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8-K - FORM 8-K - TRANSATLANTIC HOLDINGS INC | y92677e8vk.htm |
EX-99.1 - EX-99.1 - TRANSATLANTIC HOLDINGS INC | y92677exv99w1.htm |
EX-10.1 - EX-10.1 - TRANSATLANTIC HOLDINGS INC | y92677exv10w1.htm |
EX-99.3 - EX-99.3 - TRANSATLANTIC HOLDINGS INC | y92677exv99w3.htm |
Exhibit 99.2
[Transatlantic Letterhead]
September 16, 2011
Dear Fellow Stockholders:
Executive Summary
This executive summary briefly highlights the key themes of our full stockholder letter that
follows. We hope you take the time to read the letter as much has happened, much has been written
and much has been said in the last 90 days. The main points we would like you to consider are as
follows:
| We have heard the concerns and opinions of our stockholders and have mutually terminated our merger agreement with Allied World. | ||
| Transatlantic believes that the right strategic combination presents an attractive opportunity, but is not an imperative. We agreed to the merger only after talking to several other potential strategic partners, evaluating the merits of the merger and comparing it to the benefits and drawbacks offered by other potential partners. | ||
| In our letter we remind you of the strategic path we identified prior to the Allied World merger agreement and we are prepared to continue on that course. We have increased our share buyback program to $600 million through 2012, half of which we commit to complete in 2011, to accelerate the delivery of value to stockholders as we execute on our strategic initiatives. | ||
| We have been open to talks with Validus since our Board reviewed its proposal. We remain willing to engage in discussions with Validus or any other seriously interested party. | ||
| We would not recommend the Validus proposal that is on the table. It does not provide Transatlantic stockholders full consideration of our book value and franchise on a relative or absolute basis. Additionally, the Validus proposal has numerous inadequacies, including the writedown of Transatlantics net worth by $500 million, the compromising of Transatlantics ratings, the shortcomings of Validus domicile relative to some other potential partners, and Validus lack of US insurance operations, among other factors. | ||
| Validus statements regarding its proposal, Transatlantic, and Transatlantics Board of Directors are inaccurate and exaggerated in many instances, incomplete in others, severely biased in all respects and often just plain wrong. We have attached to the letter a fact sheet specifically addressing a number of Validus inaccurate statements. We believe that Validus unwarranted attacks on the integrity of the Transatlantic Board, and its initiation of a consent solicitation, are motivated by a desire to avoid paying full and fair value in a negotiated transaction. | ||
| We believe National Indemnity remains interested at or below its first per share price indication. Given our track record of growing book value and our strong balance sheet, the Board has concluded that it will not recommend selling Transatlantic for cash at such a substantial discount to book value. | ||
| The Board will continue to entertain and evaluate any serious proposal or opportunity to provide our stockholders with the fullest value, balancing the short and long-term opportunities and risks whether by strategic combinations or acquisitions. |
Transatlantic has a strong brand and franchise, and an enviable 20-plus year track record of
earnings and book value per share growth. We like our prospects as an independent company. That
being said, we have demonstrated that we are also open to considering alternative proposals to
deliver value to our stockholders. The Allied World merger was the only proposal that gave full
consideration to our book value, accelerated most of the strategic initiatives that we set for the
Company and maintained our ratings. We do not believe that the other proposals as presently
constructed deliver appropriate value on a relative or absolute basis. As always, we will continue
to work tirelessly on your behalf to maximize the value of Transatlantic in any manner appropriate
and believe our actions over the last 18 months underscore this commitment.
Introduction
Much has developed over the past several months. We are writing this letter to share with you our
perspective on these events and the actions we have taken, including those announced today.
Upon gaining full independence from AIG in 2010, we began addressing several strategic objectives
to enhance our industry-leading position. In June of this year, we reached a merger agreement with
Allied World that we believe would have accelerated the achievement of these objectives in a book
value for book value transaction that offered significant incremental value for our stockholders.
After listening carefully to our stockholders, we have mutually terminated the merger agreement
with Allied World and cancelled the Special Meeting of Stockholders called for September 20, 2011.
