Land of the surprising sum

Mitsui Sumitomo assumes a lot with Amlin swoop

Mitsui Sumitomo Insurance is assuming a fair bit with its swoop on Amlin. The Japanese insurer, part of MS&AD, on September 8 said it would pay £3.5 billion for the second-biggest insurer in the Lloyd's of London market. The target is getting the better end of the deal, although as with other recent Japanese acquisitions, the buyer's strategy is not without logic.

Mitsui is paying a high price. Amlin shares were already trading at 59 per cent above their 10-year price-to-earnings level before the approach, according to Starmine data - and almost a fifth above their average price-to-book ratio over the same time. A 36 per cent premium to the UK group's closing price on September 7 means a valuation of 2.4 times tangible book value, the highest of the various recent acquisitions of Lloyd's insurers.

At first glance, the financial appeal also looks thin. Assume Amlin's cost of capital is around eight-nine per cent, and that's what Mitsui must get back to justify the acquisition. Amlin is likely to make £258 million of operating profit in 2017, according to Eikon data. Tax this and set it against Amlin's enterprise value of just over £3.5 billion, and it would only generate a return of 5.8 per cent. Competition makes things worse: it has been eroding prices in Amlin's core catastrophe reinsurance division over the last two years.

Mitsui shareholders may look at it differently. Japanese 20-year bond yields are around one per cent and the rise in equity prices since the start of the Abenomics stimulus programme means Japanese insurers' equity, as measured by regulators, has risen 50 per cent, according to Goldman Sachs research. MS&AD currently writes only 11 per cent of its premiums overseas, while rival Tokio Marine writes 47 per cent. And Mitsui's cost of capital is around half Amlin's, a person familiar with the situation says.

If Mitsui can use its new scale to weather reinsurance pressures in the United Kingdom and the United States, plus deploy Amlin's underwriting expertise in Asia, revenue synergies will reduce the valuation difference. If not, file this alongside Nikkei's recent acquisition of the Financial Times as an addition to corporate Japan's cabinet of expensively purchased trophies.