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By ROGER CROMBIE, a Bermuda-based columnist for Risk & Insurance®

The Validus deal is a "takeunder," valuing IPC at less than book value (albeit at a small premium to market value). Such transactions are rare, generally the product of straitened economic circumstances and, usually, a lack of interest on the part of anyone else. With two declared bidders and an unknown number of others out there, IPC has fallen for less than its auditors think it is worth.

IPC and Validus shareholders are yet to vote on the deal agreed between the companies' two boards, but as of today, its approval is considered a formality. A few weeks earlier, the deal agreed with Max Capital was voted down by a surprisingly large 72 percent of IPC shareholders. Max may have some consolation: Reports suggest that it was to be paid $50 million if Validus should end up owning IPC.

With a closing expected in the third quarter, Validus would take on all the bets IPC has placed on the second half of this year's hurricane season. Strong hurricane or other catastrophic activity between now and the shareholder votes could yet affect the deal.

IPC was founded by Maurice (Hank) Greenberg and others. If all goes smoothly, Validus, which was founded by Hank's son Jeffrey Greenberg's Aqualine Capital Partners and others, will vault up the league table of reinsurers. Validus was the 12th largest Bermuda company, measured by shareholders' equity, at Dec. 31, 2008. On a proforma basis, it would have risen to fifth largest, had the deal been completed today.

FRIENDLY COMPETITION

Given the overlap between the books of Validus and IPC, some redundancies are expected at IPC. Long-time CEO Jim Bryce had already resigned, as of June 30, concluding 15 years at the helm. He will remain a consultant until December 31. The future of IPC's other 30 employees is less clear, but the majority of them are Bermudian, and under local laws Bermudians must be given any job for which they apply and are qualified, if it is held by an expatriate. IPC staff would likely be in demand even without this protection.

The saga has been unusual on many levels. The Bermuda companies profess to be involved in "friendly competition," but the bidding war for IPC was anything but friendly. While none of the players admits to experiencing "bad blood," the IPC deal has reinforced the notion that "friendly competition" is something of an oxymoron.

ILLIQUID ISLAND

With PartnerRe last week agreeing to buy Paris Re --the proposed year-end close makes the deal subject to the hurricane season and counteroffers--in an all-stock transaction, and now Validus paying only about a quarter of its proposed price for IPC in cash, the effects of the liquidity crisis have finally struck the Bermuda insurance market. Other than a relative paucity of financing deals, the insurance business in Bermuda had previously been little affected, apparently, by global conditions.

The two transactions would seem to enhance the prospects for further consolidation among the Bermuda companies, and those farther afield. Bermuda has nine companies with capital between $1 billion and $2 billion that are not owned by a single parent or their policyholders. The urge to merge at Max Capital, IPC, Validus and Flagstone has already been expressed; others are likely to follow in the next 12 months, willingly or otherwise.

July 9, 2009

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