NEW YORK—Validus Holdings Ltd.'s hostile takeover bid for Transatlantic Holdings Inc. generated a war of words last week, as well as a Transatlantic lawsuit accusing Validus of false and misleading statements.

“The mud is starting to be slung back and forth,” said Paul Howard, director of research at Solstice Investment Research L.L.C. in Glastonbury, Conn.

Allied World Assurance Co. Holdings A.G. last week stuck by its all-stock merger agreement with New York-based Transatlantic, valued at $3.2 billion when announced in June, arguing that its offer “provides the best immediate and long-term value and strategic benefits for all shareholders.” And Bermuda-based Validus has not budged from its cash-and-stock proposal, initially valued at about $3.5 billion.

While Transatlantic previously said it was open to talks with Validus, the Bermuda reinsurer refused the offer as it was conditioned and instead made a direct appeal to shareholders on July 25.

Transatlantic's board then advised its shareholders to reject Validus' offer, and it filed suit in U.S. District Court in Wilmington, Del., alleging that Validus made false and misleading statements in bid documents.

In its proposal, Validus bid 1.5564 Validus shares and $8 in cash per Transatlantic share, which it said was $55.95 per share based on the July 12 closing price. Among other allegations, Transatlantic said Validus failed to disclose that its stock price later declined enough to significantly diminish the bid's value.

In its lawsuit, Transatlantic seeks to compel Validus to correct its alleged misstatements.

Validus Chairman and CEO Ed Noonan retorted that Transatlantic is “spreading misinformation” to hide the fact that Validus' bid “provides greater market value.” In a statement, he said the Transatlantic board has taken “steps to entrench themselves by establishing a poison pill, initiating meritless legal action and changing corporate bylaws in an apparent effort to more easily manipulate stockholder meetings.”

Transatlantic last week filed a plan with the Securities and Exchange Commission that CEO Robert Orlich called a “commonly used” instrument “to assist in protecting stockholders from abusive takeover tactics.”

Under that plan, if someone acquires beneficial ownership of at least 10% of Transatlantic, every shareholder gets the right to buy stock at a 50% discount, thereby diluting the acquirer's holdings.

Kevin Lee, a senior credit officer at Moody's Investors Service in New York, said last week's developments show that “it's going to be a more contentious path to a merger” for Transatlantic. “At the end of the day, what matters is what the Transatlantic shareholders think.”

Validus said Transatlantic wouldn't discuss its proposal without a “standstill” provision that would contractually prohibit the Bermuda reinsurer from pursuing its bid without board approval.

But Transatlantic board Chairman Richard S. Press said the agreement it asked Validus to sign is “the standard confidentiality agreement” required under its agreement with Allied World, with “substantially” the same terms and conditions that Allied World agreed to, including a standstill provision.

In contrast, Validus sent Transatlantic's board a draft confidentiality agreement that had no standstill provision and included other terms that would have allowed Validus to disclose Transatlantic's information, Mr. Press said in the statement.

The Allied World deal “will provide greater long-term value potential to Transatlantic's stockholders than Validus,'” Transatlantic said in its statement, noting that it consulted independent advisers to reach its conclusions.

Allied World, whose headquarters is in Zug, Switzerland, said last week that integration planning with Transatlantic was “well under way,” noting that rating agencies reacted favorably to its offer, among other things.

New York-based Standard & Poor's Corp., for example, put its BBB+ counterparty credit rating on Allied World and its A counterparty credit and financial strength ratings on Allied World's subsidiaries under review with positive implications. In a statement, S&P said that being part of a leading global reinsurance group could improve Allied World's competitive position.

“We view the fact that Transatlantic and Allied World entered into a definitive agreement as a stronger possibility of success than Validus' (unsolicited) bid prevailing,” said Tracy Dolin-Benguigui, an associate director at S&P in New York.

Developments suggest there's more momentum in favor of the deal between Transatlantic and Allied World, but shareholders have the final say, she said.