TKOMY Tokio Marine Holdings Inc (PK)

U.S. insurer Delphi Financial Group Inc. announced the completion of its acquisition by Japan-based Tokio Marine Holdings Inc. (TKOMY) yesterday.

The merger was completed for a cash consideration of approximately $2.7 billion. The acquisition price translates into a substantial premium of 42% over and above Delphi’s book value of $1.9 billion as of March 31, 2012. Delphi shareholders have been awarded a special dividend of $1 per share.

Delphi’s stock traded on the New York Stock Exchange for the last time on May 15, 2012.  It would be made unavailable for trading before the opening bell on May 16 and de-listed later on.                                                              

Despite being a wholly-owned subsidiary of Tokio Marine, Delphi will continue to operate on its own. It will work in tandem with Philadelphia Insurance, another U.S. subsidiary of Tokio Marine. Though both companies will serve the same markets, there will be no conflict of interests as their products will be different from each other.

The deal which was announced in December 2011, had earlier faced opposition from Delphi’s shareholders who claimed that that the deal was structured in a way that Class B shares, held by Delphi’s CEO Robert Rosenkranz, would fetch a higher payout in comparison to Class A shares.

In January 2012, the agreement was tagged as unfair and consequently the shareholders sued the company in Delaware Chancery Court, Wilmington to stop the sale, on account of the provisions regarding “disparate consideration.”

The judge ruled that the plaintiffs may continue with their litigation. However, they could vote since they were already receiving a premium for their share. The judge also stated that discontented shareholders had the right to receive monetary compensation for Rosenkranz’s actions. 

Consequently, at a special meeting held in March 2012, Delphi received approval from its shareholders with 86.1% of them voting in favor of the sale.

Delphi expects to pay its Class A shareholders a monetary compensation amounting to $49 million related to legal settlements. The liability is, however, contingent to approval from Delaware courts, due in late second half of 2012.

Following the announcement of completion of the acquisition, Fitch Ratings sprang into action and upgraded the ratings of Delphi and its subsidiaries. The rating agency upgraded Delphi’s issuer default rating (IDR) to “A-“ from “BBB”, senior notes due 2020 to “BBB+” from “BBB-“and junior notes to “BBB+” from “BB”. 

The issuer financial ratings of Delphi’s chief operating subsidiaries – Reliance Standard Life Insurance Co., First Reliance Standard Life Insurance Co. and Safety National Casualty Corp. were all raised to “A+” from “A-“. All the ratings have been revised from positive to a stable outlook.

Fitch’s decision to raise Delphi’s ratings is based on the premise that the company will be able to sustain the current capital levels of its subsidiaries. Moreover, Delphi will also have the capital strength of Tokio Marine to fall back on. 

Fitch views that Delphi fits very well within Tokio Marine strategic goal of expanding in the U.S. insurance market. Given Delphi’s niche presence in the excess workers’ compensation and group disability insurance markets in the U.S., the rating agency believes that Delphi may gradually become a core operating subsidiary of Tokio Marine.  

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