With Alterra buy Markel get into collateralized reinsurance and third-party capital

One of the larger re/insurance industry mergers in recent years is on the cards for 2013 after Markel Corporation and Alterra Capital Holdings announced that their boards have unanimously approved a merger agreement this week. Under the merger terms Alterra is valued as worth approximately $3.13 billion. The merger will create a very large specialty insurance, reinsurance and investment management group with a combined shareholder equity of around $6 billion.

Strategically the merger makes a lot of sense as the combined power of the group will give them a lot of underwriting weight and broaden both firms reach and product lines. Markel gain access to a large reinsurance business and large-account insurance portfolio to their speciality insurance business. Following the close of the merger, the combined Markel company will write premiums of around $4.4 billion annually. Markel is expected to have a business mix, after the close of the merger, of approximately 50% short-tail, 50% long tail; 67% insurance and 33% reinsurance.

The other thing this merger gives to Markel is a foothold in the collateralized reinsurance market and in third-party capital management with Alterra’s sidecar vehicles such as New Point V (which grew its capitalisation after new fundraising recently). Markel have not been particularly active in this area and it will be interesting to watch how this segment changes and performs. Markel may choose to spin the third-party capital management platform off into a separate and supporting entity, or, given Markel’s strong history in investment management, they may make this a new focus.

Steven A. Markel, Vice Chairman of Markel, commented on the merger; “We are very pleased to have reached this agreement to acquire Alterra, an impressive company with proven worldwide underwriting operations in product lines that we believe are highly complementary to Markel’s existing lines. In particular, the addition of Alterra’s reinsurance and large account insurance portfolios will serve to diversify and strengthen Markel’s current book of specialty insurance business. We look forward to welcoming Alterra’s talented underwriting teams to Markel – with their help and the benefit of approximately $6 billion in combined shareholders’ equity, we believe we will be well positioned to take advantage of a wide range of profitable opportunities.”

W. Marston (Marty) Becker, President and Chief Executive Officer of Alterra, added; “The combination of Alterra with Markel will create an incredibly strong company in global specialty insurance and investments.  The demonstrated track record of underwriting discipline in niche market segments by both companies, along with Markel’s proven asset management strengths, should benefit all stakeholders. I am confident that Alterra’s shareholders, clients and other business partners will continue to be well served when Alterra’s underwriting operations join forces with Markel’s, and all should benefit from the superior financial strength, expanded capabilities and synergies created by the combined entity.”

The combined entity will have around $16 billion of total assets under management so the third-party aspects through the collateralized and sidecar business will not be a major part of the merged firm, but it may be a part they choose to grow and so this will be an interesting merger to watch play out.