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The fight over Transatlantic Holdings Inc. (TRH) is a battle for size, as reinsurance companies struggle to distinguish themselves from a crowded field.
Both Allied World Assurance Co. (AWH), which struck a deal to merge with Transatlantic in June, and Validus Holdings Ltd., which made an unsolicited rival bid Tuesday night, could roughly double in size and move into more-elite ranks of the reinsurance world if they successfully pull off a deal with Transatlantic.
The winner of the fight would diversify its business by bolting on Transatlantic's global casualty-reinsurance operations, increasing its geographic footprint. And the winner would gain clout in negotiating reinsurance contracts, with increased leverage to set prices and terms.
"The reinsurance business is one of scale," said Validus Chief Executive Ed Noonan in an interview Wednesday. "If you think of the increasing cost of risk around the world" as infrastructure projects grow bigger and airplanes become costlier, "it's the sizable, well-run reinsurance companies that have a big leg up."
Wall Street seems to favor larger reinsurers as well. Many Bermuda-based reinsurers and insurers trade substantially below book value, a measure of assets minus liabilities. Exceptions to the rule typically are larger ones, like RenaissanceRe Holdings Ltd. (RNR) and Ace Ltd. (ACE). Both trade slightly above their book value.
Allied World and Transatlantic agreed in June to a $3.2 billion stock-for-stock deal. The competing Validus bid is worth about $3.5 billion in cash and stock.
Transatlantic said in a statement that its board "will carefully consider and evaluate the Validus proposal in due course and will inform Transatlantic stockholders of its position." A representative for Allied World had no comment on the rival bid.
Validus's effort to pre-empt Allied's bid comes as the U.S. is bracing for what traditionally is the worst part of hurricane season, and some forecasters are calling for an especially active several months. Noonan said the possibility of landfalls of major storms wasn't a deal-killer because "That's the business we're all in.... We're not uncomfortable with that."
Both Validus and Transatlantic "are well capitalized," he said, and should this be a year of big hurricane hits, "there's a pretty strong case to be made" that premium rates would surge, and a combined Validus-Transatlantic entity "would be a prime beneficiary" of such higher prices.
Still, Validus said it planned to add $500 million to Transatlantic's reserves if it is successful in its efforts to acquire the company. Noonan said the reserves would largely go toward policies the company sold years ago.
-By Erik Holm and Leslie Scism, Dow Jones Newswires; 212-416-2892; email@example.com