Furthermore, today we announced an increase in our stock repurchase program to $600 million, which
we intend to execute alongside our existing strategic initiatives.
Moving forward, we remain highly optimistic about our future. Transatlantic has an excellent track
record of growing book value over its 20-plus years as a public company. We have a strong brand, a
highly regarded global franchise and one of the most respected underwriting teams in the industry.
We have always liked our prospects and we continue to be enthusiastic about them today.
In this letter, we want to take the opportunity to set the record straight about the events of the
last several months. We will also address unfounded allegations and misstatements made by Validus
during the course of its efforts to acquire the Company. Finally, we will provide more insight on
where we go from here.
Lets start by taking a closer look at how we developed the strategic plans that ultimately led us
to recommend the merger with Allied World.
Transatlantics Strategic Review Process
Transatlantic emerged as a fully independent, publicly traded company in March 2010. No longer
facing the strategic restrictions imposed by AIGs majority ownership, we undertook a full analysis
of the competitive landscape and our franchise. We concluded that Transatlantic has a strong
competitive position, a solid balance sheet, a well-regarded risk management process and a valuable
brand. We also identified strategic imperatives that would enable us to compete most effectively
over the long-term:
| Enhance our operational flexibility to allow us to meet regulatory requirements |
| Broaden our distribution to include U.S. primary insurance capabilities |
| Lower our cost of capital and enhance our earnings |
We developed and began executing plans to address these initiatives independently, but we also
determined that a strategic combination could accelerate our ability to achieve our strategic
objectives while preserving our ability to return capital.
Accordingly, we evaluated potential partners, including Allied World, Validus Holdings and a number
of others, through a lengthy process that included substantial internal and external analyses and
conversations with several companies. Allied World emerged from this process as the strongest
candidate. We were able to reach a fairly valued financial transaction that met all of our desired
strategic criteria:
| Fair valuation an exchange ratio based on at least book value for book value |
| Favorable domicile with U.S. tax treaty | ||
| Properly capitalized EU subsidiary support $1 billion-plus of premium | ||
| Maintain strong ratings S&P A+ rating | ||
| Financial flexibility balance market opportunities with return of capital | ||
| Established U.S. insurance company broaden distribution | ||
| Cultural fit preserve strong risk-management and underwriting expertise | ||
| Significant upside for stockholders path to long-term value creation |
We had hoped to complete the Allied World merger because of its outstanding strategic and financial
benefits, and we believe this path was superior to the alternative proposals that have since
emerged. However, the decision to approve this merger transaction was ultimately the stockholders
and a majority were not supportive. Lets take a look at each of the alternative proposals now.
National Indemnity Offer
The all-cash proposal from National Indemnity represents the less compelling of the two alternative
transactions.
Given our strong long-term prospects combined with the historically low valuations prevalent in the
industry today, we believe that embarking on a process to sell the Company would not deliver
appropriate value to stockholders. In this environment, it is not surprising that reinsurance
companies have not been selling themselves. Even so, in keeping with our fiduciary responsibility,
we would always give careful consideration to a sale proposal that could offer superior value to
our stockholders.
After reviewing the National Indemnity proposal, it was clear to the Board that this offer did not
provide superior value in fact, it was demonstrably inferior on most valuation metrics. We
received this proposal following a week in which the prices of insurance stocks declined
significantly. The indicated offer represented only 77% of our stated June 30, 2011 book value,
and ranked below the 25th percentile of comparable insurance transactions1 in
key benchmarks based on analysis by our outside financial advisors (as highlighted on page 36 of
our investor presentation filed on September 2, 2011).
Nevertheless, we entered into a confidentiality agreement with a customary standstill provision.
Through several conversations, we encouraged National Indemnity to perform due diligence and
meaningfully increase their offer they only conducted very limited due diligence and never
improved their offer. Our Board has concluded that selling Transatlantic for cash at such a
substantial discount to book value, when our book value has been growing consistently, simply would
not deliver fair value to our stockholders. We conveyed our position to National Indemnity several
times, most recently on Friday, September 9, 2011. They reiterated that they remain potentially
interested in an acquisition at or below $52 per share. We continue under a confidentiality
agreement, and while further talks may occur, none are currently scheduled.
