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Transatlantic to Merge With Allied World in $3.2 Billion Deal

Allied World Assurance Company Holdings CEO Scott Carmilani
Allied World Assurance Company Holdings AG Chairman and CEO Scott Carmilani. Source: Allied World Assurance Company Holdings AG via Bloomberg

Transatlantic Holdings Inc. and Switzerland’s Allied World Assurance Company Holdings AG agreed to merge in a $3.2 billion deal that creates a reinsurer with operations in 18 countries.

Allied will exchange 0.88 of a share for each Transatlantic share to form TransAllied Group Holdings AG, with Transatlantic shareholders owning about 58 percent of the combined firm, the companies said yesterday in a statement. The combination of New York-based Transatlantic, which gets more than half its revenue from the U.S., and Allied, which received approval last year to establish a syndicate at Lloyd’s of London, will have total invested assets of $21 billion.

Mid-sized reinsurers have been combining to gain scale and diversify their business mix in the past two years. Max Capital Group Ltd., the reinsurer co-founded by Louis Moore Bacon, merged last year with rival Harbor Point Ltd. to form Alterra Capital Holdings Ltd. In 2009, Validus Holdings Ltd. bought IPC Holdings Ltd.

“Being part of a leading global reinsurance group could improve its competitive position,” Standard & Poor’s said today as it announced it may upgrade Allied’s credit rating. The deal will “decrease earnings volatility,” according to the ratings firm, which said it also may upgrade Transatlantic. Reinsurers provide coverage to primary insurers for some of the biggest risks, including natural disaster claims.

Expanding Coverage

The combined company will be based in Switzerland, which may provide a tax advantage for Transatlantic, said Matthew Heimermann, an analyst with JPMorgan Chase & Co., in a note to clients today. TransAllied may expand accident-and-health coverage, S&P said.

Transatlantic provides medical-malpractice protection and guards corporate officers against lawsuits through so-called directors-and-officers coverage. Allied offers professional liability insurance. S&P has a BBB+ counterparty credit rating for Allied.

Scott Carmilani, 46, chairman and chief executive officer of Zug, Switzerland-based Allied, will be president and CEO of the combined company and Robert Orlich, 63, CEO of Transatlantic, will retire with the completion of the deal, which the companies expect in the fourth quarter, according to the statement.

“The structural flexibility we are creating in the deal, will give us the ability to allocate capital to the highest-return geographies,” Michael Sapnar, the Transatlantic executive who will lead reinsurance operations for the combined company, said in a conference call today. “This capability enables us to identify and seize opportunities ahead of our competitors, especially in emerging markets.”

‘Bigger is Better’

The deal values Transatlantic at about $51.10 a share, or about $3.2 billion, based on Allied’s June 10 closing price and 62.5 million Transatlantic shares outstanding, according to data compiled by Bloomberg. The price is 16 percent above Transatlantic’s June 10 close.

Transatlantic climbed to $49.40 in New York Stock Exchange composite trading at 9:36 a.m. Allied slipped $1.20 to $56.87.

“In the reinsurance business, having a larger capital base means you get more access to business,” Michael Paisan, an analyst at Stifel Nicolaus & Co., said in an interview earlier this year, discussing possible consolidation in the industry. “Bigger is better.”

Allied, which closed last week at $58.07, has gained 29 percent in the past year through June 10, compared with a 5.7 percent decline for Transatlantic.

Allied was formed in Bermuda in November 2001 by investors including American International Group Inc., Chubb Corp. and Goldman Sachs Group Inc. and had been repurchasing securities from its founding shareholders. In February, Allied paid $53.6 million to buy back its last warrant from AIG.

AIG Bailout

AIG also owned a majority stake in Transatlantic, which it sold in two public offerings after taking a $182.3 billion taxpayer bailout.

“AIG played a formative role in our development and has been a major contributor in our past success,” Orlich said in a July 2009 conference call. “The separation opens new opportunities for us, giving us greater strategic and financial flexibility. We are embracing our independence.”

Goldman Sachs and Moelis & Co. were financial advisers to Transatlantic, and Gibson, Dunn & Crutcher LLP and Lenz & Staehelin acted as U.S. and Swiss legal counsel. Deutsche Bank AG acted as financial adviser to Allied, and Willkie Farr & Gallagher LLP and Baker & McKenzie provided as U.S. and Swiss legal counsel.

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