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

Markel Corporation (NYSE:MKL) entered into an agreement to acquire Alterra Capital Holdings Ltd (NASDAQ:ALTE) 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 summary

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 -B).  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 Financial Corp (NYSE:CNA), The Travelers Companies, Inc. (NYSE:TRV) and Meadowbrook Insurance Group, Inc. (NYSE:MIG).

Alterra Capital Holdings Ltd (NASDAQ:ALTE) 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.