Flagstone Outbids Validus, Awaits IPC Board Nod

Mr. Byrne said his understanding is that the IPC board will meet tomorrow to review all proposals and fulfill its obligations to shareholders. He speculated that the board members are delaying any endorsements because they want time to analyze final proposals.

He said the IPC board has been negotiating with Flagstone, Validus "and maybe other parties to try to achieve multiple purchase and sale agreements in forms they found acceptable, presumably as apples-to-apples as they could, so that tomorrow they can sit down and pick a winner."

At that point, he said, "we're not at the letter of intent stage. We're at the definitive agreement stage once they do that." He later confirmed that IPC shareholders would then have to approve a Flagstone-IPC deal if Flagstone is the "winner" of an IPC board endorsement and sign-off of deal terms.

Addressing the benefits of a friendly deal, Mr. Byrne said IPC has a "pretty big book of business [and] we don't view it as automatic that if you go in with a blowtorch to the place and get rid of everybody…that you're going to retain all that business [and] client relationships," suggesting that some people expect Validus to use the "blowtorch" approach he described.

Separately, Validus Holdings announced this morning that it will not change the terms of its deal in spite of a higher bid announced by Flagstone Re late last Wednesday.

Flagstone, which like Validus was launched in Bermuda in the wake of the 2005 hurricanes to write short-tail property reinsurance and insurance lines, said it is prepared to exchange 2.638 of new common shares for each IPC common share plus $5.50 per share in cash for total consideration of $33.62.

The price, a 21 percent premium to IPC's closing price of $27.77 last Wednesday, puts the total deal value at about $1.8 billion for the company whose Bermuda operating subsidiary, IPC Re, specializes in property-catastrophe reinsurance.

Validus made its first offer for IPC back in late March, less than a month after IPC Holdings and Max Capital Holdings announced their intention to merge in a deal valued at roughly $900 million back then.

IPC shareholders have since voted down the Max-IPC deal, and the current Validus deal on the table consists of 1.1234 Validus common shares and $3.75 in cash for each IPC common share.

Under Validus' offer, IPC shareholders would receive total consideration of $28.63 based on Validus' closing price on July 2, 2009, Validus said. The total deal value at that price comes to about $1.6 billion.

The IPC shareholder vote against the Max merger came after repeated announcements from Validus that it was directly offering to tender shares from IPC shareholders and pursuing other means of acquiring the company under Bermuda law. More recently, Validus said it would seek to oust some members of IPC's board.

In a statement announcing the Flagstone proposal last week, Flagstone Chairman Mark Byrne commented: "Our offer contains a materially greater cash component and offers a greater overall value to IPC shareholders. Our offer is not subject to financing and is made on a friendly basis, with a plan to work with the existing board and management of IPC to preserve the business and franchise value of IPC in the combined entity."

During today's conference call, Mr. Byrne noted that while the deal will be slightly dilutive to Flagstone shareholders (meaning it will initially cause a dip in earnings per share), the combined company will have $400 million of excess capital that can be deployed to generate 20 percent greater margins for an annual benefit of $80 million.

Mr. Byrne and Flagstone CEO David Brown noted there is ample opportunity to write more business, but said that neither IPC nor Flagstone as standalone operations have enough capital to support greater business volumes. In fact, Mr. Brown noted that Flagstone had the opportunity to write some $1.5 billion in gross premiums this year, but against its capital base, it could only accept $1 billion, leaving $500 million of opportunity on the table.

If a Flagstone-IPC deal gets done, the combined company will have $4.9 billion in assets and $2.9 billion of shareholders equity, Mr. Byrne said.

Validus by itself had nearly $1.9 billion of shareholder's equity at year-end 2008, and a deal with IPC would create a larger combined company with $3.8 billion in shareholders equity.

While Mr. Byrne highlighted the benefits of a friendly deal with IPC's board, and noted that Flagstone is a shareholder-friendly company (as evidenced by Mr. Byrne and Mr. Brown's combined ownership stake of nearly 12 percent), Mr. Brown highlighted some key operational advantages that Flagstone has over competitors.

Since inception, he said, management set out to create a company with a worldwide platform and invested heavily in infrastructure–both in people and superior technology. Currently, Flagstone has more than 500 employees in 13 offices around the world, and its technology provides the "ability to efficiently analyze, price, manage the huge number of opportunities our global platform produces 24 hours a day, and with industry-leading responsiveness," he said.

"The aftereffects of the financial crisis create opportunity for growth for a company with global reach," he said.

At one point, Mr. Brown also said he believed that Flagstone has the "industry's largest supercomputer," operating at "seven teraFLOPS," referring to a measure of computer operating efficiency.

Mr. Byrne said, "It's true that Validus and others are larger in capital size, but we have a bigger footprint and deeper capabilities," noting that most competitors launched in Bermuda have operations "in Bermuda and perhaps London and that's about it," while Flagstone also operates in Dubai, Switzerland, Brazil and South Africa, and seven more global locations.