15 October 2013

Consistency and scale

It is clear from talking with Jed Rhoads, president and chief underwriting offi cer for property reinsurance at Markel Global Reinsurance and formerly of Alterra, that it is the DNA of Alterra’s reinsurance team that is going to create a fi rm foundation for success at Markel Re.

According to Rhoads, who made the transition with the majority of Alterra’s underwriting staff in May of this year, Markel is more than making good on its promise to “create an even more dynamic and fi nancially powerful specialty insurance, reinsurance and investments company.”

As Rhoads explained, “Having gone through these transactions before, I can say that this one has been smoother than most. Obviously no transition is completely smooth—there have been disappointments in a few of the departures and I would be lying if I said otherwise—but, by and large, this transition has gone much more smoothly than others I have seen. The management team at Markel has been absolutely terrific. They have been supportive of everything we do.”

Rhoads speaks from experience. Alterra itself was formed by a merger— in 2010, Max Capital Group and Harbor Point combined their operations to create Alterra, a company that specialised primarily in reinsurance and large account insurance. Just three years later, Alterra was acquired by Markel Corporation for $3.1 billion.

According to Rhoads, the management teams at Markel’s US headquarters in Richmond, Virginia are comfortable with Markel Re’s managers and underwriters taking the lead on the development and execution of their own business plans. That management style is good for morale and gives Markel Re the opportunity to carry on doing what it does best with the additional resources of a larger company behind them, said Rhoads. A truly mutually beneficial relationship has blossomed on the traditionally bloody field of mergers and acquisitions.

Sticking together

According to Rhoads, a vital element in easing the acquisition and integration process was the fact that there was only modest overlap between Markel’s existing business and Alterra’s. With a long history of writing reinsurance and large account insurance, the expertise of Alterra’s staff was quite different from Markel’s, and Markel’s management were quick to recognise the value that created.

Some overlap did exist, however. As Rhoads explained, “Although there were some expected changes in the very senior management ranks and some overlap in the back office support centres, there was negligible impact in the underwriting group. One of the reasons why Markel bought Alterra was to add talent and expertise in our two principal lines of business, enabling the formation of two new Markel insurance divisions —Markel Global Reinsurance and Markel Global Insurance. Markel successfully retained the core group of Alterra underwriters for these divisions.”

While all acquisitions face difficulties, layoffs and the associated damage to morale were largely avoided in the case of Markel’s acquisition of Alterra. Underwriters—the backbone of any re/ insurer—weren’t forced to fight for their jobs or conform to a new ideology. Teams were kept largely intact, free to continue writing reinsurance the way they always had, said Rhoads. Furthermore, the company was happy to let its property reinsurance arm retain its Bermudian DNA.

“Nothing has dramatically changed for the Bermuda underwriting operations following the acquisition by Markel. The processes, the underwriting guidelines, the systems we use—everything that we have done in the past will continue. We do business with the same customers and seek new business as we always have,” said Rhoads. Markel Re is keen to build upon the successes achieved by Alterra.

As Rhoads explained, “Markel did its due diligence before buying Alterra. They liked what they saw. Why would they want to change it? In their view, we’ll remain successful as long as we execute the business in the way that we always have. Markel has made it very clear that they want to be in the know about what we intend to do and why, but they’ve been completely supportive of us so far. I have absolutely no criticisms or concerns.”

Rhoads added, “After the combination, Markel adopted the moniker of ‘scale enhanced, business as usual’. A lot of people were sceptical about that, but I can tell you they’ve walked the talk. They have allowed us to run our business as we have done over the last 10 to 12 years, and they have shown every indication that we’re going to be permitted to continue doing so.”

While Markel Corporation is committed to maintaining key insurance and reinsurance operations in Bermuda, the domicile of the holding company is remaining in the US.

The best of both worlds

The acquisition has been a win for Markel and Alterra associates and customers alike, according to Rhoads. While Markel has a new reinsurance segment with years of experience and the expertiseand ability to be successful, the new Markel Re is able to extend considerable scale into the market. Markel’s strong capital base and the position of reinsurance within the company make growth a real possibility for Markel Re.

"There's more business diversity and plenty of room to grow the reinsurance business, with encouragement to do so from the top."

“At June 30, 2013, Markel had shareholders’ equity of $6.3 billion. We can use that very strong capital base to support fairly aggressive growth, but market conditions are going to dictate when and by how much we will increase our writings. Markel does want to grow, but it is not an organisation that wants to expand if the market is not conducive to profitable underwriting. Markel has the capabilities and desire to strengthen its position, but only when the time is right.”

When the market does come around, Rhoads says, the reinsurance arm is in a much better growth position now than it was under Alterra’s management. At Alterra, the reinsurance operations made up approximately 60 percent of gross premiums written. Management was more inclined to see their primary insurance operations grow, particularly in light of the stronger rate environment in the insurance sector. According to Rhoads, that isn’t the case at Markel. Markel Re accounts for only some 20 percent of gross written premiumswithin the wider Markel group, meaning that there’s more business diversity and plenty of room to grow the reinsurance business, with encouragement to do so from the top.

In addition, Markel’s presence in the US is a major boon to Markel Re. Travelling and marketing were a challenge for Alterra’s Bermudabased property reinsurance team, restricting opportunities in the US market, said Rhoads. “Now, with Markel Corporation and Markel Bermuda both being US taxpayers, we have much more freedom to market our products, our people and our capacity in the US—at least on the property reinsurance side—than we did before.

“That should lead to growth opportunities. At the end of the day, reinsurance is still largely a people business. More opportunity to interface should lead to growth and better relationships with clients and brokers alike, particularly in the US.”

All of these positives aren’t just the stuff of speculation. There’s solid proof that the acquisition has been a success for both parties. Just a few months after shareholder approval of the acquisition, Rhoads said that Markel Re has seen business picking up.

“As a group, we have more than doubled the size of our balance sheet, maintained our ratings and have seen zero slippage of business. In fact, we were looking at the numbers just last week in Virginia and our reinsurance premiums are actually up a little bit since the merger. I think that’s a strong testament to the fact that the market has accepted the acquisition and that there really are no material issues.”

With impressive scale, an experienced staff, and Markel Re operations covering the globe from offices in Bermuda, New Jersey and London, the future is bright.