Bad blood in Bermuda

1 March 2009 is the date to remember. That’s when a merger was announced between two Bermudan companies, Max Capital and IPC. It had been months in the making and only required the approval of the regulators and stockholders of both companies, the former being a certainty. A transition team was formed, and Max looked set to emerge as a $3bn player.

A month later, out of the blue, a third Bermudan reinsurer, Validus, jumped in with an offer for IPC. It was a stunner: there hadn’t been an ugly insurance skirmish in Bermuda since ACE queried XL Capital’s acquisition of Nac Re almost 10 years ago, forcing XL to pay a great deal more than its originally agreed acquisition price.

Bermudan companies speak of “friendly competition”. But the tone of Validus and Max’s exchanges became anything but friendly. Privately, executives at both companies denied the existence of bad blood, but it quickly became a fight to the death.

Validus went to court to seek an injunction, arguing that the $50m termination fee in the deal between IPC and Max was excessive, and that agreeing to it and to a “no-talk” provision was a breach of the directors’ fiduciary duties.

In May, the Supreme Court of Bermuda denied Validus’ application. Nothing daunted, on 18 May Validus sweetened its offer with a cash component of $3 per share. As the days counted down to IPC’s shareholder vote on the Max deal, the smart money was on acceptance. Shares in IPC are mainly held by about 200 institutional investors. The rival bidders hit the phones to convince them their deal was the best.

Many were surprised when 72% of IPC’s shareholders rejected the Max deal. Although IPC chairman Kenneth Hammond had said that a vote against Max was not automatically a vote for Validus, the disintegration of the Max combination has left IPC highly vulnerable.

Also if a twice-sweetened offer from Validus does finally snag IPC, Validus could still end up paying less than book value. IPC asked Validus for something nearer to book value, but was in no position to barter.

Will anyone else now come forward to bid for IPC? At the time of writing, Validus looks likely to swallow IPC before autumn sets in. That would in turn make Validus a $3bn player, assuming IPC’s shareholders go along this time. It seems unlikely that they will not.

So are more mergers on the cards? Consolidation is supposedly overdue for the “Class of 2001” – the reinsurers which set up in that year. Its predecessors, the companies formed in Bermuda in 1993, have been reduced to a rump (including IPC) within five years, although a continuing soft market was a big factor. In the mixed markets that have prevailed since 2001, the comparison is a little odious.

Some say that to be taken seriously these days, a reinsurance company needs $1.5 or $2bn in capital. On that basis, a few merger candidates present themselves —Hiscox, Montpelier Re Holdings, Max itself, Lancashire Holdings and Flagstone Reinsurance Holdings have capital of less than $1.5 bn. Platinum Underwriters Holdings has less than $2bn.

Given the continuing rarity of credit, acquisitions would have to be funded by shares as, in the main is Validus’s offer for IPC, and as would have been the case with the Max deal.

While the shape of future deals is unclear, another lesson is clear: to avoid unpleasant surprises, directors must at all times closely consult with their shareholders and fight hard to create value for them.

david.sandham@globalreinsurance.com

Key points

• A hostile bid by Validus led to IPC shareholders rejecting the agreed offer from Max

• More mergers could be on the cards, as size is considered important in reinsurance

• Mainly share offers, rather than cash, are more likely