Validus Proposal
Subsequent to the Allied World merger announcement, Validus made an unsolicited proposal to acquire
Transatlantic. After refusing our offer to engage with us under customary terms, Validus launched
a hostile exchange offer. Validus has consistently misled investors as to your Boards exercise of
its
fiduciary duty and efforts to come to the right conclusion on which transaction, if any, is best
for
1 | Transactions include: Fairfax / Zenith, Tokio Marine / Philadelphia Consolidated, Allied World / Darwin, Liberty Mutual / Safeco, Mapfre / Commerce Group, Munich Re / Midland National, D.E. Shaw / James River, Liberty Mutual / Ohio Casualty, Farmers / Bristol West, TPG / Direct General and Aviva / AmerUS. |
Transatlantic stockholders. We will address all of these issues here, beginning with the
merits of the offer.
While the Validus offer generally traded marginally above the indicated value of the Allied World
transaction prior to the termination, this small premium does not compensate our stockholders for
the strategic and financial shortcomings of its offer. In fact, the Validus offer is inadequate on
both a relative and absolute basis, for the following reasons:
| Insufficient valuation The proposed deal is considerably less than a book value for book value exchange. Validus arbitrarily seeks to charge Transatlantic stockholders for what it perceives to be a $500 million reserve shortfall. This is the primary reason that Transatlantic stockholders would receive only 48% of the future earnings of a combined company versus 52% in a book value for book value transaction taking into account the cash component of Validus offer. The proposed transaction also results in Transatlantic book value per share dilution of 10%.2 | ||
| Less-than-optimal domicile While Validus is domiciled in a favorable tax jurisdiction, Bermuda is without a U.S. tax treaty. The resulting 30% withholding tax rate on dividend distributions from U.S. subsidiaries creates significant frictional costs as compared to the domiciles of other potential partners. | ||
| Undercapitalized EU subsidiary There is questionable flexibility to fund a subsidiary that could support $1 billion-plus of international premiums. | ||
| Negative impact on ratings The combined company will likely carry lower ratings than Transatlantic on a standalone basis. | ||
| Uncertain financial flexibility Property catastrophe concentration adds earnings volatility and capital management risk. | ||
| No U.S. insurance company The transaction does not advance our objective of broadening distribution to U.S. specialty business not available to reinsurers. | ||
| Cultural incompatibility Validus has centralized underwriting, a stated distaste for the casualty business, and a short, six-year operating history compared with our 30-plus years. | ||
| Questionable upside for stockholders There is less than fair ownership in the combined entity for Transatlantic stockholders and a lack of due diligence. |
Put simply, our Board believes if a partner is going to deliver less ownership than a book value
for book value transaction would imply, compromise Transatlantics ratings, bring a questionable
strategic rationale, and refuse to engage in mutual due diligence under customary terms, then it
needs to offer significantly greater value to our stockholders.
Validus failure to develop an offer that we could recommend to our stockholders is no ones fault
but its own. Validus chose not to accept the path that was right in front of it: Sign the
confidentiality agreement with the standstill and conduct due diligence. Instead, Validus
contested our confidentiality agreement in Delaware Chancery Court. Consider that the Delaware
court indicated that Validus should sign the confidentiality agreement with a standstill and that
both Allied World and National Indemnity signed the same agreement, and in our view it is clear
that Validus position on this matter was not reasonable.
Additionally, Validus allegations of Transatlantic Board entrenchment are false. In the Allied
World merger we previously recommended, our Chairman would have stepped down after one year; our
current CEO was to have retired as part of the transaction; and our current COO and soon-to-be CEO
would have waived a retention bonus and would have reported to Allied Worlds CEO. The Allied
World merger
triggered no Change in Control provisions for Transatlantic management. The Validus proposal would
2 | Compares TRH standalone book value per basic share of $67.76 versus Validus pro forma book value per basic share of $53.15 based on page 33 of Validus S-4 filed as of August 19, 2011 plus $8.00 received in cash by TRH stockholders. |
trigger Change in Control provisions, making a Validus combination more lucrative for much of
Transatlantic management and many employees.
