Validus to Buy Flagstone in $623 Million Reinsurane Deal

Validus Chief Executive Officer Ed Noonan
Validus Holdings Ltd. Chief Executive Officer Ed Noonan said in the statement, “Flagstone brings a strong client base that will add scale to our business.” Photographer: Ramin Talaie/Bloomberg

Validus Holdings Ltd. agreed to buy Flagstone Reinsurance Holdings SA for 19 percent more than yesterday’s closing price to expand in property-catastrophe reinsurance.

Flagstone investors will get 0.1935 share of Bermuda-based Validus and $2 in cash for every one of their shares, according to a joint statement today from the companies. The transaction represents an aggregate equity value of $623.2 million, the companies said. The deal values Luxembourg-based Flagstone at $8.43 a share, based on Validus’s closing price yesterday.

Mid-sized reinsurers have been combining to diversify their business mix and enable the companies to take on larger risks from primary insurers. Validus last year was among bidders for Transatlantic Holdings Inc., which was purchased by Alleghany Corp. In 2009, Validus bought IPC Holdings Ltd.

“The price seems very reasonable, possibly enough to attract other bids,” said Meyer Shields, an analyst at Stifel Nicolaus & Co., in a note to investors. “Validus has proven to be a successful, albeit somewhat aggressive, acquirer that should benefit from increasing scale and diversification.”

Validus dropped 1.1 percent to $32.88 at 9:35 a.m. in New York trading. Flagstone surged 18 percent to $8.32.

Increased size benefits reinsurers as they seek to attract clients, Validus Chief Executive Officer Ed Noonan said last year. Adding Flagstone will expand Validus’s property-catastrophe business and specialty reinsurance operation covering shorter-duration liabilities, the company said.

Size Matters

“Size does matter in terms of your ability to take on risk and manage risk,” Noonan said in a July 2011 interview. “Size and scale is an asset to the reinsurance business and it seems like increasingly more so with the passage of time.”

Banks, private-equity firms and hedge fund managers from Steven A. Cohen to Daniel Loeb have formed reinsurers to take advantage of rising rates after losses from natural disasters.

Record catastrophe losses last year from the earthquake and tsunami in Japan to flooding in Thailand helped boost reinsurance rates. In the U.S., property reinsurance prices have risen 6.5 percent this year from 2011 as primary insurers changed how they managed risk after last year’s losses, Guy Carpenter & Co. said last month.

Donald Marron’s Lightyear Capital LLC and Trilantic Capital Partners, which together own about 23 percent of Flagstone’s shares, have agreed to vote in favor of the transaction, according to the statement. Allied World Assurance Co. Holdings AG’s deal to buy Transatlantic last year was scuttled after opposition from Davis Selected Advisers LP, Transatlantic’s largest shareholder.

Lehman Brothers

Trilantic is a former private-equity fund of Lehman Brothers Holdings Inc. The investment bank helped take Flagstone public in 2007 in an offering that valued the reinsurer at about $1 billion.

Flagstone closed yesterday at $7.06, compared with $13.50 in the 2007 offering. Validus went public the same year, selling shares for $22 each.

Validus was formed following 2005 hurricanes such as Katrina with the help of former Marsh & McLennan Cos. CEO Jeffrey Greenberg, who remains on the reinsurer’s board. Greenberg is also managing principal of Aquiline Capital Partners LLC, which is the second-largest holder of Validus.

Validus will assume $250.2 million of Flagstone hybrid junior subordinated deferrable interest debentures, the buyer said in a slide show on its website. The deal is expected to be completed in the fourth quarter, the companies said.

Deutsche Bank AG and Skadden, Arps, Slate, Meagher & Flom LLP advised Validus on the transaction, and Evercore Partners Inc. and Cravath, Swaine & Moore LLP provided advice to Flagstone.

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