COMMENT: Noonan sparks this summer’s transfer saga

COMMENT: Noonan sparks this summer’s transfer saga

Every summer, the soccer world gets wrapped up in transfer sagas. Tussles erupt for the sport’s prized players and newspapers speculate wildly about which team will get their man. This close-season, for example, the clubs that Tottenham’s Luka Modric and Arsenal’s Cesc Fabregas will be lining up for next season are highly uncertain at this point.

Ed Noonan, chief executive of Bermudian reinsurer Validus, seems determined to introduce the same dynamic into the reinsurance industry. Two summers ago, he hijacked a friendly merger deal between Bermudian firms Max Capital and IPC. A summer of increasingly hostile bickering ensued, with Noonan eventually wresting catastrophe reinsurer IPC from Max Capital’s grasp. Max Capital later sated its urge to merge by joining forces with class of 2005 reinsurer Harbor Point and rebranding as Alterra Capital.

This summer, Noonan has sparked a similarly intriguing situation. He is attempting to gatecrash the merger of equals between Transatlantic Holdings and Allied World Assurance Company, which woud create TransAllied. Validus this week unveiled a $3.5bn offer for Transatlantic and trumpeted it as a “superior proposal” to the Allied World deal.

The transfer at stake is attractive. US-based Transatlantic is a top 10 reinsurer with a broad book of business globally and by business line. The firm is particularly strong in casualty business. It was formally majority owned by AIG, which sold its stake to raise capital after hitting trouble.

Analysts say there is little in it, with the drop in Validus’ share price since the deal was announced making its offer only a slight premium to that of Allied World . Equity analysts at Keefe, Bruyette & Woods reckon there is a “modestly higher likelihood” of the Allied deal going ahead as planned.

That might be true if the offers from both sides stay as they are. But this is far from guaranteed.

Similar predictions were made about the success of Max’s deal for IPC. Then, as now, it seemed the combination of a friendly agreement between the firms and a CEO looking to get out of the business – IPC’s Jim Bryce was looking to retire as Transatlantic’s Robert Orlich is now – would see the deal through. Noonan overcame that by taking the issue to IPC’s shareholders, who threw their lot in with Validus, despite the IPC board backing Max.

Don’t think that the $115m break-up fee attached to Transatlantic’s merger agreement with Allied World will deter any change of plan. Max Capital was left with the consolation of a $35m break-up fee once Noonan had ruined its deal with IPC.

Noonan should not be underestimated. The former CEO of American Re clearly has the stomach for a fight.

And he may get support from investors. Some shareholders had already grumbled that the Allied deal undervalues Transatlantic. The TransAllied deal values it at 79% of book value. Transatlantic’s largest shareholder Davis Selected Advisers, which holds around 24% of the US reinsurer, said soon after the Allied deal was announced that it may oppose the $3.2bn merger agreement citing “serious concerns about the proposed transaction”.

Noonan has already been quoted in Bloomberg as saying he has been getting calls from Transatlantic investors who were hoping for an alternative to the Allied deal.

Both deals make sense. The addition of Transatlantic – the eighth largest global reinsurer in 2009 with $4bn of net premiums – would catapult the victorious bidder into a serious reinsurance player.

Allied World has a small reinsurance operation compared with its insurance activities, so Transatlantic would represent a reinsurance bolt on with minimal overlap to complement its primary insurance and Lloyd’s businesses.

Validus was part of the class of 2005 reinsurers that were set up on Bermuda to write short-tail catastrophe business. It has broadened its horizons since then, notably with the acquisition of Lloyd’s insurer Talbot, but still is heavily weighted in cat business.

Noonan was keen to highlight the lack of much overlap in the Validus offer. "The combination of Validus' strong positions in Bermuda and London with Transatlantic's profile in the United States, continental Europe and Asia will produce a rare example of a complementary business fit with minimal overlap. Combining a leader of the short-tail reinsurance market with a leader of the long-tail market creates a franchise properly balanced to manage the reinsurance underwriting cycle,” he said.

So the lines are drawn. It may come down to a matter of price. Expect this one to run and run. A bidding war for a prized top 10 player may only just be beginning.


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October 2018


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