Allied World - Transatlantic Merger Kicks Off Insurer Consolidation Season

| About: Allied World (AWH)

Allied World Assurance Company Holdings (NYSE:AWH) announced that it is buying Transatlantic Holdings (NYSE:TRH) for $3.2 billion in stock. The New York based Transatlantic was once a part of American International Group Inc (NYSE:AIG). Many have called for increase M&A activity amongst the insurers and reinsurers. This deal represents what may end up being the first of many in this predicted wave of consolidation.

Goldman Sachs acted as financial adviser to Transatlantic, while Deutsche Bank acted as financial adviser to Allied World. Transatlantic shareholders will receive 0.88 Allied World shares or $51.10 per share for their Transatlantic shares, representing over a 16% premium compared to the company’s closing price on Friday.

AIG was forced to sell its stake in Transatlantic in order to repay the U.S. government for its kind and non-capitalistic rescuing. Allied World is headquartered in Switzerland and it is expected that Transatlantic will shirt its business to become domiciled in Switzerland as well, as such a maneuver is expected to result in preferential taxation. Scott Carmilani, Allied World’s Chairman and CEO, indicated that the purchase should be concluded in the fourth quarter of this year. Robert Orlich, CEO of Transatlantic, is expected to retire at the conclusion of the acquisition.

The combined company will operate as a holding company, as both companies currently are. The new corporate name will be TransAllied Group Holdings. Transatlantic shareholders should own over 50% percent of the combined company. Additionally, of the new company’s11-member board, six seats will be appointed by Transatlantic and five by Allied World.

This deal is more than just a 16% improvement in valuation for Transatlantic investors. This deal also underscores the recent preference by various companies to shield the business from U.S. taxation, though this will not be a issue to the many Bermuda-based insurers that proliferate the business.

Further, this deal proves that substantial mergers are being discussed amongst insurers and that merging such businesses may result in insurers with stronger cash and asset positions. It is likely that additional, similar deals will follow this one.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.