KBW Downgraded HCC Insurance; Here's Why

In a report published Thursday, Keefe, Bruyette & Woods analyst Vincent DeAugustino downgraded the rating on HCC Insurance Holdings, Inc. HCC from Outperform to Market Perform, while raising the price target from $63 to $78. Tokio Marine Holdings Inc (ADR) TKOMY announced that it has signed an agreement to acquire HCC.

"Tokio Marine announced that it has reached an agreement to acquire HCC for $78 per share in an all cash offer ($7.5 billion in aggregate)," DeAugustino reported, while adding that he believed that the deal would be favorable for HCC's shareholders. A competing bid is unlikely to emerge.

"We also see very little risk of any large loss emergence potentially derailing the deal, making an earlier 4Q15 close more likely," the Keefe, Bruyette & Woods report said.

According to the analyst, Tokio Marine believes that it can achieve significant synergies by using HCC's underwriting products and expertise across its global markets.

"First, we see this as a more strategic approach than what we've seen in some recent scale-driven deals, particularly within the reinsurance space. Second, we believe HCC has extracted significant value for its shareholders for these synergies. And last, we think purely opportunistic investment-based buyers would be unlikely to generate such synergies or pay significantly to other sellers where they exist," DeAugustino stated.

Although Tokio Marine announces that it does not see any significant US acquisition opportunities at present, the analyst expects HCC to continue to look for bolt-on M&A options.