Alleghany to Buy Reinsurer Transatlantic for $3.4 Billion in Cash, Stock

Alleghany Corp. (Y) agreed to buy reinsurer Transatlantic Holdings Inc. (TRH) for $3.4 billion in cash and stock and said it would appoint a former Berkshire Hathaway Inc. (BRK/A) executive as chairman of the target company.

Investors will get 0.145 share of Alleghany and $14.22 in cash for each Transatlantic share, valuing the reinsurer at $59.79 a share based on the buyer’s Nov. 18 closing price, the New York-based firms said today in a statement. Transatlantic will be a stand-alone subsidiary of Alleghany after the deal’s completion, with Joseph Brandon, former chief executive officer of Berkshire’s General Re unit, as chairman.

The agreement caps months of takeover interest in Transatlantic, a former unit of American International Group Inc. (AIG) that helps insurance companies pool their biggest risks. A merger with Allied World Assurance Co. Holdings AG was scrapped in September, and the company shunned offers from Berkshire and Bermuda-based rival Validus Holdings Ltd. (VR) Davis Selected Advisers LP, Transatlantic’s largest shareholder, said it would support the Alleghany transaction after opposing Allied World.

“It’s a good deal, and with them on board, I think that this is the final offer,” Cliff Gallant, an analyst at KBW Inc., said in a phone interview. “I would be very surprised now if there is any more tug-of-war on Transatlantic.”

The $59.79 price is almost 10 percent higher than Transatlantic’s close on Nov. 18. The reinsurer climbed to $54.84 at 4:02 p.m. in New York. Alleghany fell 6.8 percent to $293.01. Validus, which was still pursuing Transatlantic, gained 1.8 percent. The deal is expected to be completed in the first quarter of next year, the companies said.

Values

Alleghany, a property and liability insurer, sometimes is compared with Berkshire because of its focus on value investing using the accumulated premium, or “float,” of an insurance business. Alleghany CEO Weston M. Hicks writes an annual letter to shareholders in which he muses about his investments, as does Warren Buffett, Berkshire’s 81-year-old chairman and CEO.

“One of the attractions to me of Alleghany is I do see a lot of similarities in the company’s values, their approach, their temperament, and their economic business model, to Berkshire,” Brandon said in a phone interview today. “I wouldn’t call it a mini Berkshire or anything like that, but I do see similarities.”

Beating the S&P

Alleghany shares have advanced from less than $200 a decade ago. The company has produced more than double the total returns for shareholders over the past quarter century as the Standard & Poor’s 500 Index.

Brandon received a letter from the U.S. Securities and Exchange Commission stating that the regulator isn’t pursuing any civil claims against him in a case tied to reinsurance accounting at General Re, two people familiar with the document said in April.

Brandon, once a candidate to succeed Buffett at Berkshire, resigned from General Re in 2008 after a jury convicted four former executives of the unit of helping AIG deceive investors through a sham transaction. The U.S. Court of Appeals in New York in August ordered a retrial for the General Re executives and a former AIG manager.

Alleghany seeks to build a portfolio of businesses that produce regular cash flows to supplement insurance operations, Hicks said in an phone interview. The company has done transactions as small as $5 million and as large as $150 million, he said.

Fixed Income

“We believe philosophically that keeping all your capital in bonds that earn 1 percent is not the optimal strategy,” Hicks said.

Founded in 1929 as a holding company for a group of railroads, Alleghany was later overseen for 39 years by Fred “F.M.” Kirby II, heir to the Woolworth retail fortune. Members of the Kirby family have agreed to vote for the transaction, according to the statement.

Davis said the Alleghany transaction makes “great strategic sense.”

“Alleghany’s management has a multi-decade record of creating enormous value for their stockholders and we look forward to becoming Alleghany stockholders,” Davis said in the statement. “Joe Brandon, who has an outstanding and proven track record of managing reinsurance and insurance companies for over 20 years, is a terrific addition to an already strong management team at Alleghany.”

Alleghany shareholders will hold 51 percent and Transatlantic investors 49 percent of the combined firm, according to a presentation on the companies’ websites. Alleghany’s board will be expanded by three people to 14, with the additional members coming from Transatlantic’s board, according to the statement.

AIG Roots

Transatlantic CEO Robert Orlich is scheduled to retire at the end of this year. The reinsurer was previously majority owned by bailed-out AIG, which sold its stake in public offerings in 2009 and 2010. With operations on six continents, Transatlantic sells reinsurance, or coverage for primary carriers to protect against the costliest claims.

The canceled deal to merge with Zug, Switzerland-based Allied World would have made Transatlantic a Swiss-domiciled company and allowed it to benefit from a lower tax rate. Alleghany will keep Transatlantic in the U.S., Hicks said.

“Part of our responsibility is to be a good corporate citizen,” he said. “The fact is we all live in New York. We work in New York. We’re a U.S. company, and somebody has to pay taxes.”

Tax Considerations

The deal with Allied World drew criticism in June from Transatlantic investors, such as Tweedy Browne Co., because it could have created a tax liability for shareholders. The Alleghany agreement may be more favorable, on a tax basis, for Transatlantic holders who wish to retain stakes in a combined entity, said Ken C. Feinberg, a portfolio manager at Davis, in a phone interview.

The Alleghany deal includes a $115 million breakup fee, Michael Sapnar, the Transatlantic executive who will replace Orlich as CEO of the reinsurer, said on a conference call today. A representative for Validus declined to comment.

UBS AG and Morgan Stanley (MS) served as financial advisers and Wachtell Lipton Rosen & Katz as legal adviser to Alleghany. Goldman Sachs Group Inc. (GS) and Moelis & Co. are financial advisers and Gibson, Dunn & Crutcher legal adviser to Transatlantic, according to the statement.

To contact the reporters on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net; Zachary R. Mider in New York at zmider1@bloomberg.net;

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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