Markel acquiring program & fronting specialist State National for $919m

Markel Corporation is set to acquire fronting and program service insurance specialist State National Companies, after the pair just announced an agreement that will see Markel acquiring all of the outstanding shares of State National for a total transaction value of approximately $919 million.

State National has grown its business into the largest Program Services and fronting specialist, working with both traditional and alternative sources of reinsurance capital, including a program with ILS manager Nephila Capital, which is one of its most significant.

The acquisition has been unanimously approved by both firm’s board of directors, and the purchase price represents a 38% premium to State National’s 30-day average share price as of May 18th 2017, and a premium of around 7% to State National’s closing stock price on July 25, 2017.

State National is the largest and longest-standing pure-play U.S. insurance fronting business with around $1.3 billion of gross written premiums in 2016 and over 60 programs in play. State National is also a leading provider of collateral protection insurance.

It’s the program fronting that State National undertakes with Nephila which is particularly of interest for our readers, as it has been a model that is now being emulated elsewhere as other providers of alternative reinsurance capital look to gain closer access to insurance risk at the front end of the industry value-chain.

Nephila has achieved this very successfully, and State National has played an important role in assisting Nephila as it has transitioned its business away from a reliance on the reinsurance renewal cycle, and more to one with a focus on sourcing risks in the most efficient way possible.

Richard R. Whitt, Markel’s Co-Chief Executive Officer, commented on the news; “We are excited to be joining forces with State National—an industry leader with a talented management team that has delivered exceptional long-term results. In addition, we are impressed by the cultural fit between our two organizations. Strategically, State National will help us to leverage our Insurtech and digital distribution initiatives, diversify our underwriting and fee based portfolios and revenue streams, and add to Markel’s third party capital capabilities. Combining Markel’s financial strength with State National’s unique business model and proven record of success, we are confident that all stakeholders will be well served moving forward.”

Terry Ledbetter, State National’s Chairman and Chief Executive Officer, added; “After careful and thorough analysis of a range of opportunities, our board of directors determined this transaction with Markel to be in the best interest of State National and our shareholders. We believe the transaction appropriately recognizes the value of State National’s business model, recent growth and future market opportunities as a leading specialty provider of property and casualty insurance services operating in two niche markets throughout the United States, and provides our shareholders with an immediate and attractive cash premium for their investment in State National.

“We believe this transaction with Markel is good for our employees and clients, as well as our shareholders. Markel recognizes our shared commitment to offering unique, high-quality solutions that simplify the complexities of insurance for clients nationwide. We have long respected Markel and are proud to partner with this distinguished company that has a strong reputation and proven track record of success in acquiring and partnering with insurance companies. Markel understands the uniqueness of our business model, and will be a tremendous asset as we, together, build upon our leadership position and specialty insurance service offerings, and continue to implement our strategic plan to deliver enhanced value for our clients. This transaction is all about growth, not cost-cutting, and we believe that State National employees will benefit from being part of a larger, stronger, growth-oriented company with a more diversified platform. Our success is driven by the ongoing efforts of our talented employees and I thank them for their continued hard work and dedication. We look forward to working with Markel to quickly complete the transaction and are committed to ensuring a smooth transition.”

The two companies hope the acquisition will be completed during the fourth-quarter of 2017, with Markel set to finance the transaction using cash balances on hand.

Upon completion of the acquisition, State National will operate as a separate business unit under Markel Corporation with the management team, led by Terry Ledbetter, set to remain in place and continuing to be based in Bedford, Texas.

This acquisition demonstrates the value that a service provider that keeps little risk on its own books can generate. As the value-chain becomes increasingly shortened there are going to be an increasing number of opportunities for those servicing risk and helping it to find its way to capital to profit from the evolving re/insurance market conditions.

State National positioned itself at the centre of reinsurance market disruption, able to assist those who wanted to innovate and those who needed access to more risk. The broad support State National will gain by becoming part of Markel Corporation should propel the company to further growth.