The Intelligent Quarterly from the publishers of The Insurance Insider

Spring 2012

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In most sectors and at most times, a multi-party hostile takeover battle would be something to set pulses racing.

So why has the competition to tie the knot with US reinsurance stalwart Transatlantic Re been a little anti-climatic?

In any takeover battle it is always the shareholders that make the ultimate decision as to which suitor brings the best rewards measured against whichever timeframe they are working to. This beauty contest sees a relatively straight strategic face-off between two trade merger partners contrasted with a simple-to-understand but discounted cash offer from Berkshire Hathaway's National Indemnity Company.

Given their economic similarities, the true relative merits of Allied World and Validus's bids are all about future strategy and how investors view the rivals' track records at navigating the turns of the market cycle and building shareholder value along the way. Naturally both Allied World and Validus point to their superior abilities in value creation, while at the same time denigrating those of their opponent.

Strategically, Allied World - Transatlantic's preferred bidder - brings the prospect of a vast well of
(re)insurance casualty expertise with a balance between the two disciplines, as well as the possibility of cross fertilisation.

Meanwhile Validus points out that, as a prospective top global reinsurer, its combination with Transatlantic would bring a compelling short and long tail balance that would benefit both players, while its rival brings concentration in long-tail lines.

Click to enlarge It says a "Validantic" merger would create a top cat writer with the flexibility, should it so wish, to write even more cat business in today's favourable market conditions and at the same time be sufficiently well-reserved to be able to pounce on a long-tail hard market.

Validus is also at pains to point out that as an almost pure reinsurance group, it is unlikely to be accused of competing with its customers - a question it explains that Transatlantic will face as a reinsurer to many of Allied World's direct insurance competitors.

Of course the Allied World and Transatlantic camp has countered that Validus is merely being opportunistic, seizing on statements from the firm's management regarding its profound lack of ambition to enter the long-tail arena.

However, in a candid moment Ed Noonan admitted that as a former CEO of American Re, there was little to know about long-tail business that he had not already experienced first hand.

And so the increasingly hostile and negative debate swings back and forth.

After the high-profile rejection of the Allied World proposal by Transatlantic's largest shareholder, neutrals might put Validus narrowly ahead on points. But if only life were so simple!

Were investors only being asked to choose between one strategic combination and another it might be a relatively uncomplicated task for them to decide and have done with it.

However this presupposes that all investors are in it for the long haul. What about owners of Transatlantic who are simply keen to maximise their value over a much shorter timeframe, say the next few months? For these investors Berkshire's now expired offer of $52 in cash - were it to be revived - would be a no-brainer to accept.

Of course the dampener is that the bid of $52 per share values the firm at a hefty discount to its estimated net tangible assets of $67.

Perhaps this is why there is a palpable sense of disappointment from major shareholders. And who could blame them? Two bidders both have paper trading below book, as does the target and a third offer is again placing a negative value on a franchise built up over a generation.

Is it any wonder that over the coming quarter shareholders may simply decide to ride out the soft market and wait for better times to exit?