IPC Sale to Validus Includes ‘Storm-proof’ Agreement

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IPC Holdings, the Bermuda catastrophe reinsurer that attracted interest from more than a dozen bidders, held out for a storm-proof agreement before agreeing to a sale to rival Validus Holdings

The $1.65 billion cash-and-stock deal, still to be approved by shareholders, is unique because it does not give Validus an exit clause if IPC is hit by large losses prior to the sale. Such an exit clause is a common feature in merger pacts and one that many other bidders for IPC had asked for.

IPC told Validus it would balk at a deal that contained a “material adverse change” or MAC clause for storm losses.

“With the advent of the hurricane season, we consider it important for IPC and its shareholders that any negotiated sale …not be conditioned upon the absence of catastrophe losses,” said Chairman Kenneth Hammond in a letter last month to Validus CEO Ed Noonan.

IPC had not made that a condition of its pact with Max Capital, an earlier suitor. But that deal was derailed by Validus’ higher bid.

The shift in IPC’s approach shows what a difference a few months can make. Hurricanes were a distant worry when it agreed to a tie-up with Max in March. Now the threat looms large, with coming weeks historically the time when storms develop in the Atlantic Ocean and can head for the populated U.S. coastline.

IPC recently reported a nearly four-fold rise in quarterly net income, helped by higher policy sales and investment gains. It had $8 million in losses from the Air France crash and damage from the earthquake in Italy.

But a major hurricane could lead to much bigger losses. After Hurricane Katrina in 2005, IPC recorded a quarterly net loss of $656.6 million, significantly more than the value of business it typically underwrites in a full year.

Still, Noonan said the risk-reward proposition is a good one. “Going into catastrophe season, IPC is extremely well capitalized for the risks they take on,” he told Reuters in an interview this week.

At the same time Noonan isn’t surprised that some others shied away from a deal that could not be broken if losses occurred. “No one wants to bet against hurricanes.”

A large global insurance and reinsurance company, identified in other media reports as Warren Buffett’s Berkshire Hathaway, may have been willing to take a bet on IPC, regardless of potential losses. However, IPC rejected the cash offer because it called for it to abandon its third-quarter dividend. IPC and Validus declined to name the bidder.

Like IPC, Validus sells property-catastrophe reinsurance. But roughly half its business is insurance.

IPC began looking at options last year, including a possible sale, after battling for several years with rating agencies over concerns the firm was over-exposed to catastrophe losses.

Reinsurance, akin to insurance for insurers, essentially spreads the risk of losses among several carriers. Big claims do not happen very often, but when they do they can be severe.

Still, a parade of potential IPC buyers — 16 at last count — was keen to hatch a deal, attracted by potential rewards from the current surge in property-catastrophe pricing.

The rates for the coverage IPC is underwriting are near peak levels, said Noonan. In contrast, the rates for most other types of commercial coverage are still in decline, showing how difficult it has been for insurers to shake off a soft market that set in several years ago.

In buying IPC, Validus will increase its capital by about 60 percent to $3.7 billion, significantly increasing its capacity to sell coverage. “We are excited about the size and the scope of the combined company,” said Noonan. “At this point it feels like we are on the right track.”

(Editing by Carol Bishopric)