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State National acquisition rounds out Markel portfolio, but adds credit risk

State National acquisition rounds out Markel portfolio, but adds credit risk

Markel Corp.’s recent acquisition of State National Cos. Inc. complements the larger company, analysts said, but Markel will be taking on some credit risks. 

On July 26, Richmond, Virginia-based insurer and reinsurer Markel said it would acquire Bedford, Texas-based State National in a deal valued at about $919 million. The transaction is expected to close in the fourth quarter, subject to regulatory and shareholder approval.

“I think they’ve done pretty well,” Jim Auden, managing director with Fitch Ratings Inc. in Chicago, said of State National. “They’re really specialized, a specialty front-end carrier, so they do some different things than Markel. Their profits are generated a bit differently. They don’t really retain much underwriting risk. They fill a certain niche in the market that’s unique and historically they’ve done pretty well.”

Mr. Auden said the State National acquisition means “there’s one less public U.S. insurance organization out there.”

“There are fewer smaller companies out there, fewer reinsurers that are smaller, that are more likely acquisition candidates,” he said. “I think growth overall for companies is slower, so you have a pretty good supply of potential buyers, but not as many sellers.”

Fitch said in a note that more than 70% of State National’s earnings come from fees on the company's U.S. insurance fronting business, with about $1.3 billion in gross written premium in 2016.

Hardeep Manku, Toronto-based director with S&P Global Ratings, said State National complements Markel’s business, but the deal is not particularly big when compared with the overall size of Markel.

“The outlook is stable,” S&P Global Ratings said in a research update. “We expect Markel to maintain very strong capitalization despite the potential for ongoing acquisitions as it builds out its operations. Furthermore, we expect it to continue reporting strong operating performance while further enhancing its operating platform with a focus on risk diversification, which will sustain its competitive position in line with that of its peers.”

Moody’s Investors Services Inc. noted in an issuer comment that, despite the potential strategic benefits for Markel, “we expect it to increase Markel’s credit and underwriting
risk disproportionally compared to pro forma net earnings, a credit negative.”

“Given the structure of its business, State National takes on considerable credit risk since it is ultimately liable for policyholders’ claims,” Moody’s said. “To help offset the credit risk, State National requires 100% or higher collateral from reinsurers that are not highly rated and not
significant in size. We expect Markel to maintain State National’s collateral requirements,
which significantly reduces, but does not eliminate, the credit risk associated with the

A report from PricewaterhouseCoopers L.L.P. said that the value of M&A deals in the U.S. insurance sector has more than tripled to $10 billion in the first half of the 2017, compared with $2.9 billion in the first half of 2016.

“A healthy appetite for deals should continue in the second half of the year as insurers seek to divest capital-intensive or underperforming businesses, and newly funded (private equity)-backed insurers continue to pursue U.S. insurance sector assets,” the report said. 


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