IPC Board Gets $1.7B Rival Offer From Validus

"This is a point in time when the industry is reshaping itself, and out of this will emerge some new leaders. We think the combined capital base [and] business platforms of the two companies will allow us to emerge as one of the leaders," Mr. Noonan said.

"We would create a combined entity with a capital base of $4.1 billion at a point in time when some of the biggest players in the industry are pulling back, dealing with their asset problems and reducing risk," he added later.

Outlining exactly how the deal would be done, Validus said it delivered an offer to the IPC board to acquire the company in a stock-for-stock merger (known as an amalgamation under Bermuda law). Under terms of the binding offer, which is not subject to due diligence, each IPC common share would be exchanged for 1.2037 Validus common shares.

Based on the prior day's closing market prices ($24.91 for Validus and $25.41 for IPC), the Validus offer represents an 18 percent premium to IPC's March 30 closing stock price and values IPC's common equity at $1.68 billion.

Should the deal be completed, Validus shareholders would own 57 percent of the combined company and IPC shareholders would own 43 percent.

Under terms of the alternative Max-IPC proposed amalgamation, announced on March 2, IPC shareholders would own the majority of the resulting company–approximately 58 percent, with Max shareholders owning about 42 percent.

According to the joint statement released by Max Capital and IPC early this month, terms of the amalgamation agreement, which their respective boards approved, had Max stockholders receiving 0.6429 IPC shares for each Max share. The deal value exceeded $900 million for the more than 56 million outstanding Max shares.

W. Marston Becker, chairman and CEO of Bermuda-based Max Capital, responded to news of the Validus offer–first in a press statement and then in a letter to IPC's board.

"We believe that combining two short-tailed property-catastrophe oriented companies would appear to do little for true shareholder diversification," referring to the fact that Validus, like IPC, specializes in property business. "By contrast, Max's track record of building a diversified platform…should lead to better long-term growth prospects," he said.

During a March 2 presentation describing the proposed deal, executives of Max and IPC highlighted the fact that their businesses are complementary with little overlap. They said the combined company would have 39 percent of its total $1.7 billion in gross premiums in short-tail property and property cat lines, 32 percent in long-tail p-c, 15 percent in life and annuity lines, and 14 percent in other short-tail lines.

In contrast, during Validus' presentation on March 31, Mr. Noonan highlighted the resulting concentration in property lines as a "superior" outcome given market conditions. He said capital-intensive short-tail lines are currently the lines where price momentum is strongest–with "rates increasing at an increasing rate by the day."

In long-tailed lines like professional liability, directors and officers liability, and medical malpractice that would comprise 48 percent of a Max-IPC combination, competition continues except in some isolated segments, he said.

Mr. Noonan also said the Validus-IPC combination does offer diversification because Validus doesn't just write property-catastrophe reinsurance but other short-tail business–non-cat fire, marine and terrorism, including insurance through its Lloyd's operation, Talbot.

Mr. Becker, in an April 1 letter to the IPC board, not only notes that Max offers a "truly diversified underwriting platform" but contrasts deal prices and controlling interests–noting that the Validus offer is at a price below IPC's book value with IPC shareholders getting a minority stake, while the Max offer is below Max's book value and allow IPC's board to continue to have significant influence.

He also highlighted Max's longer track record, having operated through events like 9/11 and the hurricane seasons of 2004 and 2005, while Validus was a 2005 startup.

During their presentation, Validus executives said a combination with IPC would result in stockholder equity of $3.8 billion, compared to $3.1 billion for Max and IPC combined, but they could not estimate to what extent the new entity would be overcapitalized if they merged. They stated, however, that their long-term strategy is to return excess capital.

In contrast, with the Max-IPC deal offering diversification into less capital-intensive lines, Mr. Becker during the early March conference put 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.

Both proposed deals are subject to shareholder approval and approvals by Bermuda regulators. Validus Chief Financial Officer Jeff Consolino noted that the Validus deal, unlike the Max deal, would not be subject to U.S. regulatory approvals because no U.S. companies are involved.

The Validus executives also noted that Validus' entire investment portfolio is in cash and fixed income securities, while Max Capital has dabbled in the more volatile world of alternative investments thereby creating more market risk.

The combination of Max and IPC would mean that 15 percent of investments would be in equities and alternative investments, representing about 35 percent of shareholders equity. An alternative combination with Validus would have 7 percent of investments in equities and alternatives (all from the IPC side), representing less than 10 percent of combined shareholders equity, they said.

For its part, IPC responded to yesterday's offer from Validus with a brief press statement. "IPC continues to be bound by the terms of the amalgamation agreement [with Max Capital] and the parties have recently filed a joint proxy statement/prospectus with the Securities & Exchange Commission," the statement said.

"IPC's board of directors will review the terms of the proposal submitted by Validus in a manner consistent with its obligations under the Amalgamation Agreement and applicable Bermuda law."