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

The companies said Tokio Marine will acquire all outstanding shares 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 The Midland Company Insurance, which the Cincinnati-based specialty insurer's shareholders approved in March.

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

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

Bala Cynwyd, Pa.-based Philadelphia Consolidated Holding Corp., through insurance operating subsidiaries that include Philadelphia Indemnity 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 property package coverages for mental health organizations, hotels, boat dealers, accountants and nonprofit directors and officers, as well as 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 Philadelphia stockholders happy and that the acquisition will provide opportunity for Tokio Marine to expand its presence in Europe and the United States.

Robert Farnam, an analyst with Keefe, Bruyette & Woods, said he had seen Philadelphia Consolidated as an acquisition target, but the sale was for more than he had expected. He said he had guessed it would go for 2.4- to 2.7-times book "and they went for 2.75."

He and other analysts said it appeared that Philadelphia Consolidated would be able to operate in a relatively autonomous fashion and there would be no layoffs involved, basing their assessment on what the companies said in a briefing.

Michael Grasher of Piper Jaffray said based on what management said that Philadelphia Consolidated executives had "done their homework and looked into other suitors and came away with Tokio Marine as the best fit."

He noted that risks are always involved with integrating companies, but it sounded as though Philadelphia Consolidated would be left alone to do its business while "ratcheting up their product in other markets."

South America and Canada are markets that Tokio Marine would like 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 the Philadelphia's product line-up include adoption agencies, home health care and hospice services, substance abuse rehabilitation facilities, museums and a business auto fleet product.

In March, Philadelphia itself made an acquisition, buying Colorado-based Gillingham & Associates, a program manager specializing in the outdoor recreation and hospitality industries.

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

S&P said that given the recent acquisition of Kiln Ltd.--a Lloyd's of London operation that redomiciled to Bermuda last year--the Japanese firm is "challenged to promptly consolidate the acquired companies...and establish group-wide management and risk management systems. If Tokio Marine's overseas business progresses as 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 insurer would continue to be run as a standalone U.S. operation. Putting a positive outlook on the rating, Moody's said, benefits could be realized from being part of a larger group, and explicit or implicit support from Tokio could prompt an upgrade.

While noting that the deal is the largest in Tokio Marine's history, Moody's said that given Philadelphia's small size and modest profile relative to Tokio Marine, the acquisition is not likely to change the Japanese insurer's overall business profile.

Presenting its own analysis of the deal impact in conjunction with announcement, Tokio Marine estimated that the two companies together would write 740 billion Japanese Yen for fiscal year 2008 (the year ending Mar. 31, 2009), or about $6.5 billion at year-end 2007 exchange rates, with $1.7 billion coming from Philadelphia.

Philadelphia Consolidated has 47 offices and approximately 1,400 employees across the United States. The companies said the transaction would combine Tokio Marine's financial strength and international market knowledge with Philadelphia Consolidated's product development capabilities and multi-channel distribution expertise.

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

He called Philadelphia Consolidated "an excellent strategic fit for us."

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

James J. Maguire, Philadelphia Consolidated's chairman, said, "I founded this company in 1962. This is a great opportunity for us to take the company to the next level, and as a demonstration of our commitment, the executive management team and I will be making a substantial investment in Tokio Marine Holdings's stock promptly after closing of the transaction," adding that he will also become a member of the International Strategic Committee of Tokio Marine.

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

"Joining the Tokio Marine Group with its international reach will fuel the next stage of our growth and will provide numerous benefits 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 strength will open up additional avenues of expansion further enabling the combined company to generate enhanced returns," he said.

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

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

The boards of directors of both companies have unanimously approved the transaction, and key family shareholders, representing approximately 18 percent of Philadelphia Consolidated's outstanding shares, have agreed to vote in favor of the transaction.

The acquisition is subject to the approval of Philadelphia Consolidated shareholders and the approval of various regulatory authorities in Japan and the United States. The transaction is expected 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 and investment losses pushing the figure down from $94.4 million for the same quarter last year.

Second-quarter underwriting highlights included a 12 percent increase in gross written premiums to $445 million, and a combined ratio of 86.2.

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

With a 2007 combined ratio of 74.3, Philadelphia Insurance remained one of the most consistent underwriting performers followed 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 average combined ratios for the twelve years extending from 1995-2006. Philadelphia Insurance Companies, ranked No. 6, with a 12-year average combined ratio of 86.3.

(Additional reporting by Susanne Sclafane)

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

Special Reports /

Tokio Marine Buys Philadelphia Consolidated For $4.7 Billion

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