Canadian Underwriter

XL Group announces offer to acquire Catlin Group for $4.1 billion

January 9, 2015   by Canadian Underwriter

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XL Group plc is seeking to acquire all capital stock of Catlin Group Limited, a move that, if approved, will create a combined business expected to have a leading presence in the global specialty insurance and reinsurance markets.

XL Group announced Friday that it has entered into an agreement under which it will offer to acquire all of Catlin Group’s common shares for “consideration of 388 pence in cash and 0.130 share of XL for each Catlin common share.”

Based on the closing price of an XL Group share at Jan. 8 of US$35.42, notes the XL Group statement, “the offer values Catlin at 693 pence per share. This represents a transaction equity value of approximately US$4.1 billion dollars.”

(Catlin confirms that as at the close of business on Jan. 8, 2015, it had 362,570,229 common shares in issue; XL confirms that as at the close of business on Jan. 8, 2015, it had 255,178,939 ordinary shares in issue.)

The name of the parent company of the combined group will remain XL Group plc, while the newly combined company will be marketed as XL Catlin, reflecting the strong reputation of both brands, the statement adds.

Structured as a scheme of arrangement, the transaction is expected to close mid-2015, subject to the approval of Catlin shareholders and sanction by the Supreme Court of Bermuda, customary regulatory approvals and anti-trust clearances, as well as other customary closing conditions.

XL Group, through its subsidiaries, is a global insurance and reinsurance company providing property, casualty and specialty products to industrial, commercial and professional firms, insurance companies, and other enterprises; Catlin Group is a global P&C insurer and reinsurer with six underwriting hubs in London, Bermuda, the United States, Asia Pacific, Europe, and Canada.

“We believe the transaction will accelerate each company’s strategy, and address the meaningful structural changes we see shaping the P&C sector,” XL CEO Mike McGavick comments in the statement. “Specifically, the combination will add immediate scale in specialty insurance, it will create a more efficient and more capable global network by bringing our two infrastructures together, and it creates a top 10 reinsurer with expanded alternative capital capabilities,” says McGavick, who will continue as CEO of the company.

“With the combination of our talented teams, we expect to maintain strong financial fundamentals while generating attractive economics and long-term value for shareholders, including double-digit EPS (earnings per share) and meaningful ROE (return on equity) accretion,” he adds.

Stephen Catlin, CEO of Catlin Group, will continue on with the combined company and, on closing of the acquisition, is expected to serve on the XL Group board and as executive deputy chairman.

“Both businesses have been built on underwriting excellence and benefit from strong cultural compatibility,” Catlin says in the statement. “We expect the enlarged business to benefit from increased diversification, significant further economies of scale, strengthened franchises in each of its markets and an improved standing with intermediaries,” he notes. “As a result, XL Catlin will be better equipped to serve its clients across a range of distribution channels and geographies with an enhanced suite of capabilities and products.”

With US$17 billion of total capital and approximately US$10 billion of net premium – based on the December 31, 2013 audited financials of each company – the combined company will achieve significant scale within its core competencies of global specialty insurance and reinsurance.

The combination of business platforms is also expected to generate compelling benefits, including the following:

  • increased relevance with brokers through greater premium volume, broader product offering and an expanded global network, particularly given an enlarged Lloyd’s platform with Catlin having a leading Lloyd’s presence;
  • more effectively leveraging investments in technology and data analytics, as well as a larger dataset to build out predictive modelling and analytics;
  • approximately US$2.8 billion of ceded reinsurance to allow for increased purchasing power and further optimization; and
  • top 10 global reinsurer with multi-line capabilities, with net premiums written nearly doubling to over US$3 billion.

“The transaction is expected to create an attractive return profile with earnings per share and return on equity accretion in 2016, the first full year of combined operation, and double-digit earnings per share accretion in 2017 upon full phase-in of expected synergies,” notes the statement from XL Group.

“It is expected that the combined entity will be able to achieve annual cost synergies of at least US$200 million, with the full level of these recurring synergies being achieved by the end of 2017,” the statement notes.

XL Groups reports that the primary sources of these cost synergies are expected through the consolidation of the combined infrastructure related to technology, real estate, and operational overlap, as well as the consolidation of business and central support functions. “It is expected that the realization of these cost synergies will result in one-time integration costs of approximately US$250 million, which are all anticipated to be incurred by the end of 2017.”