The Transatlantic Holdings Merger Timeline

By Ryan C. Fuhrmann | September 08, 2011 AAA

Back in 2009, in a fight for survival, beleaguered global insurance giant American International Group (NYSE:AIG) sold its majority ownership stake in reinsurer Transatlantic Holdings (NYSE:TRH). In February 2010, Transatlantic's management team started considering partnering up with a rival to improve its competitive position. A year later, it started talking with a rival and, despite a couple of competing bids, including one from Warren Buffett's firm, the company has decided to move forth with a merger. Below is an overview of the developments and what it will likely mean for shareholders.
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Merger Developments
After nearly five months of negotiations, on June 12 Transatlantic announced a merger agreement with Allied World Assurance (NYSE:AWH). Transatlantic shareholders will receive 0.88 Allied shares for every share they hold. The transaction will leave them with 58% of the combined company, with Allied shareholders owning the remaining 42%. The deal's value was about $51 per share as of early August.

On July 13, Transatlantic received a competing bid from rival Validus Holding (NYSE:VR) with Validus offering 1.5564 Validus shares for every Transatlantic share, as well as $8 in cash. The value, at the time the deal was announced, was about $56 per Transatlantic share. Then, on August 5, National Indemnity, a division of Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B), made yet another offer for $52 in cash per share.

Recent Results & Outlook
In the midst of the merger frenzy, Transatlantic reported mixed second quarter results at the end of July. It saw net premiums written rise 5.2% to $996.6 million. Net premiums earned fell nearly 2% to $954.9 million but net investment income rose just over 3% to $119.5 million. Including other investment gains and adjustments, total revenues fell 2.2% to $1.1 billion. A 1% increase in total expenses sent operating income down 27.5% to $94.7 million. Lower income taxes tempered the net income decline slightly to 26.8% as earnings fell to $80.9 million. Share buybacks again lessened the decline a bit, with diluted EPS dropping 25.1% to $1.28. (Find out what these company programs achieve and what it means for stockholders. For more, see A Breakdown Of Stock Buybacks.)

For the full year, analysts project revenue growth of 3.3% and total revenue just north of $4 billion. The earnings consensus currently stands at only 75 cents per share and is associated with a charge in the first quarter. Next year, analysts expect $6.13 EPS.

The Bottom Line
Berkshire's bid expired August 8, and Transatlantic has committed to honoring the original Allied World bid. With recent stock market volatility, the deal's value has fallen to less than $44 per share. This is well below the $52 original Berkshire offer, and the Validus offer would currently be valued at $47 per share. (Get a piece of Warren Buffet's profit by using Form 13F to coattail his picks. For more, see Build A Baby Berkshire.)

Transatlantic posted an investor presentation to its website on September 6 to summarize its take on all of the merger proposals and justify why it decided to go with the Allied World bid. In a nutshell, it felt hooking up with Allied World offered it the best chances to build critical scale in the industry. Its number crunching also suggested the most future upside for shareholders. It puts the combined entity as the third-largest industry player, based on total capital, and sees a similar culture between both firms, which could make the merger run more smoothly.

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