The Intelligent Quarterly from the publishers of The Insurance Insider

Winter 2011 / 2012

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By negotiating a sale to New York-listed P&C insurer Alleghany, Transatlantic Re may have guaranteed its future and brought to an end a public takeover battle that has been in full swing since June.

A rival takeover proposal from a Stone Point Capital and JC Flowers-led consortium would have seen parts of the group placed into run-off, with the rest of the firm subsumed by Allied World.

If successful with the Alleghany deal, the board will also have succeeded in maintaining the operational independence that it would have lost under the hostile Validus bid that it fought tooth and claw to escape.

On 21 November, Transatlantic Re announced an agreed part-cash deal to sell itself to Alleghany for $3.4bn, or $59.79 a share at 18 November closing prices. The new deal is expected to close in Q1 2012 with an $115mn break-up fee to try and ensure it stays on track.

Crucially, it has the support of its largest shareholder, Davis Advisors, whose rejection of the initial TransAllied merger effectively ended the proposal.

Transatlantic, through its board's doggedness, has won a number of the benefits that it had originally been seeking through its voluntary combination with Allied World.

Firstly, an influx of management expertise to compensate for the retirement of outgoing CEO Bob Orlich, with former Gen Re CEO Joe Brandon coming in as chairman.

It has also satisfied its desire for a US primary operation to provide diversification away from the reinsurance lines that currently account for 100 percent of group premium.

Click to enlarge Transatlantic has also gained a measure of independence it would not have had under other proposals (see table). Alleghany said in its post-agreement presentation it had "a semi-autonomous subsidiary operating model". When asked if the takeover would change the company's risk appetite or business plan Transatlantic CEO-elect Mike Sapnar said: "Transatlantic will stay the same as it is. It will be business as usual" (see chart for merged companies' pro forma business mix).

However, the Alleghany deal is not an outright victory for Transatlantic and it has been forced to sacrifice some of the benefits that it expected to get from the Allied World deal - notably the "established EU platform" that Transatlantic said it needed to secure through M&A; and a Lloyd's platform.

Transatlantic does not currently have an incorporated, separately capitalised business in Europe, which would prevent it from writing business after Solvency II comes into effect. And not only does Alleghany lack a Lloyd's operation, but it is also considered one of the least likely companies to secure entry after a disastrous prior stint in the marketplace cost the Central Fund over £100mn.

It is also widely understood that Transatlantic had wanted to use a transaction as an opportunity to move offshore. Sources have suggested that a low-tax domicile could be worth more than $100mn a year to the US-based reinsurer. Again, Delaware-based Alleghany can offer no solution.

The announcement of the successful Alleghany-Brandon bid came after a period of feverish activity, as bidders pushed up against the psychological barrier of the Validus record date on 22 November. The consortium led by Stone Point Capital and including private equity company JC Flowers was confident that its cash bid in excess of $60 per share would be accepted.

Validus is also understood to have held talks with Transatlantic, as the latter sounded it out about increasing its offer in the wake of richer bids from Stone Point and Alleghany. Stone Point's intention to place Transatlantic into run-off seems to have been the decisive difference between the two proposals, and rumours persist that the New York Insurance Department went so far as to prohibit the bid.

Click to enlarge