NEW YORK (Bloomberg) — Validus Holdings Ltd. offered $1.7 billion in stock for IPC Holdings Ltd., threatening to derail IPC's combination with Max Capital Group Ltd. and raising the prospect of a bidding war among Bermuda-based reinsurers.

Validus bid 1.2037 of its shares for each share of IPC, the reinsurer said in a statement yesterday. Based on the companies' closing prices yesterday, the Validus offer is worth 14 percent more to IPC shareholders than the all-stock merger with Max Capital announced March 2.

Bermuda reinsurers, many of which specialise in niche businesses such as reimbursing insurance companies after catastrophic storms, are weighing mergers to diversify their operations and gain scale. IPC last year hired JPMorgan Chase & Co. to seek potential partners and began talks with at least seven parties in addition to Max Capital, it said in a regulatory filing on March 27. IPC "has become the darling of a bidding war", Citigroup Inc. analyst Joshua Shanker said in a note yesterday. Policies sold by IPC protect against catastrophe damage, and the results of much of the firm's underwriting will be known within 12 months. That makes the firm more attractive to suitors than reinsurers selling so-called long-tail coverage against liabilities, such as lawsuits, that may not surface for years, he said.

Under the agreement with Max, IPC isn't allowed to engage in discussions with other potential bidders, and must give Max a chance to top any bid. Validus asked for a response by April 15.

Max Capital CEO Marston Becker responded last night to the Validus move. "While we have not yet had the opportunity to review Validus' proposal carefully, we believe that combining two short-tailed property catastrophe oriented companies would appear to do little for true shareholder diversification," Mr. Becker said. "By contrast, Max's track record of building a diversified platform without diluting shareholder value should lead to better long-term growth prospects and value creation following completion of the pending IPC-Max merger."

The deal is scheduled to close either late in the second quarter or early in the third, pending shareholder approval. IPC rose $1.63, or 6.4 percent, to $27.04 in New York Stock Exchange composite trading. Validus, formed in Bermuda in 2005 with the help of former Marsh & McLennan Cos. chief executive officer Jeffrey Greenberg, fell $1.23, or 4.9 percent, to $23.68. Max Capital, the insurer scaling back investments in "alternative" holdings such as hedge funds, rose 28 cents, or 1.7 percent, to $17.24.

Greenhill & Co., the New York-based advisory boutique, is representing Validus. Bank of America Corp. is representing Max Capital.

Billionaire investor Wilbur Ross said this month he's considering buying and combining reinsurance companies with a market value of $1 billion to $2 billion after a drop in the stock prices of carriers around the industry. Consolidation among reinsurers is likely to increase because of a scarcity of capital, Ross said.

"Most companies are trading at or below their book value," Ross said, referring to the measure of assets minus liabilities.