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Rating Action:

Moody's affirms Transatlantic Holdings ratings on merger announcement; Reviews Allied World insurance financial strength ratings for possible upgrade

12 Jun 2011

$1,005 million of Transatlantic Holdings, Inc. senior notes and $798 million of Allied World Assurance Company Holdings, Ltd. senior notes ratings affirmed

New York, June 12, 2011 -- Moody's Investors Service has taken the following rating actions as a result of the merger announcement between Transatlantic Holdings, Inc. (NYSE: TRH; "Transatlantic") and Allied World Assurance Company Holdings, AG (NYSE: AWH, "Allied World"):

- Affirmed Transatlantic Holdings, Inc. debt ratings (senior debt Baa1 / stable);

- Affirmed Transatlantic Reinsurance Company ("TRC") insurance financial strength at A1 (stable outlook);

- Affirmed Allied World Assurance Company Holdings, Ltd. debt ratings (senior debt Baa1 / stable);

- Placed the A2 insurance financial strength ratings of Allied World Assurance Company, Ltd. ("AWAC Bermuda") and certain other Allied World subsidiaries under review for possible upgrade.

According to Moody's, the proposed transaction is an all-stock merger that is not expected to put additional pressure on either party's capital structure. Transatlantic shareholders would receive 0.88 Allied World shares in exchange for their common shares, based on a fixed exchange ratio. Following the merger, Transatlantic shareholders will own approximately 58% of the combined company on a fully diluted basis, with Allied World shareholders owning approximately 42%. Scott Carmilani, current CEO of Allied World, will become the CEO of the combined company and Bob Orlich, current CEO of Transatlantic, will retire upon completion of the merger. The combined company, to be named TransAllied Group Holdings, AG, is expected to have pro forma shareholders' equity of nearly $7 billion as of March 31, 2011.

Moody's placed Allied World's A2 insurance financial strength ratings under review for possible upgrade to indicate the possibility of harmonizing the ratings of Allied World and Transatlantic upon merger. The main rationale for moving toward harmonization is that the two principal operating subsidiaries, TRC and AWAC Bermuda, would have broadly equal importance in the combined group. TRC currently has the bigger balance sheet but, in Moody's view, AWAC Bermuda will likely play an important role in optimizing capital and tax efficiencies through intercompany reinsurance from the U.S. to Bermuda.

The rating agency believes the merger will provide both franchises with strategic benefits. Currently, Transatlantic focuses solely on reinsurance while Allied World focuses more on insurance. The two platforms will give management the flexibility to trade between reinsurance or insurance, depending on market conditions. Transatlantic brings a highly reputable reinsurance franchise and more points of contact with international markets.

That said, Moody's noted the transaction carries some risks. In particular, Moody's will focus its review on the following items: 1) any impact from the U.S. hurricane season, 2) reserve adequacy, given the significant casualty risk exposure of the combined company, 3) catastrophe leverage of the combined company, 4) capital plans by legal entity and 5) extent to which Transatlantic's reinsurance clients may fear competition from the new insurance platform. Moody's expects to conclude its review upon closing of the merger.

Moody's has affirmed and left unchanged the Baa1 senior debt rating (stable outlook) of Allied World Assurance Company Holdings, Ltd. (Bermuda) to match the senior debt rating of Transatlantic Holdings. This is consistent with the harmonization of notching for insurance groups with capital spread in multiple jurisdictions. Post-merger, the majority of the group's capital will reside in the U.S. Moody's currently rates Transatlantic's senior notes at three notches below the insurance financial strength rating of TRC.

The proposed transaction is expected to close in the fourth quarter of 2011, subject to shareholder and regulatory approvals.

Transatlantic's ratings reflect the company's strong competitive position in the US and international reinsurance markets, its lead position on many treaties, its well-diversified insured portfolio, its high quality investments and its moderate financial leverage. Partly offsetting these strengths are the persistent competition from the largest global reinsurers, which have greater capital resources, the company's elevated catastrophe risk exposure relative to its capitalization and operational leverage, and the firm's meaningful exposure to the risk of future inflation given its high reserve leverage resulting from its sizable long-tail casualty business.

Allied World's ratings reflect a track record of strong and stable operating returns, comfortable capital adequacy, good product and geographic diversification, and manageable exposure to natural catastrophes, which would likely lessen the need to raise capital after a major catastrophe. These strengths are tempered by a general weakening of industry reserve adequacy, a key pressure point for the company because of its emphasis on long-tail casualty insurance.

LIST OF RATING ACTIONS

The following ratings have been affirmed with a stable outlook:

Transatlantic Holdings, Inc. -- senior unsecured debt at Baa1, provisional senior unsecured debt at (P)Baa1 and provisional subordinated debt at (P)Baa2;

Transatlantic Reinsurance Company -- insurance financial strength at A1.

Allied World Assurance Company Holdings, Ltd -- senior debt at Baa1; provisional senior unsecured debt at (P)Baa1; provisional subordinated debt at (P)Baa2; provisional preferred stock at (P)Baa3;

The following insurance financial strength ratings have been placed on review for possible upgrade:

Allied World Assurance Company, Ltd -- insurance financial strength at A2;

Allied World Assurance Company (U.S.) Inc. -- insurance financial strength at A2;

Allied World National Assurance Company, Ltd -- insurance financial strength at A2; and

Allied World Reinsurance Company -- insurance financial strength at A2.

The last rating action on Transatlantic occurred on November 18, 2009, when Moody's rated $350 million of senior notes.

The last rating action on Allied World occurred on November 10, 2010, when Moody's rated $300 million of senior notes.

The principal methodology used in these ratings was Moody's Global Rating Methodology for Reinsurers published in July 2008.

Transatlantic Holdings, Inc. is a holding company for Transatlantic Reinsurance Company, together with its subsidiaries Putnam Reinsurance Company and Trans Re Zurich. For the three months ended March 31, 2011, TRH reported a GAAP net loss of $190 million and a combined ratio of 147.8%. As of March 31, 2011, stockholders' equity was approximately $4 billion.

Allied World Assurance Company Holdings, AG is a Swiss holding company whose subsidiaries write non-life insurance and reinsurance from hubs in Bermuda, U.S., Ireland, Asia, London and Switzerland. For the three months ended March 31, 2011, AWH reported GAAP net income of $8.6 million and a combined ratio of 122.6%. As of March 31, 2011, total shareholders' equity was $3.0 billion.

New York
Kevin Lee
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
James Eck
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Transatlantic Holdings ratings on merger announcement; Reviews Allied World insurance financial strength ratings for possible upgrade
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