Validus to Weather IPC Storms

With the onset of hurricane season, IPCR wants to make sure that losses from hurricanes and tornadoes do not let Validus walk away from the deal. However, the risk-reward ratio is balanced. IPCR is well capitalized against the risk arising from hurricane losses.

Though there were more than a dozen bidders vying for ownership of IPC, most of them were unwilling to take the potential risk arising from the alliance. Validus took the bet.

Hurricane losses can severely impact the insurer’s profitability. Though IPCR’s second-quarter net income improved, storm losses can eat into the company’s profitability in the coming quarters. Depending upon the intensity of the hurricane, losses may outweigh the value of business underwritten.

Earlier in June, IPC’s amalgamation agreement with Max Capital Group Ltd (MXGL - Analyst Report) had been terminated.

Berkshire Hathaway (BRK.A - Analyst Report) may have been willing to take a bet on IPC disregarding its potential losses. Last June, Berkshire offered to buy IPC in cash for $1.7 billion. However, a clause prohibited the latter from its third-quarter dividend caused the rejection of the proposal.

The combination of IPCR and Validus is expected to make way for strategic and profitable diversification into multiple short-tail lines with favorable rate trends. The rates are firming due to increase in overall demand for reinsurance.

The combined entity will also have a wider scale of operation with an increased capital base. As such, we are reiterating our Hold recommendation on the shares of IPCR.

Earlier this month, Bermuda-based PartnerRe (PRE - Analyst Report) announced its agreement to acquire Paris Re in a deal that would make it the fourth-largest reinsurer in the world by shareholders' equity.