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“As you can imagine, subsequent to our telephone conversation yesterday, I have been watching the screen all morning,” Jain wrote to Bob Orlich, president and CEO of Transatlantic Holdings Inc. “With your stock trading at $45.83, I have to believe that you will find our offer to buy all of Transatlantic shares outstanding at $52.00 per share to be an attractive offer.
After three days and consultation with its legal and financial advisors, Transatlantic informed Berkshire and its shareholders that they did not deem the offer superior to that of Allied World Assurance Company Holdings (AWH), the company Transatlantic had already agreed to merge with since June 12.
Transatlantic went on to say that its fiduciary duties obligated it to enter into discussions with National Indemnity, but considered it reasonably likely that the offer would lead to a superior offer. On Sept. 16, Transatlantic declared itself worth of a book value of $69 to $70. No superior offer from Berkshire came, but Jain did reiterate the same offer.
Jain was likely drawn to Transatlantic for its appealing valuation currently. Its P/B ratio has dipped to 0.7, quite close to its historic P/B ratio reached just post-recession in early 2009. While the stock price has fallen 17.5% over the last 10 years, the book value has more than doubled. It went from $28.28 in 2001 to $67.76 as of June 30, 2011. The stock price is down 7.9% year to date, compared to 4.4% for the S&P. Entering 2002, the company had a much higher P/B ratio of 2.5.
Transatlantic stands out for its 30% discount to the industry average P/B ratio, 1.0, as well.
The chart below shows its historical P/B ratio:
The chart below shows its 10-year P/B valuation band:
Underlying strengths add appeal as the stock price falls. For instance, the company has a formidable board of directors. It most recently welcomed Stephen Bradley from the Harvard Business School, and Reuben Jeffrey III, former US Under Secretary of State for Economic, Energy and Agricultural Affairs. Executive management is also stable and proven – the CEO has been with the company since 1990, and the CFO has served since 1995.
The capable management has more than doubled the company’s revenue and equity over the last 10 years. They have made good investment returns in spite of depressed interest rates and lower yields, which required self-described “steely determination” and discipline. As of December 31, 2010, the fair value of the total investment portfolio was $13.02 billion. In 2010, Transatlantic reported a pre-tax effective yield of 3.7%.
National Indemnity’s offer represents a 14% premium over the company’s then-price of $45.83 per share, but it is a 23% discount to their book value per share of $67.76 – a sizable margin of safety. Jain would also have the company’s $62.2 million float to invest.
Upon rejecting the offer, Transatlantic said it ranked below the 25th percentile of comparable insurance transactions, represented only 77% of its stated June 30 book value and did not deliver fair value to its stockholders. It also said that National Indemnity “has neither increased its opportunistic $52 per share proposal nor shown interest in conducting full due diligence or holding discussions that could lead to a higher offer.” Buffett, of course, never haggles once he has made an offer.
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