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Big multiple in Tokio Marine/PURE tie-up does not necessarily make deal rich

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Big multiple in Tokio Marine/PURE tie-up does not necessarily make deal rich

With a headline multiple of 33x projected after-tax 2020 earnings in Tokio Marine Holdings Inc.'s recent agreement to purchase the group that manages high-net-worth personal lines insurer Privilege Underwriters Reciprocal Exchange, it came as no surprise that prepared remarks on the conference call discussing the $3.1 billion deal quickly turned to valuation.

That figure, along with certain other multiples to PURE's historical and projected pre- and post-tax profits, exceed those associated with recent transactions involving publicly traded specialty U.S. property and casualty targets. But, as Tokio Marine said, it is right in line with trading multiples for "a listed comparable company with a similar business model."

Tokio Marine did not refer to the listed company by name on the call, but it almost assuredly was Erie Indemnity Co., which, like the PURE entities being sold, operates a largely fee-based business model in its capacity as the attorney-in-fact for a subscriber-owned, personal lines-focused reciprocal exchange. Both Erie Indemnity and PURE Risk Management LLC perform various administrative functions on behalf of the respective exchanges, though PURE also includes a stock insurance company.

During September, Erie Indemnity shares traded between 28.2x and 33.5x the S&P Global Market Intelligence consensus normalized EPS estimate for 2020, with a mean close of 31x forward EPS. The mean close relative to the 2019 normalized EPS estimate was 33.4x. The more precise relative valuations for PURE based on Tokio Marine estimates are 32.6x the target's projected 2020 after-tax income and 29.8x projected 2019 pretax income.

"We consider the acquisition price, based on comprehensive factors such as asset portfolio and the business portfolio of PURE group as well as growth potential and profitability and so on, to be fair and appropriate," Tokio Marine Co-Head of International Business Akira Harashima said on the call, through a translator.

The combination of the nearly perfect comparable in the form of Erie Indemnity's relative valuation and Tokio Marine's expectations for rapid growth in PURE's premiums under management and pretax profitability over the next four years may render recent M&A transactions less relevant in analyzing this transaction.

Markel Corp.'s $922.6 million 2017 agreement to acquire State National Cos. Inc. came at 16.9x projected pretax income and 26.6x projected after-tax income for that same calendar year, but much lesser multiples to forward projections, according to an Evercore fairness opinion. Merger consideration of $70 per share paid in 2018 by Hartford Financial Services Group Inc. for Navigators Group Inc. represented 20.8x the median analyst estimate for the target's EPS in a 12-month period ending June 30, 2019, according to a Goldman Sachs fairness opinion. The implied per-share consideration of $121.02 offered by Kemper Corp. for Infinity Property & Casualty Corp. was 20.7x analysts' median 2018 EPS estimate and 19.2x the median 2019 estimate, a merger proxy filing stated.

While none of those three targets operate in a model directly comparable to PURE, State National might come the closest given its substantial fronting business and the contribution of fee income to total revenue. Projections displayed in the Evercore opinion for that deal showed the potential for the target to generate substantial growth in both revenues and profitability in the four years following the transaction's announcement.

Looking beyond specialty P&C transactions to the life and health sector, Western & Southern Mutual Holding Co. attracted attention in September 2018 by agreeing to pay $1.55 billion, or 5.4x capital and surplus, for Gerber Life Insurance Co. That deal, however, included a long-term licensing agreement to use the well-known Gerber Life name in connection with financial services.

Prudential Financial Inc.'s September agreement to buy financial solutions platform Assurance IQ for $2.35 billion at closing prior to an earnout of up to $1.15 billion represented 19.6x the target's 2018 revenues. Tokio Marine is paying a multiple of 13.5x PURE's 2018 fee income in another transaction that assumes rapid future growth for the target.

The PURE group is majority owned by funds managed by Stone Point Capital LLC with significant minority positions held by KKR Crystal Aggregator LP and XL Reinsurance America Inc. The latter entity, a subsidiary of AXA SA, held a 9.8% stake as of year-end 2018 which it listed as having an actual cost of $65.2 million and carrying value of $47.6 million.