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Mini-Berkshire Hathaway Acquiring a Competitor: Markel Corporation (MKL)

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.

The article Mini-Berkshire Hathaway Acquiring a Competitor originally appeared on and is written by Mike Thiessen.

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