Allied World Assurance Company Holdings AG has agreed to merge with US reinsurer Transatlantic Holdings Inc in a $3.2 billion deal that creates a reinsurer with operations in 18 countries - but other suitors may be tempted to make a rival bid for Transatlantic.Allied will exchange 0.88 of a share for each Transatlantic share to form TransAllied Group Holdings AG, with Transatlantic shareholders owning about 58 percent of the combined firm, the companies said late on Sunday in a statement.The combination of New York-based Transatlantic, which gets more than half its revenue from the US, and Allied, which received approval last year to establish a syndicate at Lloyd’s of London, will have total invested assets of $21 billion.Barclays analyst Jay Gelb said in a note yesterday that Transatlantic may attract other suitors before the deal is approved by shareholders. The break-up fee for the merger agreement is $115 million.Mr Gelb also said smaller Bermudian players in particular were now more likely to be thinking about selling themselves after the Transatlantic deal.“Allied is merging with Transatlantic at a valuation of 0.79x book value for TRH, which could result in other P&C insurers and reinsurers competing for TRH, in our view,” Gelb wrote.Allied was formed in Bermuda in November 2001 by investors including American International Group Inc, Chubb Corp and Goldman Sachs Group Inc and had been repurchasing securities from its founding shareholders.In February, Allied paid $53.6 million to buy back its last warrant from AIG. Last year, Allied moved its country of incorporation from Bermuda to Switzerland. The new company will be domiciled in Switzerland.Both companies have offices in Bermuda. The impact of the merger on their Island-based units was not clear yesterday.Scott Carmilani, 46, chairman and chief executive officer of Allied, will be president and CEO of the combined company and Robert Orlich, 63, CEO of Transatlantic, will retire with the completion of the deal, which the companies expect in the fourth quarter, according to the statement.Mr Carmilani said in a conference call yesterday that he saw the deal making producing savings of $50 million in its first year.On a pro forma basis, the combined company’s gross premium written would total almost $5.9 billion and total capital of $8.5 billion taking it ahead of PartnerRe, Everest Re, Axis Capital, Arch Capital, RenRe and Validus Holdings on those measures, though still trailing Ace and XL Group.Mid-sized reinsurers have been combining to gain scale and diversify their business mix in the past two years. Bermuda-based Max Capital Group Ltd, the reinsurer co-founded by Louis Moore Bacon, merged last year with Bermuda rival Harbor Point Ltd to form Alterra Capital Holdings Ltd. In 2009, in another all-Bermuda deal, Validus Holdings Ltd bought IPC Holdings Ltd.“Being part of a leading global reinsurance group could improve its competitive position,” Standard & Poor’s said yesterday as it announced it may upgrade Allied’s credit rating. The deal will “decrease earnings volatility”, according to the ratings firm, which said it also may upgrade Transatlantic. Reinsurers provide coverage to primary insurers for some of the biggest risks, including natural disaster claims.The combined company will be based in Switzerland, which may provide a tax advantage for Transatlantic, said Matthew Heimermann, an analyst with JPMorgan Chase & Co, in a note to clients yesterday. TransAllied may expand accident-and-health coverage, S&P said.Transatlantic provides medical-malpractice protection and guards corporate officers against lawsuits through so-called directors-and-officers coverage. Allied offers professional liability insurance. S&P has a BBB+ counterparty credit rating for Allied.“The structural flexibility we are creating in the deal, will give us the ability to allocate capital to the highest- return geographies,” Michael Sapnar, the Transatlantic executive who will lead reinsurance operations for the combined company, said in a conference call yesterday. “This capability enables us to identify and seize opportunities ahead of our competitors, especially in emerging markets.”The deal values Transatlantic at about $51.10 a share, or about $3.2 billion, based on Allied’s June 10 closing price and 62.5 million Transatlantic shares outstanding, according to data compiled by Bloomberg. The price is 16 percent above Transatlantic’s June 10 close.Allied shares slipped $2.63 to $55.44 in New York Stock Exchange trading yesterday, while Transatlantic’s shares surged $4.18 to $48.19.“In the reinsurance business, having a larger capital base means you get more access to business,” Michael Paisan, an analyst at Stifel Nicolaus & Co, said in an interview earlier this year, discussing possible consolidation in the industry. “Bigger is better.”Allied, which closed last week at $58.07, gained 29 percent in the past year through June 10, compared with a 5.7 percent decline for Transatlantic.AIG previously owned a majority stake in Transatlantic, which it sold in two public offerings after taking a $182.3 billion taxpayer bailout.“AIG played a formative role in our development and has been a major contributor in our past success,” Orlich said in a July 2009 conference call. “The separation opens new opportunities for us, giving us greater strategic and financial flexibility. We are embracing our independence.”