CORRECTED - UPDATE 4-Risky Transatlantic bid drags Validus shares

Wed Jul 13, 2011 4:57pm EDT

(Corrects to remove date of shareholder meeting, next to last sentence)

* Validus shares down 10 pct, Allied World up 1 pct

* Transatlantic up 5 pct, co confirms unsolicited offer

* Transatlantic says board will evaluate Validus proposal

* Validus CEO says will go hostile if needed (Adds comments by CEO, adds BANGALORE to dateline)

By Rachel Chitra and Tanya Agrawal

BANGALORE, July 13 (Reuters) - Shares of Validus Holdings Ltd (VR.N) fell as much as 10 percent after the reinsurer outbid rival Allied World Assurance (AWH.N) for Transatlantic Holdings Inc TRH.N, with investors questioning both the price and the additional risk Validus is adding to its books.

Analysts had been deeply split on whether anyone would seek to outbid Allied World. Some said yes, given what they felt was a discounted price; others said no, citing what they perceived as a unique cultural fit between Transatlantic and Allied.

Shares of Validus, which termed its $3.5 billion deal for Transatlantic "superior," slipped to an eight-month low of $27.87 on the New York Stock Exchange.

Analysts said Validus, which has a relatively pristine balance sheet with virtually no exposure to what insurers call "long-tail lines," will now be taking additional risk from Transatlantic.

Long-tail lines, such as medical malpractice or workers compensation, have a longer duration between the claim-causing incident and its settlement.

Citigroup said Transatlantic's greater exposure to long-tail business was less attractive in the sustained weak pricing environment.

But Validus' CEO, Ed Noonan, said in an interview that the combined company would still be nearly three-quarters short-tail business, a mix he argued would ultimately be attractive for the company's investors.

The combined company would be the world's sixth-largest reinsurer. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

DEALTALK on reinsurance deals [ID:nN13142656]

Allied World to buy Transatlantic [ID:nL3E7HD00X]

Validus tops Allied World's bid [ID:nL3E7IC3R1] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

COULD GO HOSTILE

Shares of Transatlantic were up nearly 6 percent at $51.93 on the New York Stock Exchange on Wednesday afternoon. Some analysts said they expected a bidding war, with Allied World potentially raising its June offer of $3.2 billion in stock.

Noonan told Reuters that Validus has been looking at Transatlantic for the last three years. He said he hopes to negotiate a friendly deal but will pursue the offer regardless.

"We will still go every step of the way to complete the acquisition," he said. Almost exactly two years ago, Validus won what had been a hostile bidding war for another Bermudan reinsurer, IPC.

Validus' offer of $55.95 for Transatlantic values the company at about 66 times forward earnings, which is well above its 10-year average.

Some analysts rate the Validus offer attractive due to the $8 per share cash component versus Allied World's all-stock deal and the 14 percent premium to Transatlantic's Tuesday close.

The Validus deal also increases the geographical footprint of Transatlantic and boosts its potential to write more property catastrophe business, JMP Securities analyst Matthew Carletti said.

Validus has also said its offer will be tax-free to Transatlantic stockholders unlike Allied World's fully-taxable proposal.

However, analysts say a Transatlantic-Allied World deal might work better due to the AIG connection.

Transatlantic was majority-owned by American International Group Inc (AIG.N) until the insurance giant sold its stake to help repay its $180 billion government bailout package.

Allied World's co-founders include AIG and Chubb Corp. (CB.N)

In a separate statement, Allied World said on Wednesday it received regulatory approval and its shareholders would be voting on the merger at a date still to be determined.

Goldman Sachs & Co and Moelis & Co LLC are acting as financial advisers to New York-based Transatlantic. (Additional reporting by Ben Berkowitz in New York and Aditi Sharma in Bangalore; Editing by Gopakumar Warrier, Saumyadeb Chakrabarty and Matthew Lewis)

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