Validus Wins IPC; Industry ‘Think Tank’ Warns on Climate Change; Partner Re to Acquire PARIS RE

The contest to acquire IPC Holding appears to be over. Validus Holdings, the formerly unwelcome suitor, whose rival bid ended Max Capital’s effort to take over IPC, has emerged as the winner.

Validus finally came up with $1.65 billion in cash and stock, beating another rival, Flagstone Reinsurance Holdings Ltd, who had entered a late bid for IPC. Validus sweetened its offer to give IPC shareholders 0.9727 of a Validus share for each of their shares and $7.50 in cash. That values IPC at $29.48 per share, or 6.8 percent above its recent closing price.

As reported by Reuters, both companies participated in an investors’ conference call to announce the deal. It is expected to close before the end of the third quarter, and as early as late next month. Validus’ previous offer included more shares but only half as much cash.

On July Flagstone announced an offer of 2.638 of its common shares and $5.50 in cash for each IPC share. That valued IPC at about $1.74 billion, or $31.17 per share. The company said it was “surprised and disappointed” in a statement issued after Validus and IPC’s joint agreement was announced.

Buying IPC gives the buyer more capital, allowing it to sell more property catastrophe reinsurance just as rates are rising. Validus will have about $3.4 billion in shareholders’ equity after the purchase closes.

A.M. Best, however, seems a bit skeptical on the deal. The rating agency placed the financial strength rating of ‘A-‘ (Excellent) and issuer credit rating (ICR) of “a-” of Validus under review with negative implications, as well as the company’s debt ratings.

Best downgraded the financial strength ratings to ‘A-‘ (Excellent) from ‘A’ (Excellent) and issuer credit ratings to “a-” from “a” of IPCRe Limited (Bermuda) and IPCRe Europe Limited (Dublin, Ireland), which are subsidiary companies of IPC Holdings Ltd.

Best explained that Validus’ “under review status reflects the uncertainties associated with this transaction including the execution risk in completing the deal as well as integrating both companies.” In addition, Best said it is “concerned with the heightened risk profile of the combined entity due to the significant property catastrophe business written by Validus Holdings and IPC. This concern is exacerbated by the timing of the transaction during the Atlantic wind storm season, which may result in undesirable correlations in a severe event.”

However, Validus CEO Ed Noonan didn’t appear concerned. “We don’t expect anything imperilling the ‘A-‘ rating,” he said.

As far as IPC is concerned, Best said its business profile “has deteriorated over the last several months, during which time IPC has been party to a failed transaction and the target of a hostile takeover.” If for any reason the current transaction is not completed, in Best’s opinion, as a stand-alone entity, IPC’s business profile is now commensurate with that of an ‘A-‘ (Excellent) rated organization.

Climate change was supposed to be an important part of the G8 meeting in Aquila, Italy, but the results were meager. Reuters reported that the G8 summit made scant progress towards a new U.N. climate treaty due to be agreed in December with some nations back-pedaling on promises of new action even before the end of a meeting.

“This hasn’t given me a huge rush of adrenalin,” said Yvo de Boer, the U.N.’s top climate change official, of climate decisions by the G8 summit and a 17-member climate forum of major emitters including China and India. Among disappointments, the G8 failed to persuade China and India and other developing nations to sign up for a goal of halving world emissions by 2050.

Just how serious the impact of climate change threatens to be was the subject of a 138 page report from the Geneva Association, the industry’s most important think tank. In a well attended presentation, held in London in Lloyd’s old library on July 2, before the G8 meeting, insurance industry leaders underscored their concerns over the potential impacts of climate change.

The Association’s CC+1 [climate change +1] report is more than a scientific study. It sets out in clear terms the industry’s conviction that climate change is a real and ongoing worldwide threat, and what steps should be taken to meet that threat.

The main “Findings and Conclusions” were summarized as follows:

• Unmitigated climate change may have significant adverse effects on the long-term development of the world economy, especially in developing countries.
• The insurance industry is uniquely positioned to provide specialized services for countries and businesses facing climate risks worldwide.
• The insurance industry is willing and able to effectively support the transition to a low-carbon economy.
• The climate challenge goes beyond mitigation action to reduce greenhouse gas emissions. In addition, effective adaptation strategies are needed as climate change will evolve over decades given the inertia in the climate system.
• The upward trend in insured losses is largely due to socio-economic factors such as value concentrations in coastal areas. This trend could accelerate as a result of climate change, primarily through changing weather patterns. It also depends on the willingness and success of insurance companies in providing coverage for their clients.
• According to the United Nations, global adaptation costs per year by 2030 will amount to between $50 and $170 billion, of which $30 to $70 billion will be required in developing countries.
• The insurance industry is keen to establish stronger climate partnership with governments. Effective mitigation and adaptation strategies require appropriate incentives from policy makers.

For well over a year the economic crisis has been the first concern of governments and business leaders, perhaps justifiably, as drastic measures were needed to prevent another worldwide depression similar to the 1930s.

However, long after the current economic crisis takes its place in the collective memory beside the great depression, climate change will still be with us. The insurance industry has taken the lead in elucidating its potential impacts and bringing them to the public’s attention. The last presenter, Thomas Blunck, member of the Board of Management of Munich Re, pointed out that the giant reinsurer “began studying them 30 years ago.”

He also noted that, because of its studies and its vast data base, a reinsurer like Munich Re, can “provide the data for making decisions and pricing risks,” which ultimately can “produce a ‘win-win’ opportunity” for the industry to develop new business.

The report, which should be essential reading for any insurance executive, is available from the Geneva Association at: www.genevaassociation.org.

The organization’s official name is the “International Association for the Study of Insurance Economics.” It consists of “the CEOs of 80 (statutory maximum) of the world’s largest insurers and reinsurers.”

Bermuda-based PartnerRe is acquiring PARIS RE, a French-listed, Swiss-based diversified reinsurer. PartnerRe will exchange 0.30 of its common shares for each PARIS RE common share outstanding in a stock-for-stock transaction.

Partner Re said the acquisition “is expected to add $1.7 billion in new shareholders’ equity. Separately, PARIS RE is expected to distribute $310 million (net of amount due on existing treasury shares held by PARIS RE) in cash as a return of capital to its shareholders, leading to a total transaction value of approximately $2 billion.”

A.M. Best commented that PartnerRe and its subsidiaries financial strength rating of ‘A+’ (Superior) and issuer credit ratings (ICR) of “aa-” are unchanged, following the announcement, as are the debt ratings.

The closing of that block purchase is expected to occur in the fourth quarter of 2009, subject to certain conditions including approval of certain insurance and competition regulatory authorities, and both companies’ shareholders.

Topics Mergers & Acquisitions Reinsurance Climate Change Market