Markel extends its reach into the collateral insurance business with its latest acquisition.
Markel Corp.’s expansion into the insurance space continues. On July 26, the Richmond, Virginia-based financial holding company announced an agreement to purchase State National Companies, Inc. for $21 a share, or $919 million in total. The per-share price is an increase of 7% over State National’s closing ticker on the day before the announcement.
The State National deal follows Markel’s May acquisition of SureTec Financial Corp, long thought to be one of the country’s largest privately held surety companies. It also comes four years after its largest acquisition in its 87-year history, the $3.13 billion purchase of Bermuda-based reinsurance company Alterra Capital Holdings.
The deal is expected to close in the fourth quarter, once shareholder and state regulatory approvals are granted. Due to a voting agreement already in place with the Ledbetter family, the founders of State National, and CF SNC Investors, LP, 37% of State National common stock will vote in favor of the transaction, per the joint announcement.
A Diversification Play
Markel currently has five divisions in the insurance and reinsurance sectors. According to the Motley Fool, its insurance units reported a solid combined ratio of 89% in the second quarter, up from 93% a year earlier. This ratio translates to $11 of earned income for every $100 of premium written by the company.
With the acquisition of State National, Markel further extends its reach into the insurance marketplace. A specialty property and casualty insurer, the Texas-based State National operates two main business lines: collateral protection policies for automobiles and other vehicles and a Program Services unit, which provides access to the U.S. P&C market in exchange for ceding fees. Its insurance fronting business wrote $1.3 billion in gross premiums in 2016.
State National likewise views the merger as a play towards diversification. “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,” State National’s current Chairman and CEO Terry Ledbetter said in a prepared statement.
A Thumbs Up
Insurance rating agency A.M. Best commented favorably on the acquisition, reaffirming its Long-Term Issuer Credit Rating (Long-Term ICR) of “bbb+” for Markel. The stable rating was based on A. M. Best’s calculation that Markel’s ratio of debt-to-total capital will remain constant after the State National acquisition.
In addition, A. M. Best endorsed the merger for its potential to expand Markel’s market capacity. “[It] adds to the diversity of Markel’s insurance product offerings and enhances its revenue stream through the inclusion of State National’s insurance operations and fee-based services,” the agency said in a note. “Markel currently does not have a presence in either of [State National’s] product categories, limiting any correlation between them and its current books of business.”
Both company’s stock prices soared as news of the possible merger swirled. State National’s stock rose 6%, while Markel’s climbed 14%, according to Market Watch. The Wall Street Journal reported Markel’s market cap at $14.4 billion, well above State National’s $879 million.
Markel usually incorporates managers of acquired companies into its larger operations. When it acquired SureTec, for example, Markel retained its Chairman and CEO John Knox Jr. as well as its team. As soon as the merger is finalized, State National will follow this custom and operate as a separate unit overseen by Ledbetter.