Investors in Bermuda-based Alterra will get 0.043 Markel share and $10 in cash for each share they own, the companies said in a statement today. Based on Markel’s closing price yesterday of $486.05, the deal values Alterra at about $30.97 a share. That’s 34 percent more than Alterra’s close yesterday of $23.15.
Markel, the company founded by a pioneer in insuring jitney buses, is adding to its main business of underwriting risk as its stock heads for a fourth straight annual gain (MKL:US). The Glen Allen, Virginia-based company provides coverage for businesses such as farms and railroads.
“Alterra’s reinsurance and large-account insurance portfolios (ALTE:US) will serve to diversify and strengthen Markel’s current book of specialty insurance business,” said Steven Markel, vice chairman of the buyer, in the statement.
Markel fell 10 percent to $436.24 at 4 p.m. in New York. The company had climbed 17 percent this year through yesterday. Alterra surged 22 percent to $28.18.
“Our initial reaction to the deal is negative,” Meyer Shields, an analyst at Stifel Nicolaus & Co., wrote in a research note. “We have enormous respect for Markel’s underwriting and investing expertise, but we think its M&A track record is frankly less impressive,” he said, citing the purchase in 2000 of Terra Nova Bermuda Holdings Ltd. and using the abbreviation for mergers and acquisitions.
Axis Capital Holdings Ltd. (AXS:US) was among Alterra’s Bermuda- based reinsurance rivals that advanced in New York trading, climbing 2.4 percent. Montpelier Re Holdings Ltd. (MRH:US) and Everest Re Group Ltd. (RE:US) also gained, as did Cayman Islands-based Greenlight Capital Re Ltd. (GLRE:US), the reinsurer that counts hedge-fund manager David Einhorn as its chairman.
Markel’s shareholders will own 69 percent of the combined company upon the completion of the deal, which is expected in the first half of next year, according to the statement. The combined company will be domiciled in the U.S., which may limit tax benefits for Alterra.
The transaction has support from the seller’s two largest shareholders (ALTE:US), insurer Chubb Corp. and the Trident Funds managed by Stephen Friedman’s Stone Point Capital LLC, Steven Markel said today on a call with analysts. Those investors controlled about 16 percent of the company, according to data compiled by Bloomberg.
Mid-sized reinsurers have been combining or joining with larger companies to diversify risk and gain scale to take on bigger accounts from primary carriers. Alleghany Corp. (Y:US) last year agreed to buy Transatlantic Holdings Inc., the reinsurer previously owned by American International Group Inc., for more than $3 billion.
Alterra was formed in 2010 through the merger of Louis Moore Bacon’s Max Capital Group Ltd. and Harbor Point Ltd. The company provides protection against natural disasters and offers professional and product-liability coverage. Both Alterra and Markel get about three-quarters of their premiums in North America.
Superstorm Sandy, which hit the U.S. in October, may support prices charged by reinsurers, Alterra said last month. The storm cost the company $90 million to $120 million before tax, Alterra said in a regulatory filing today.
Alterra Chief Executive Officer Marty Becker is expected to leave after the deal is completed, according to the statement. Two directors designated by Alterra will join Markel’s board.
Markel has averaged a 16 percent annual return on its investment portfolio in the last two decades by seeking out undervalued assets. The insurer has also acquired companies that make dredging and baking equipment. The deal with Alterra will increase the funds that the buyer manages to $16.4 billion from $9.2 billion, according to a presentation on Alterra’s website.
Markel plans to reallocate part of the combined investment portfolio toward equity in public and private companies, the insurer said today on the conference call. The merged firm would have equity investments of about 40 percent of book value, a measure of assets minus liabilities. That compares with about 60 percent at Markel as of Sept. 30.
Citigroup Inc. (C:US) was Markel’s bank on the deal, and Debevoise & Plimpton LLP and Appleby provided legal advice. Bank of America Corp. (BAC:US) assisted Alterra, which was represented by Akin Gump Strauss Hauer & Feld LLP and Conyers Dill & Pearman.
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