximately 18 percent of Philadelphia Consolidated's outstandingshares, have agreed to vote in favor of the transaction.

The acquisition is subject to the approval of PhiladelphiaConsolidated shareholders and the approval of various regulatoryauthorities in Japan and the United States. The transaction isexpected to close in the fourth quarter of 2008.

Separately, Philadelphia reported second-quarter net income of$52.9 million, with a combination of catastrophe losses andinvestment losses pushing the figure down from $94.4 million forthe same quarter last year.

Second-quarter underwriting highlights included a 12 percentincrease in gross written premiums to $445 million, and a combinedratio of 86.2.

For the latest full year, 2007, Philadelphia Insurance reportednet written premiums of $1.5 billion, taking a 47th place rankingon NU's Top 100 groups listing based on net premiums.

With a 2007 combined ratio of 74.3, Philadelphia Insuranceremained one of the most consistent underwriting performersfollowed by NU.

In December of last year, Philadelphia was also ranked among the"Profit Champions" for the U.S. p-c industry developed by NU. The"Champions" were the 50 p-c insurers with the lowest averagecombined ratios for the twelve years extending from 1995-2006.Philadelphia Insurance Companies, ranked No. 6, with a 12-yearaverage combined ratio of 86.3.

(Additional reporting by Susanne Sclafane)

See related article, "Philadelphia, RLI Take Spots In NU ProfitHall Of Fame"