Max Capital Group and IPC Holdings have moved to join forces in a deal valued at more than $900 million, with the boards of both companies unanimously approving an "amalgamation agreement" that would make the united firm the seventh-biggest in Bermuda.
"This is not a transaction about expense savings, but [one] about growth and long-term value creation for our collective shareholders," said W. Marston Becker, chairman and chief executive officer of Max Capital–a specialty insurer and reinsurer created in Bermuda in 2002–during a conference call announcing the deal.
IPC President and CEO James Bryce, explaining one impetus of the agreement from the perspective of his company–a property-catastrophe reinsurer that existed for more than 16 years–said that after a trio of hurricanes in 2005 (Katrina, Rita and Wilma), "it became apparent…that the monoline business model would make it difficult to build and sustain value for [IPC] shareholders over the long term."
Seeking ways to adjust the model and to reduce earnings volatility, IPC began looking for a partner with a similar underwriting culture–one focused on underwriting profits rather than top-line growth, Mr. Bryce noted.
According to the joint statement, terms of the definitive amalgamation agreement call for holders of Max common stock to receive 0.6429 IPC shares for each Max share. With the prior day's IPC closing stock price at $25.41 per share, the deal value exceeds $900 million for the more than 56 million outstanding Max shares.
"We believe the timing of this transaction will prove to be both opportune and attractive to our shareholders," according to Mr. Bryce.
"This is truly a transformational transaction for both companies," Mr. Becker added, noting that the combined company "should be expected to have strong earnings with more stable underwriting results than would be expected from either company individually," along with a high-quality balance sheet and "greater financial flexibility to efficiently manage its capital."
Based on results for Dec. 31, 2008, the deal creates a company with shareholders' equity of over $3 billion and total assets of approximately $10 billion, Mr. Becker said.
According to statistics on shareholders' equity compiled by NU (using financial information reported on Highline Data's online service, "Analyst PRO"), the combination of Max Capital and IPC Holdings would position it as the seventh-largest Bermuda company, behind ACE (now a Zurich-based company), XL Capital, Everest Re Group (redomiciled to Bermuda from the United States), Axis Capital Holdings, PartnerRe and Arch Capital Group.
"We believe the new entity will be meaningfully overcapitalized on Day One," Mr. Becker said, later putting an estimate of excess capital in the $300-to-$400 million range. "While in normal times, we might be inclined to adjust this at closing, in the present economic environment, we believe this anticipated overcapitalization will be a competitive strength," he added.
Upon closing of the tax-free, stock-for-stock merger–expected to occur in the third quarter of 2009–IPC shareholders will own approximately 58 percent of the combined company, with Max shareholders owning about 42 percent.
IPC and IPCRe Ltd. (the reinsurance operating subsidiary of IPC Holdings) were created in the wake of Hurricane Andrew in 1993 through the sponsorship of American International Group, which maintained a 24 percent stake until August 2006.
Over the years, IPCRe diversified its operations globally, and in 2008 the company reported that 36 percent of its clients and 53 percent of its $403.4 million in gross written premiums were in the United States, with the balance of the reinsurance portfolio spread across the world, principally in the United Kingdom, Europe, Japan, Australia and New Zealand.
Diversification beyond short-tailed reinsurance lines, however, had seemed less likely for IPCRe until recently. In fact, the company's commitment to a business model narrowly focused on property reinsurance prompted a ratings downgrade from Standard & Poor's to "A-minus" in April 2007.
In third-quarter 2005, after an onslaught of hurricane losses pummeled earnings reports for monoline property reinsurers, Mr. Bryce was one of several executives asked whether the model was still viable.
"As long as people want to live in Florida, on Long Island, in the Gulf or in California, insurers will have to buy catastrophe reinsurance," he replied back then. "It's the one product that is going to be sold, [no matter what happens]."
"We have specialized in that product for over 12 years [and] built up geographic diversification that's unparalleled," he continued, adding that after Sept. 11 and Katrina losses, "we're still in business. We're still viable."
