NEW YORK—Transatlantic Holdings Inc.'s planned merger with Allied World Assurance Co. Holdings A.G. would create a stronger combined entity out of complementary operations, analysts say.

Transatlantic, the former reinsurance affiliate of American International Group Inc., announced plans Sunday to merge with specialty insurer and reinsurer Allied World in a $3.2 billion stock-for-stock deal, the two companies announced Sunday.

The two companies would operate as separate brands—Transatlantic Reinsurance and Allied World Insurance—under the TransAllied Group Holdings A.G. holding company.

The deal, which is expected to close in the fourth quarter, puts Transatlantic at 79% of its value in terms of its assets and liabilities.

Shares up, questions arise

After the deal announcement, Transatlantic's stock price surged to $49.46 per share in intraday trading Tuesday, from $44.01 per share at the market's close on Friday. Allied World's stock hit a high of $58.24 on Monday but then fell to $56.44 by Tuesday from $58.07 per share on Friday.

If the deal goes ahead, Transatlantic's shareholders will end up with around 58% of the combined company and Allied World's with around 42%.

But shareholder approval is not a given. One large shareholder Tuesday objected to the deal.

Complementary firms

Analysts said the merger makes sense, given the complementary operations of the two companies.

Allied World “got a good price—or a fair price—and they were able to really take their franchise to the next level,” said Dean Evans, senior vp of equity research at Keefe Bruyette & Woods Inc. in New York. But, he added, “It might be disappointing to people who are bullish on the market that a $3 billion reinsurance company is now selling at 80% of book.”

Experts say most reinsurers have been trading at or below their book values recently.

The New York ratings agency Moody's Investors Service Inc. put its A2 insurance financial strength ratings of Allied World Assurance Co. Ltd. and certain other Allied World subsidiaries under review for possible upgrade, noting that the merger “will provide both franchises with strategic benefits.” Moody's also affirmed Transatlantic's ratings.

Meanwhile, New York-based Standard & Poor's Corp. put its BBB+ counterparty credit rating on Allied World and its A counterparty credit and financial strength ratings on Allied World's subsidiaries on credit watch with positive implications. S&P also placed its BBB+ counterparty credit rating on Transatlantic Holdings Inc. on credit watch positive but kept the same ratings on Transatlantic's subsidiaries.

The ratings agency said in a statement that being part of a leading global reinsurance group could improve Allied World's competitive position.

“They complete each other,” said Laline Carvalho, director and sector specialist in reinsurance at S&P “Each is bringing a strength to the table.”

A.M. Best Co. Inc. affirmed its A financial strength ratings on Transatlantic and Allied World and the subsidiaries of each.

In a statement, Oldwick, N.J.-based Best said the deal would bring “two complementary organizations together. With Allied World being predominately a primary writer and Transatlantic a pure reinsurer, the merged entity is expected to enjoy an enhanced business profile that will likely inure benefits in the form of an improved competitive position.”

Best also noted that the combined company would benefit from broader distribution channels and products and a large global presence.

Analysts noted that the companies also have cultural similarities, given their ties to AIG. Transatlantic Holdings Inc. is the former reinsurance affiliate of the New York insurer.

Meanwhile, AIG and other insurers, including Chubb Corp., started Allied World after the Sept. 11, 2001, terrorist attacks.

Offshore moves

The deal gives Transatlantic an offshore parent, which “could level the tax playing field vs. competitors over time,” the New York financial services firm JPMorgan Chase & Co. said in a statement.

Many reinsurers have moved their headquarters from Bermuda to Switzerland in recent years for regulatory or tax reasons, and Transatlantic is among the few to remain in the United States, experts say.

More deals?

The merger is one of only a handful to take place among reinsurers and insurers during recent years.

For example, Max Capital Group Ltd. last year merged with fellow Bermuda company Harbor Point Ltd. to form Alterra Capital Holdings Ltd. In 2009, Bermuda players Validus Holdings Ltd. and IPC Holdings Ltd. merged, and Bermuda-based PartnerRe Ltd. acquired Swiss reinsurer Paris Re Holdings Ltd.

Some analysts say the latest deal isn't the start of a major trend.

“I don't think (the Transatlantic and Allied World) deal greatly increases or decreases the likelihood of these transactions taking place,” said Mark Dwelle, an equity insurance analyst in Richmond, Va., at New York-based RBC Capital Markets. “I think it's more particular to these two companies agreeing on a structure and format.”