HAMILTON, Bermuda—IPC Holdings Ltd. has agreed to accept a sweetened takeover offer from Validus Holdings Ltd., ending a bidding war over the Bermuda-based reinsurer but raising some concerns with analysts over the timing of the deal in the middle of the Atlantic hurricane season.
Under the terms of the merger agreement, announced Thursday, Validus agreed to purchase IPC for $1.65 billion in cash and stock. IPC shareholders will receive 0.9727 of a Validus share and $7.50 in cash for each of their shares of IPC. The deal values IPC at $29.48 per share, or 6.8% above its closing price Wednesday, the two firms said.
Bermuda-based Validus started a hostile bid for IPC in March, breaking up IPC’s planned merger with Max Capital Group Ltd., but IPC rejected Validus’ previous offers. Last week, another Bermuda-based reinsurer, Flagstone Reinsurance Holdings Ltd., made an offer for IPC valued at roughly $1.74 billion.
Validus’ most recent previous offer—valued at $1.72 billion—included more shares but half as much cash.
IPC Chairman Kenneth L. Hammond cited the “significantly higher cash component” of Validus’ revised offer as key to the new deal.
“IPC shareholders will still be able to participate in the upside of owning shares in a larger, stronger and better-capitalized underwriting platform,” Mr. Hammond said in a statement.
The combined entity would have roughly $3.7 billion in total capital and a big presence in the property catastrophe market, analysts say.
However, several analysts expressed concern regarding the heightened risk profile of the combined entity due to the significant property catastrophe business written by both companies.
“The combination creates significant catastrophe exposure in the middle of the storm season. Right now we view this deal with caution,” said Dean Evans, an analyst with Keefe, Bruyette & Woods Inc. in New York. Mr. Evans also noted that striking a deal in the middle of hurricane season was “extremely unusual.”
As part of its revised deal, Validus has given up termination rights in the event of catastrophe losses, meaning that if a large event occurs before the deal closes, Validus cannot back out of the deal, Mr. Evans said. Previously, Validus reserved the right to terminate the deal.
In announcing the transaction, Mr. Hammond cited the termination provision as a key feature of the revised offer, and analysts say it provides IPC shareholders additional security. However, the provision “is extremely risky for Validus because they could be exposed if a loss occurs,” Mr. Evans said.
Oldwick, N.J.-based A.M. Best Co. Inc. placed it’s A- ratings of Validus under review with negative implications because of risks related to the “significant property catastrophe business” of both companies. Best said its concerns were “exacerbated by the timing of the transaction during the Atlantic windstorm season, which may result in undesirable correlations in a severe event.”
Best also downgraded IPC’s rating to A minus, from A, and placed its ratings under review with negative implications, pending a thorough review of the combined entity’s risk portfolio, according to a statement.
In a conference call with investors Thursday, Validus’ management said they would ultimately like to reduce catastrophe exposure to roughly 25% to 28% of the combined book. Currently, on a pro forma basis, property catastrophe business accounts for roughly 40% of the combined entity’s book of business, with property lines accounting for roughly 57% of its business, Mr. Evans said.
The Validus and IPC boards have approved the merger, which is expected to close by the end of September pending shareholder approvals, the statement said.
Validus Chairman and Chief Executive Officer Ed Noonan would remain in charge, with Validus shareholders owning about 62% of the combined company, the statement said.
A date for shareholder meetings has not been set.
For reprints of this story, please contact Lauren Melesio at 212-210-0707 or email lmelesio@crain.com
