For Allied World, Is No Deal a Better Deal?

By Brenton Cordeiro | October 5, 2011

Allied World Assurance Co. Holdings Ltd.’s withdrawal from a bidding race for Transatlantic Holdings may have cost it the chance to beef up its portfolio, but a nimbler Allied may be better able to navigate choppy markets.

Zurich-based Allied’s stock has fallen about 7 percent since it first bid for Transatlantic in mid-June. Its shares currently trade at a 33 percent discount to their book value.

Most insurers are battling pricing pressures and sluggish growth in new business, and some analysts reckon Allied’s rivals may be a better investment.


Allied World has among the highest return-on-equity and book-value growth among its peers, noted Dean Evans, an analyst at Keefe, Bruyette & Woods. “That’s something being overlooked by the market in terms of the valuation of their shares.”

Allied currently trades 21 percent below its mean price target of $68.38, according to Thomson Reuters StarMine data.

“The stock is ridiculously undervalued,” said Jay Kaplan, a fund manager for Royce Total Return Fund. “It would probably buy back a ton of its shares.”

Allied had about $201 million left in a buyback program at the end of the second quarter, and is expected to resume buying back its shares this quarter.

“They definitely have available cash to use, but I expect they’d wait until after the Atlantic hurricane season to really do anything substantial,” said KBW’s Evans, referring to a likely end-November timeframe.

Termination fees from the Transatlantic non-deal should add more than $1 per share to Allied’s earnings — another positive for its stock. Allied would receive a $35 million break-up fee and $13.3 million in costs from Transatlantic.

Reinsurer Transatlantic, once controlled by American International Group Inc. and also recently courted by Validus Holdings and Berkshire Hathaway Inc.’s National Indemnity, would also owe Allied another $66.7 million if it enters another deal within a year.


The insurance market has been battling sluggish growth and price weakness since the 2008 financial crisis.

Allied World, whose reinsurance operations make up around a third of its revenue from gross premiums, would benefit from any price hikes — but analysts see larger players like ACE and XL Group benefiting more.

“ACE and XL screen best here because both have flexible and robust property-catastrophe platforms, which can directly benefit from better pricing,” said Goldman Sachs analyst Michael Nannizzi.

In addition, any gains from new business that Allied may win could be offset by the high losses from catastrophe this year such as the Japan and New Zealand earthquakes, flooding in Australia and blizzards and hurricanes in the United States.

“The rebound in underwriting and operating margins expected for 2012 is skewed by a high level of catastrophe losses incurred so far in 2011,” said Standard & Poor’s equity analyst Cathy Seifert.

Was this article valuable?

Here are more articles you may enjoy.