By ROGER CROMBIE, the Bermuda-based columnist for Risk & Insurance®
HAMILTON, BERMUDA--The merger of two Bermuda reinsurers, Max Capital Group and IPC Holdings, announced in early March, is only the second significant merger and acquisitions deal in the sector since 1999. The combined holding company, to be known as Max Capital Group Ltd., is expected to be Bermuda's sixth largest, with assets of $9.6 billion and capital in excess of $3 billion, based on the companies' December 31, 2008, financial statements.
The transaction fits both companies' strategic needs, bringing scale to Max and diversity to the shareholders of IPC. The share-for-share transaction requires no new capital at a time when the credit markets are frozen. Very little overlap exists in the composition of the two companies' books of business, and no jobs will be lost in the merger.
Marty Becker, the current CEO of Max, will lead the new enterprise, and, at least until December 31, 2009, Jim Bryce, the current CEO of IPC, will act as nonexecutive chairman of Max IPC Re-- IPC and Max's renamed platform for the Bermuda and Dublin reinsurance operations (formerly called IPCRe Ltd).
"In April, I start my 40th year in the business," Bryce told Risk & Insurance®. "I've been wanting to throttle back."
Both companies were actively looking at a means of increasing their size. When the deal was announced, IPC had capital of approximately $1.8 billion, Max about $1.2 billion.
"In 2005, following hurricanes Katrina, Rita and Wilma, the bar was raised to require more capital for a dollar of risk, both on an absolute and a PML (probably maximum loss) basis," Bryce said. The catastrophe specialist "needed a larger capital base and decreased volatility, which means diversity."
By late 2008, IPC had formed a short-list.
"Max was the perfect partner, meeting all the criteria we had set, in terms of increasing financial mass and scale, reducing volatility and enhancing shareholder value ... and the compatibility of people and underwriting philosophy, which was important," Bryce said.
"That 2008 was the second-worst year on record for manmade and natural catastrophes, plus the state of the capital markets, meant this wasn't only a good plan, but opportune," he added.
Subject to shareholder and regulatory approval, the deal should close in the third quarter of 2009.
At Max, the merger was codenamed "Project Delta." A clearly pleased Marty Becker told Risk & Insurance®: "For us, this combination represents prospecting and serendipity. For the past couple of years, Max has focused on strategic growth, which included a goal to increase scale. The world's changing, and we believe we need more than a billion three to properly build out our underwriting platforms."
Max entered the U.S. market in 2007 and Lloyd's last year, "and all along that spectrum we asked ourselves how we could build more capital," Becker said.
"Earning our way to critical mass would be a slow endeavor. This combination is a way to capstone the strategic work we'd been doing for two years and to jumpstart both organizations on a new level," he said.
The combined company is expected to have "a meaningful amount of excess capital," Becker said, which will be used to grow the book or for other purposes.
"Capital is king right now," he said. "The newly combined board will, of course, consider extraordinary dividends, but until the financial world stabilizes and raising money once again becomes a viable option, we'll expect to just hold on to it."
Another attractive feature for Max shareholders from Becker's perspective was that "in its simplest form, the Max shareholder has paid 1.5 percent in book-value dilution to participate in a balance sheet that's two and a half times bigger. At the same time, we should have sufficient balance sheet strength and a material decrease in asset leverage to weather any economic storm."
On the U.S. side, Max will continue to focus on specialty excess and surplus lines.
"At the moment, we are concentrated on short-tail lines: property, inland marine, ocean cargo," Becker explained. "We anticipate diversifying into some of the tougher casualty classes, including both professional and general liability. It's a process of finding the right underwriters."
TICKET TO THE DANCE
IPC was one of only three members of the Class of 1993 that kick-started the Bermuda market to be standing alone 16 years later. Now just two of the eight companies formed that year remain independent: PartnerRe and RenaissanceRe.
A broader question is now asked of other smaller Bermuda companies. The cost of "the ticket to the (reinsurance) dance," in the words of Don Kramer of Ariel Re, has been pushed further upward. His company and half a dozen others may feel the same pressures that drove Max and IPC into each other's arms.
March 6, 2009
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