Fitch: Flagstone Re's IPC Bid Puts Firm On Rating Watch Negative

Fitch Ratings has placed the "A-minus" ratings of Bermuda-based Flagstone Reinsurance Holdings, Ltd. on Rating Watch Negative in response to Flagstone's $1.8 billion offer to acquire IPC Holdings, Ltd.

IPC has received competing bids from other entities as well, Fitch noted, and company shareholders have already defeated a $900 million merger deal offered by Max Capital, which IPC's board supported. Validus Holdings, which was competing with Max Capital over IPC, still has a $1.6 billion offer on the table.

Under Flagstone's proposed deal, Flagstone would acquire all of IPC's outstanding shares in a stock and cash transaction, Fitch said.

Terms of the offer call for Flagstone to exchange approximately $1.5 billion of shares and $300 million of cash in exchange for IPC's outstanding common stock. The proposal was announced on July 1, 2009.

Fitch said its decision to place Flagstone's ratings on Rating Watch Negative reflects "uncertainty as to how combining the two companies' books of business will affect the resulting entities' risk profile and risk adjusted capitalization."

The Chicago-based rating agency said the deal is favorable from a competitive positioning standpoint, as Flagstone would likely benefit from the combined entities' enhanced size and scale.

"Furthermore," Fitch said, "the execution risks associated with the transaction are largely mitigated by Flagstone's familiarity with the property and catastrophe reinsurance market and IPC's short-duration reserves and comparatively small number of employees."

Fitch said it would likely affirm Flagstone's ratings as Fitch "gains comfort with the combined entities' risk-adjusted capitalization."

"If IPC's board accepts Flagstone's offer, Fitch expects to meet with Flagstone's management in the short term to discuss the effect of the transaction in greater detail. Conversely, if IPC were to reject Flagstone's offer, Fitch would remove the ratings from Rating Watch," said the rating agency.