Transatlantic, Allied World off CreditWatch as Merger Looks Less Likely: S&P

By | September 14, 2011

Standard & Poor’s Ratings Services has removed both Transatlantic Holdings and Allied World Assurance Co. Holdings AG from its CreditWatch Positive, where they were placed on June 13, following the announcement of their merger agreement.

S&P’s long-term counterparty credit rating on Transatlantic is ‘BBB+’, S& P also affirmed its ‘A+’ counterparty credit and financial strength ratings on Transatlantic’s subsidiaries. Allied World’s long-term counterparty credit rating is also ‘BBB+’ and its subsidiaries ‘A’ counterparty credit and financial strength ratings are ‘A.’ The outlook on all of these ratings is now stable.

“As a result of the events that have transpired during the past 90 days, we believe the possibility that Transatlantic’s shareholders will approve the merger with Allied World on the Sept. 20, 2011, ballot is less than 50 percent–our threshold to maintain a CreditWatch status,” explained credit analyst Tracy Dolin. The same explanation in was given in a separate bulletin on Allied World.

In identical language S&P set forth the events that triggered the change in its outlook, starting with the “ISS Proxy Advisory Services’ Sept. 9, 2011, recommendation to Transatlantic Holdings Inc.’s shareholders to vote down the merger with Allied World Assurance Co. Holdings AG.

“In addition, Transatlantic’s largest shareholder, Davis Selected Advisors L.P. (23.6 percent stake; 9.9 percent voting rights), opposes the merger, per an Aug. 24, 2011, filing with the SEC. Lastly, since we placed Allied World on CreditWatch Positive and the holding company rating on Transatlantic on CreditWatch Positive, two additional unsolicited offers emerged–from Validus Holdings Ltd. and Berkshire Hathaway.”

S&P said its stable outlook on Transatlantic reflects the group’s “well-diversified mix of business, strong reputation with brokers and clients, strong and disciplined underwriting culture, very strong capital adequacy and liquidity, and conservative investment portfolio. Partially offsetting these strengths are operating returns that historically have been below our expectations. In addition, softening market conditions in most of Transatlantic’s lines and currently low interest rates are posing challenges for the company, particularly given its significant proportion of casualty writings.”

Allied World’s stable outlook includes S&P’s expectation that it will “increase premiums by mid- to high-single digits in 2011 because of small regional accounts business and opportunistic growth in its global reinsurance and international writings. Considering the above-average catastrophe loss levels in first-quarter 2011 and excluding further favorable development, the group’s operating results will likely remain strong, with a combined ratio near 100 percent and a return on revenue of about 10 percent. The expense ratio will likely continue to increase, though at a slower pace during the next two years as a result of Solvency II compliance, further expansion into the U.S., and increased investment in operational procedures. We expect the group’s capital adequacy to be very strong.

Source: Standard & Poor’s

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