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Profitable surety writer makes for latest Markel acquisition

Diversification and specialization have been hallmarks of Markel Corp.'s business strategy over time, and a deal announced Feb. 1 provides the company with an opportunity to further its pursuits in both respects.

The Virginia-based Markel agreed to acquire Houston-based surety company SureTec Financial Corp. for approximately $250 million, including a three-year earnout.

The SureTec group had $91.4 million in policyholders' surplus as of Sept. 30, 2016, and generated nearly $76 million in direct premiums written during the trailing-12-month period ended the same date. It had net admitted assets of $229.6 million.

The acquirer plans to operate SureTec, which writes a range of contract, commercial and court bonds, as a separate business unit under the leadership of existing Chairman and CEO John Knox Jr. using the name Markel Surety.

The Texas-domiciled SureTec Insurance Co. reported $64.4 million in direct premiums written in 2015, virtually all of which came from the surety line; the California-domiciled SureTec Indemnity Co., which SureTec Insurance capitalized in 2012, wrote $8.6 million in surety business on a direct basis. Together, they ranked as the No. 18 writer of surety business at the group level in 2015 on an as-is basis in a market in which the two largest players, Travelers Cos. Inc. and Liberty Mutual Holding Co. Inc., combined to account for more than 27% of the total filed direct premiums written. SureTec's 2015 surety market share was 1.3%.

Markel's existing U.S. P&C subsidiaries had zero surety direct premiums written in 2015. The Markel U.S. P&C group, as consolidated by S&P Global Market Intelligence, produced $967.2 million in direct premiums written from the other liability-occurrence and other liability-claims made lines on a combined basis, representing 39.6% of their total filed direct business volume.

"Specialization creates the opportunity to develop deep expertise about specific areas," Markel explained in its 2015 annual report.

"Diversification serves a dual purpose of allowing us to continue to adapt and grow as different markets change over time and to protect our financial position from the vagaries of any one product or area," the company added.

In SureTec, Markel will add one of only 10 U.S. P&C groups or standalone P&C entities that generated at least $10 million in surety direct premiums written in 2015 and for which surety business accounted for more than 90% of their overall volume for the year. It is the fourth-largest of those 10 entities, based on 2015 surety direct premiums written, behind IFIC Surety Group Inc., Lexon Surety Group LLC and Merchants Bonding Co. (Mutual).

Beyond the specialization and diversity SureTec will provide, it brings a track record of profitability. The group's net underwriting profit has improved for four consecutive calendar years as it emerged from the challenges associated with the financial crisis, and the underwriting gain increased to $11.6 million for the first nine months of 2016 from $9.6 million in the year-earlier period.

The surety line has ranked among the most consistently profitable parts of the U.S. P&C industry in recent years. Pretax returns on average surplus, adjusted for prior-year reserve development, have exceeded 20% at the industry level in the surety line in eight of the past 10 years.

Markel officials have stated that they consider M&A to rank third behind organic growth initiatives and investments in publicly traded debt and equity securities among their preferred means of capital deployment. But acquisitions both inside and outside the insurance industry have been a regular feature of Markel's growth in recent years.

In the insurance realm, the company acquired Bermuda-based insurer and reinsurer Alterra Capital Holdings Ltd. in May 2013, U.K. legal and tax professional services provider and insurer Abbey Protection Group Plc in January 2014, and Bermuda-based insurance-linked securities investment fund manager and reinsurance manager CATCo Investment Management Ltd. in December 2015.

The Markel Ventures business, meanwhile, includes businesses from a wide range of industries grouped into manufacturing and non-manufacturing segments. It seeks to invest in profitable companies with talented management at reasonable prices in a manner akin to its approach to purchasing equity securities. Company officials said in November 2016 that it remained a seller's market for Markel Ventures; it previously announced a majority investment in management consulting firm CapTech Ventures Inc. in December 2015.

The SureTec deal is at least the seventh acquisition announced by the Markel insurance business or Markel Ventures since the start of 2010 with a deal value calculated by S&P Global Market Intelligence of $100 million or more.