We have expeditiously and fully evaluated alternative offers. Management traveled the country
twice since June to solicit and respond to investor views. We have returned every phone call. We
have been honest and transparent. Do not believe what Validus management tells you about our
motivations. They are biased and wrong.
This brings us to the consent solicitation filed by Validus this week. In our view, it is obvious
that Validus thinks it can determine the future course of your Company by nominating its three
hand-picked candidates to consummate a hostile takeover. We believe the solicitation is another in
a series of transparent and opportunistic attempts to mislead stockholders into accepting an
acquisition offer that does not reflect full and fair value. We strongly urge stockholders to
reject the Validus consent solicitation.
Finally, Validus has made a number of inaccurate assertions that we would like to address directly
to correct the record. We have included a fact sheet at the end of this letter that recaps these
misstatements and states the facts.
Notwithstanding all of the foregoing, we are ready to enter talks with Validus in a constructive
manner that will allow both parties to conduct mutual due diligence.
The Path Forward
If we were to undertake a strategic combination, it would have to be the right transaction, one
that fairly rewards stockholders and meets multiple objectives. To be clear, Transatlantic
believes that the right strategic combination presents an attractive opportunity, but is not an
imperative.
We have a proven track record of creating value for our stockholders. Over a 20-plus year period
as a public company, we have grown book value per share at 12% per year over multiple industry
cycles and have done so while being a U.S. taxpayer (unlike most of our competitors). We strongly
believe that Transatlantics existing franchise will continue to deliver this type of performance,
which should be further enhanced by the $600 million share repurchase program we announced today.
This program, which represents a $455 million increase to our existing repurchase authority,
includes a commitment to repurchase $300 million of shares prior to December 31, 2011 and plans to
complete the remainder of the program during 2012. This program should deliver immediate value to
our stockholders. Had the repurchase activity taken place in the first half of 2011, it would have
enhanced book value per share by 7%3 while preserving our franchise and ratings.
Additionally, we have never stopped addressing the strategic initiatives we identified in our
original 2010 review:
1. | Completing insurance licensing process for our Putnam subsidiary, which will provide access to U.S. primary insurance business | ||
2. | Executing on existing plan to address European and Latin American regulatory requirements | ||
3. | Adjusting the mix of short-tail and long-tail business, given the current or future market environment | ||
4. | Remaining focused on lowering cost of capital |
3 | Assumes average repurchase price of $49.14 per share, which was the average share price of Transatlantic common stock from January 3, 2011 to June 30, 2011. |
In closing, Transatlantic has a proven track record of value creation and your Board of Directors
has a clear path to enhancing that record in the months and years to come. Looking ahead, we have
an experienced management team in place to execute on our path forward. Consistent with Bob
Orlichs prior plans to retire as CEO upon the closing of the Allied World transaction, Bob will
now remain CEO through the end of this year and retire from that post on December 31, while
remaining on the Board. Meanwhile, Mike Sapnar will assume the role of President, effective
immediately, and will take on the additional duties of CEO upon Bobs retirement.
All of us on the Board and in management have and will continue to work tirelessly to deliver value
for our stockholders. We appreciate your thoughtful feedback over the past several months and we
look forward to continuing that dialogue in the future.
Thank you for your support.
