Markel entered into an agreement to acquire Alterra Capital Holdings on December 19, 2012 for what works out to about $30 per share, around a 34% premium to the share price prior to the announcement and 1.07x tangible book value. Each Alterra Capital Holdings share will get converted to 0.04315 shares of Markel plus a cash payment of $10. The Boards of both companies have approved the merger agreement.
The shares of Markel reacted negatively following the announcement, dropping 12% to $428 before rebounding over the past month to $469. The negative reaction was likely due to concerns around integration of the two companies, general disapproval and possibly some hedging activities. The shares of Alterra now trade at $31 per share, increasing recently possibly behind a lawsuit filed on behalf of shareholders seeking a higher price.
Markel operates in specialty insurance where it benefits from less competition. It has revenues of $2.9 billion and a 7.4% ROE. Since 2001, premiums have grown by a CAGR of 12% at Markel. Offerings include insurance on distinctive risks like racehorses. Markel’s limited market results in fewer premiums to spread expenses over. This negatively impacts profitability compared with a carrier that has a wider range of higher volume insurance products. Markel sells their products through independent brokers and operates in three segments: Excess and Surplus lines, Specialty Admitted, London Markets.
Merkel holds a larger than normal amount of equity security investments. It is sometimes called a mini-Berkshire-Hathaway . Berkshire is much larger in market cap ($250 billion vs $4.5 billion), but they operate in many similar insurance markets. Plus, with Buffett steering Berkshire, they have done very well investing the insurance premium float in securities. This can increase returns, but this does result in a higher risk level and volatility to earnings. Key competitors are CNA Finanical (CAN), Travelers Companies (TRV) and Meadowbrook Insurance Group (MIG).
Alterra Capital holdings summary
Alterra is an insurance company that provides specialty insurance and reinsurance products to institutions. It operates in five segments: Insurance, Reinsurance, U.S. Specialty, Alterra at Lloyd’s, Life and Annuity Reinsurance. It has operations in the US, Europe and Latin America. Some of the end markets Alterra participates have less favorable dynamics – more competitive - than those in specialty. The products are more of a commodity.
Breakdown of the deal
The deal doubles the size of Markel. It will give Markel equal parts short and long insurance premiums with two thirds from insurance and one third reinsurance. The merger increases exposure to catastrophe risk at Markel. There are cost savings and diversification benefits for Markel. In addition, management plans to allocate Alterra’s investment portfolio in a similar manner to Markel’s. The idea here is that Markel is a better investment manager and with the merger, has more assets to manage. Management believes this will create value for shareholders.
Get long Markel?
Markel shares have performed in line with the S&P 500 over the past five years. Late in 2012, the stock started to break out and finally outperform the index. Since the deal, the shares have retreated on concerns noted earlier. The bull case argues the shares can have a superior growth profile and value may come from Markel’s opportunity to cross-sell their products to Alterra customers and vice versa. Additionally, Markel will have a new customer base it can sell to and adds underwriting capabilities where the company can offer larger limits without increasing use of reinsurance. This may allow Markel to grow book value, earnings and ROE at a more rapid pace than as a standalone firm.
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