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Sources: Transatlantic Exploring Limited Standstill Agreement with Validus

Source: WSJ - Gina Chon & Erik Holm

Posted on 20 Sep 2011

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According to people familiar with the matter, reinsurer Transatlantic Holdings Inc., having nixed offers from two potential suitors, is considering a move to facilitate discussions with a third rival, whose offer it has also rebuffed.

Transatlantic is exploring a "limited standstill" agreement to see if Validus Holdings Ltd. would agree to certain terms as a condition of seeing Transatlantic's financial books, people familiar with the matter said.

Standstill agreements restrict potential deal suitors from certain activities.

Validus this year has been one of several suitors seeking to purchase Transatlantic, along with Allied World Assurance Co. and Warren Buffett's Berkshire Hathaway Inc.

Reinsurers sell backup protection that lets insurers pass on some of the costs from large losses. Rates for many types of reinsurance have dropped for years, but the price of natural-disaster protection has begun rising in recent months, and some industry analysts predict other lines of coverage may also see price increases soon.

Reinsurance stocks don't reflect that optimism. Several reinsurers—including Transatlantic, Validus and Allied World—trade below book value, a measure of assets minus liabilities. That could make them attractive takeover targets. One complicating factor is that the likely bidders include rival reinsurers, who would be paying for the acquisition with their own seemingly undervalued shares.

Still, that hasn't stopped Validus. The company this summer rejected an earlier standstill agreement from Transatlantic and took its offer directly to Transatlantic shareholders. Validus had objected to a provision in the proposed agreement that would have prevented the company from talking directly to Transatlantic shareholders without the permission of Transatlantic's board for two years, among other terms.

At the time, Transatlantic was bound by a deal it had agreed to with Allied World, which was dropped last week after it was clear shareholders would reject it. The merger agreement with Allied World had required that any competing bidder sign a confidentiality agreement similar to the one Allied had signed when it was negotiating its deal with Transatlantic.

Validus argued publicly that a standstill provision wasn't necessary. People familiar with the matter said it was only after the Allied World deal was shelved that Transatlantic felt free to look into offering a more-limited standstill agreement. It is unclear whether such an agreement will be offered or accepted, but Validus is open to the prospect, the people said. Such an agreement, if reached, could provide an opening for Validus to conduct due diligence and possibly get a deal done under friendly terms, the people added.

However, in order to close a deal, Validus would likely need to increase its current cash and stock offer, valued Monday at about $2.9 billion, the people said.

On Monday, Transatlantic rejected a renewed takeover offer from the National Indemnity unit of Berkshire Hathaway, which remained at $52 a share, or about $3.25 billion. The all-cash offer from Mr. Buffett's insurance lieutenant, Ajit Jain was unchanged from a bid he submitted to Transatlantic in August. The offer expires at the close of business Monday and won't be renewed, according to a letter from Mr. Jain.

After the Transatlantic/Allied World merger was called off, Transatlantic Chairman Richard Press said Transatlantic remains willing to negotiate with potential partners, but completing a merger "is not an imperative."