Sincerely,
Richard S. Press, Chairman, on behalf of the Board of Directors
Cautionary Note Regarding Forward-Looking Statements
This communication contains forward-looking statements that involve a number of risks and
uncertainties. Statements that are not historical facts, including statements about our beliefs and
expectations, are forward-looking statements. Such statements involve risks and uncertainties,
which may cause actual results to differ materially from those set forth in these statements. For
example, these forward-looking statements could be affected by risks that the terminated merger
agreement disrupts current plans and operations; risks that the unsolicited Validus exchange offer,
consent solicitation and/or National Indemnity proposal disrupts current plans and operations; the
ability to retain key personnel; pricing and policy term trends; increased competition; the impact
of acts of terrorism and acts of war; greater frequency or severity of unpredictable catastrophic
events; negative rating agency actions; the adequacy of loss reserves; changes in regulations or
tax laws; changes in the availability, cost or quality of reinsurance or retrocessional coverage;
adverse general economic conditions; and judicial, legislative, political and other governmental
developments, as well as managements response to these factors; and other risks detailed in the
Cautionary Statement Regarding Forward-Looking Information, Risk Factors and other sections of
Transatlantics Form 10-K and other filings with the Securities and Exchange Commission. You are
cautioned not to place undue reliance on these forward-looking statements, which speak only as of
the date on which they are made. Transatlantic is under no obligation (and expressly disclaims any
such obligation) to update or revise any forward-looking statement that may be made from time to
time, whether as a result of new information, future developments or otherwise, except as required
by law.
Additional Information About the Validus Exchange Offer
This communication is neither an offer to purchase nor the solicitation of an offer to sell any
securities. In response to the exchange offer commenced by Validus, Transatlantic has filed a
Solicitation/Recommendation Statement on Schedule 14D-9 with the SEC. Investors and security
holders are urged to read the Solicitation/Recommendation Statement on Schedule 14D-9 because it
contains important information about the Validus Exchange Offer. All documents, when filed, will
be available free of charge at the SECs website (www.sec.gov). You may also obtain these
documents by
contacting Transatlantics Investor Relations department at Transatlantic Holdings,
Inc., 80 Pine Street, New York, New York 10005, or via e-mail at
investor_relations@transre.com.
Additional Information about the Validus Consent Solicitation
On September 14, 2011, Validus filed a preliminary consent solicitation statement with the SEC
relating to Validuss proposals to, among other things, remove all of Transatlantics directors and
nominate three new directors to the Transatlantic board of directors. Transatlantic will file with
the SEC a consent revocation statement (the Statement) in connection with Validuss solicitation
of written consents. Investors and securityholders are urged to read the Statement and other
documents, when they become available, as they will contain important information. All documents,
including the Statement, when filed, will be available free of charge at the SECs website
(www.sec.gov). You may also obtain these documents by contacting Transatlantics Investor
Relations department at Transatlantic Holdings, Inc., 80 Pine Street, New York, New York 10005, or
via e-mail at investor_relations@transre.com.
Participants in the Solicitation
Transatlantic, its directors and executive officers may be deemed to be participants in a
solicitation of Transatlantics stockholders in connection with the Validus consent solicitation.
Information about Transatlantics directors and executive officers is available in Transatlantics
proxy statement dated April 8, 2011 for its 2011 Annual Meeting of Stockholders. Additional
information regarding the participants in the solicitation and a description of their direct and
indirect interests, by security holdings or otherwise, to the extent applicable, will be contained
in the Statement.
VALIDUS MISSTATEMENTS AND CLAIMS: CORRECTING THE RECORD
1. | Claim: ...we see this as essentially a book for book value exchange at parity to each party4 |
| Fact: Validus never conducted due diligence of non-public information. One cannot realistically arrive at a book value to book value transaction by arbitrarily adjusting downward Transatlantics book value. |
2. | Claim: Reserves are inadequate, necessitating a $500 million writedown of our net worth. |
| Fact: Four external parties, including two independent actuarial firms, evaluated Transatlantics reserves over the last 12 months. All of these parties were comfortable with the adequacy of our reserves. |
