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Transatlantic Re's reported third quarter book value might be understating the true value by up to 7.5 percent due to the uncertainty of a long-running dispute between the reinsurer and former parent American International Group (AIG), The Insurance Insider understands.

Transatlantic was previously claiming damages of $350mn from AIG due to the alleged mismanagement of its securities lending programme, though this figure has now risen to $503mn.

Equity analysts suggest that after tax these sums could be worth approximately $3-$5 per share, taking the stated book value per share from $69.67 to as high as $72.50-$75.

It is not unusual for companies to have unsettled disputes of significant size, but under standard accounting procedures the uncertainty means that the potential asset is not recognised.

The case has been in arbitration in New York since May 2010. On 13 September last year AIG submitted an answer to Transatlantic's claims, denying that it had breached its securities lending agency agreements.

The arbitration hearing is not scheduled until March 2012.

Neither Transatlantic Re nor its unsolicited suitor Validus has mentioned the pending arbitration or settlement in the hundreds of pages of filings and counter-filings both sides have made in the drawn out M&A battle for the New York-headquartered reinsurer.

Bermudian Validus is understood to be proceeding on the assumption that it should value Transatlantic based upon its existing book and market values.

After prolonged initial skirmishing the battle is now set to commence in earnest with the setting of a record date of 22 November for the exchange offer.

Transatlantic and Validus have exchanged acrimonious words with each other in the days following the rejection of the latter's enhanced takeover bid.

For the full version of this article, see today's issue of The Insurance Insider which is available for subscribers to download now...