It has been about a week since the two insurance companies
announced an acquisition agreement where Guru
's Markel Corp. (
) will adopt Alterra Capital Holdings Ltd. (
)'s majority stake.
As Markel's stock has been entering negative territory in the
past week since the revealing of the news (its stock is down by
0.33 percent Thursday morning), it is apparent that widespread
doubt still lingers about the acquisition.
As reported by reinsurance magazine
, capital market credit rating provider, Moody's has changed
Markel Corp.'s rating outlook to "negative" from stable,
"reflecting the significant execution and integration risk
associated with sizable transaction, as well as the combined
group's higher business risk profile."
This sizable transaction refers to Markel being officially
entitled to 69 percent of the combined company on a fully diluted
basis after the completion of the transaction, while Alterra's
shareholders are approximately left with 31 percent, according to
the original news release announcing the merger. Markel will be
acquiring Alterra for a combination of stock and cash. Each
common share of Alterra stock will be exchanged for 0.04315
common shares of Markel stock plus $10 in cash. The aggregate
consideration paid for Alterra is approximately $3.15 billion.
What Markel expects to get out of this business deal is
diversification of its service offerings, as well as to
strengthen its business in specialty insurance and investments,
with the two companies' combined equity of $6.9 billion.
"The merger brings together seasoned and accomplished
underwriting teams with limited overlap in diverse specialty and
reinsurance lines," the release stated.
As for Alterra, Moody's has retained its stable financial
strength rating, while its debt rating has been set to "negative"
from stable as well, expected to weaken after the merger, which
is scheduled to close in the first half of 2013.
Enrico Leo, Moody's Markel analyst, said, "While the group
[Markel] will benefit from an enhanced market presence, the
change to a negative outlook reflects the significant execution
risk associated with a large transaction as well as the combined
group's higher product risk that includes greater
catastrophe-exposed property and long-tail casualty lines of
Former accountant turned value investing Guru,
, gave GuruFocus the play-by-play on evaluating different types
of insurance companies, during an interview back in January.
Whether property and casualty insurance (P&C), reinsurance or
title insurance, Gayner shared his insight during the
"Think about the differences between life and P&C. If
you're a large life insurance company...the dispersion of
possible outcomes is pretty tight. Large numbers of people,
suddenly dying...just doesn't happen. Whereas, in a property and
casualty company, you might have series of things just link in
2011 [Gayner names a series of catastrophic events in 2011, such
as the tsunami in Japan, the flood in Thailand and the series of
earthquakes]. Those are big catastrophic events that happen in
the P&C world, that don't really happen in the life world.
That gives us a sense of what the possible outcomes for
businesses might be."
Gayner then brings forth deferred acquisition cost, or DAC, which
he highlighted, is important when looking at life or P&C
"P&C companies are going to have certain methodologies
and certain ways of putting DAC costs on their balance sheets. A
life company is going to have a very different way of doing that,
and usually a much higher amount of DAC than what a P&C
company does. That introduces some components of uncertainty that
you just need to be thoughtful in thinking about."
When asked about Markel's intrinsic value, Gayner said:
"I would not put a specific number on it, but the mentality
that I would have in thinking about it is, I would think about
our insurance businesses with a normalized amount of premium
volume, and a normalized amount of underlying profitability. That
gives a normalized amount of operating earnings from the
insurance company. Then I would look at our net investments per
share, which was total investments minus all the debt. I would
then think to myself, well, if this insurance company continues
to operate at an underwriting profit, and at least stays the same
size, then all of the net investments per share are actually
working for the shareholder, so that value should be added. Then
the third thing I would think about is the Markel ventures set of
companies and what the operating cash flows and operating
earnings are on a normalized basis and assign a multiple of that.
I would divide that by the number of shares outstanding, and get
a sense of what Markel's each share is worth."
Around the time of the interview, Gayner said the insurance part
of Markel has had its book value compounded in the high teens in
his 20 years of working there. "Going forward, I'd say that
that's an aggressive goal... and I would hope that would end up
being a double-digit return to our shareholders from doing so,"
he added. (Read the entire interview at
Tom Gayner's Interview with GuruFocus.)
Market capitalized at $4.16 billion, GuruFocus ranks Markel Corp.
1 star in
, 5 in Financial Strength and 8 in Profitability and Growth. Its
P/B ratio is 1.1 and its Price/Tangible Book Value is 1.6.
Similarly, Alterra, too, has a Business Predictability rank of 1
star, a Financial Strength of 5 and a Profitability and Growth
rank of 7. It has a $2.69 billion market cap, and is trading at
$27.98, with its stock up 0.14 percent Thursday afternoon.
Gayner remains Markel Corp.'s president and chief investment
officer, as well as the president of Markel Ventures, a Markel
Markel is a diverse financial holding company serving a variety
of niche markets, with its principal business as marketing and
underwriting specialty insurance products. Alterra Capital is a
global enterprise dedicated to providing diversified specialty
insurance and reinsurance products to corporations, public
entities, and property and casualty insurers.
To read more about the merger of the two companies, view the
16-slide presentation that Markel put together.About GuruFocus:
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