During a third-quarter 2007 earnings conference call, however, Mr. Bryce hinted that the company's single-product focus might not continue indefinitely.
"We always want to enhance shareholder value–and the current flavor is [that] diversification does seem to enhance value in terms of share price," Mr. Bryce said, responding to an analyst's question during the call. "We're always looking at options," he added, declining to be specific.
Max Capital, taking a very different historical path than IPC, was originally launched as Max Re in 2000 with a model focused on writing finite casualty reinsurance contracts. A few years later, post-9/11 price hikes and increased buyer appetite for more traditional risk-transfer products prompted the company to grow a more traditional casualty reinsurance book.
Within two years, the company added insurance to the mix, targeting areas where it said it could offer solutions to clients facing market challenges–subsequently growing the insurance book in lines such as medical malpractice, products and professional liability, and then launching an aviation unit in Dublin.
While still more concentrated on long-tail casualty, after four hurricanes in 2004 Max Re executives in place at the time set out to take advantage of an improving property market and started slowly building a property treaty reinsurance practice–accelerating the strategy after Katrina.
Diversifying further, in mid-December 2006, Max Re announced its plan to launch a new U.S. E&S subsidiary–Max Specialty Insurance Company. And in July last year, Max Capital announced it would put up over $200 million (roughly $22 million in cash and replacing letters of credit totaling $179 million) to acquire Imagine Group (UK) Ltd., a Lloyd's insurance operation, which was rebranded as "Max Lloyd's Ltd."
According to Max Capital's most recent earnings report, 20 percent of more than $1.0 billion of gross p-c premiums written in 2008 came from the U.S. and Lloyd's operations, while operations in Bermuda and Dublin made up the rest–with reinsurance making up 40 percent of the remaining p-c book and insurance the other 38 percent.
IPC did better in 2008 from a profit standpoint than Max–indeed, better than most other Bermuda companies–posting $90.4 million in net income and a combined ratio of 56.4, the best of any Bermuda company tracked by NU. Max Capital, which reported a 91.9 combined ratio for 2008, also reported a bottom-line net loss of $175.3 million, fueled by $233 million in losses on alternative investments.
Moody's Investors Service highlighted the investment losses in a statement issued just after the Max-IPC deal was announced, citing the pressure on capital adequacy and financial flexibility that the investments had caused as one reason for keeping a negative outlook on Max Capital's "A3″ financial strength rating.
Moody's affirmed the rating, citing a now-enhanced business profile for Max in the property-catastrophe arena from the IPC deal, a capital base now commensurate with Bermuda peers, lower consolidated debt as percentage of capital, and better overall asset quality relative to total capital.
Separately, S&P affirmed IPC's "A-minus" rating with a stable outlook, noting decreased earnings and capital volatility of the consolidated entity among factors driving the ratings statement.
A.M. Best placed its "A" financial strength rating for IPCRe under review with negative implications, while keeping its "A-minus" on Max's operations unchanged. Explaining the "under review" status of IPCRe, Best said the IPC-Max combination will be largely influenced by Max from a multitude of perspectives–including premium volume, liabilities, operating platforms and information technology systems.
Upon closing of the amalgamation agreement, IPC Holdings Ltd. will be renamed Max Capital Group Ltd. The combined company will serve as the holding company for the existing global specialty insurance and reinsurance operating subsidiaries of Max and for IPCRe Ltd., the existing Bermuda-based property-catastrophe reinsurance subsidiary of IPC.
IPCRe Ltd. will be renamed Max IPC Re Ltd.
Mr. Becker will be the president and CEO of Max Capital Group, while Mr. Bryce will commence a long contemplated retirement from his executive position as of June 30, 2009. Mr. Bryce, however, will continue in a non-executive role as chair of Max IPC Re, and will be active in client relations and marketing.
The executives said retention programs have been put in place to retain the majority of the people currently employed by IPC. "For this combined entity to have a very nice role for each of [those] 32 employees is not at all challenging," Mr. Becker said.
Max Capital currently has over 300 employees worldwide.
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