S&P Sees No Ratings Change on Validus from Transatlantic Bid

Standard & Poor’s Ratings Services has said that its “ratings on Validus Holdings Ltd. (BBB/Stable/–) remain unchanged following the insurance company’s unsolicited offer to combine with Transatlantic Holdings Inc. (BBB+/Watch Pos/–) in response to the definitive merger agreement between Transatlantic and Allied World Assurance Co. Holdings AG (BBB+/Watch Pos/–) announced on June 12, 2011.”

S&P noted that Validus will in all likelihood become the surviving entity if its offer prevails, which would probably mean that “the combined group will be domiciled in Bermuda. The merger contemplates Transatlantic shareholders owning 48 percent of the combined company, with Validus’ shareholders owning the remaining 52 percent and completion by year-end 2011.”

The rating agency added that it doesn’t plan any “immediate rating action on any of these companies as a result of Validus’ offer.” However S&P also indicated that it would continue to monitor the situation and “could place our ratings on both Validus and Transatlantic on CreditWatch if the offer succeeds. Our financial strength ratings on the core operating subsidiaries of Validus and Transatlantic are ‘A-‘ and ‘A+’, respectively, with stable outlooks.”

A successful merger between the two companies would create a significantly larger reinsurance group with about $6.1 billion in gross premium written and $8.4 billion of capital. The combined group would become the sixth-largest reinsurer on a global basis based on gross premium written.

In S&P’s opinion this might “also produce a more diversified book of business and reduced earnings/capital volatility.” However as a partial offsetting factor S&P cited “the integration risk associated with the merger. We think the retention of key managers and staff members at the combined company will be an important element in the merger’s success, given both companies’ strong expertise.

“While some overlap in terms of employees, property catastrophe exposures, and investments might exist, we think the post-merger company will likely be the combination of two relatively intact stand-alone entities. We expect enterprise risk management (ERM) will increase in importance to the overall rating of the combined entity due to the increased complexity of the organization and a shift in its risk profile, with casualty writings becoming a more meaningful proportion of the business.

“In addition, although Validus successfully integrated IPC in 2009 and Talbot in 2007, we think a merger with Transatlantic would likely be a more formidable task. We will also monitor how Validus optimizes capital management to recognize jurisdictional benefits in formulating our opinion of notching between the holding company and operating companies.”

In conclusion S&P noted that it had placed Transatlantic’s issuer credit ratings on CreditWatch positive following its signed definitive agreement of amalgamation with Allied World, “given our view that narrowing of notching between our ratings on the holding company and the operating company to two notches from three was a possibility.”

Source: Standard & Poor’s