| Fact: Validus never conducted due diligence of non-public information. |
3. | Claim: Rating agency commentary indicates Validus and Transatlantic would be strong partners.5 |
| Fact: Moodys states that the combination would be credit negative for Transatlantic.6 |
| Fact: Higher ratings are better than lower ratings. |
4. | Claim: Pro forma debt to capitalization of a combined Validus and Transatlantic would be 20.1%.7 |
| Fact: This claim is based on the assumption of including Validus junior subordinated debentures as 100% equity. The Validus S-4 discloses a pro forma total debt to capitalization ratio of 23.4%, which we believe to be more reflective of rating agencies views.8 |
5. | Claim: Validus has better catastrophe risk management experience.9 |
| Fact: Validus claim is based solely on one event and on a flawed comparison of Transatlantics Japanese loss to its Florida PML. |
| Fact: Transatlantic has consistently outperformed Validus when measuring after-tax cat losses as a percentage of cumulative property catastrophe premiums written, even when comparing Transatlantics net losses to net premiums to Validus net losses to gross premiums. Between January 1, 2008-June 30, 2011 after-tax cat losses prior to any reinstatement premiums as a percentage of gross property catastrophe premiums written were 52% for Validus. For Transatlantic, for the same period, the ratio of after-tax cat losses prior to any reinstatement premiums as a percentage of net property catastrophe premiums written was only 44%.10 |
| Fact: Transatlantic has been writing cat business for 25 years compared with less than six years for Validus. |
4 | Joseph E.Consolino, Validus CFO, Validus Holdings investor conference call, July 13, 2011 | |
5 | September 6, 2011 Validus investor presentation, page 4 | |
6 | Moodys press release, July 18, 2011 | |
7 | September 6, 2011 Validus investor presentation, page 13 | |
8 | S&P stated that Validus financial leverage measured as debt-plus-preferreds-to-total-capital... (September 1, 2010) and by Moodys, who noted that Validus financial leverage included 25% equity credit for junior subordinated debentures (June 30, -2011).Validus own S-4 discloses that this same figure is 23.4% | |
9 | September 6, 2011 Validus investor presentation, page 12 | |
10 | Based on gross premiums written for Validus as Validus does not disclose net premiums written for the Property Cat XOL segment. Assumes tax rate of 0% for Validus and 35% for transatlantic. Based on event based catastrophe losses between Jan 1, 2011 and June 30, 2011 from public disclosures for Ike and Gustav in 2008, Chile, Xynthia, Australia and New Zealand in 2010, Australia, New Zealand and Japan in Q1 2011 and U.S. Tornado in Q2 2011. Source: Validus and Transatlantic financial supplements, earnings releases, 10Q and 10K. |
6. | Claim: Validus is balanced between insurance and reinsurance, with 40% of premiums coming from insurance underwriting.11 |
| Fact: Validus Lloyds syndicates (Talbots) premium appears to be more than 50% reinsurance, which would bring the parent company business mix to about an 80/20 split of reinsurance to insurance.12 |
7. | Claim: Lloyds syndicate (Talbot) easily satisfies Transatlantics stated strategic objectives of establishing U.S. primary insurance operations.13 |
| Fact: Talbot is subject to Lloyds restrictions and requirements and is not an effective substitute for U.S. primary insurance operations for Transatlantic. |
8. | Claim: EU passport through Validus Re Europe Limited, Funded as Appropriate13 |
| Fact: Validus Re Europe has only $6 million of capital and Transatlantic Re writes more than $1 billion of European premium. |
9. | Claim: We also see very clear benefit to Transatlantic to be able to diversify their business more broadly, both in class and geography14 |
| Fact: No line of business comprises more than 16% of Transatlantics premium and 50% of its premium is written outside the U.S. We do not need to merge with Validus to achieve diversification. If anybody needs a deal to diversify, it is Validus. |
10. | Claim: Historically, Transatlantic did not develop operations in Bermuda or at Lloyds, which are natural extensions of Transatlantics worldwide reinsurance franchise15 |
| Fact: Transatlantic wrote more than $200 million of premium in 2010 from Bermuda-based cedants. |
| Fact: Lloyds as a composite represents $215 million of Transatlantics premium and is one of our top 5 reinsurance clients. |
| Fact: Transatlantic writes nearly as much property cat premium as Validus you do not need a substantial Bermuda-based operation to write cat business. |
11 | August 30, 2011 Validus investor presentation, page 21 | |
12 | Annual Report 2010, Talbot Underwriting Ltd. Syndicate 1183, Page 24 | |
13 | September 6, 2011 Validus investor presentation, page 4 | |
14 | Ed Noonan, Validus CEO, Validus investor conference call, July 13, 2011 | |
15 | August 30, 2011 Validus investor presentation, page 24 |