Global insurance and reinsurance firm XL Group has approached competitor Catlin Group with an offer that looks part acquisition, part merger, which if successful would see a new top 10 player appear in the global re/insurance market.
Merger, acquisition or combination, these are the words that come to mind in the current insurance and reinsurance marketplace, as companies compete for market share and look for scale, diversification or just a unique and innovative angle to help them outperform the rest.
With RenaissanceRe seeking to buy Platinum Holdings and Montpelier Re rumoured to be considering its options as well, the next to look to a deal as a way to set the stage for the next phase of growth and to navigate the structurally changing insurance and reinsurance market is XL Group.
Catlin reported first that it had been approached by XL with an offer to combine the two firms. XL Group later confirmed their approach, declaring it as a positive way to position two independently successful firms for their next phase of success and growth.
In the challenging, competitive and changing reinsurance market, scale, diversity, access to talent, risk and capital are all becoming increasingly key and one of the best ways to acquire that is growth through acquisition or merger.
The problem for these firms is that they sit in a middle ground of scale, big enough to perhaps survive, but increasingly likely to find themselves marginalised to a degree if recent re/insurance market trends continue. So do they sit back and try to carry on regardless? Look to how they can best innovate, perhaps scale back in terms of size and become more efficient? Or seek to acquire the scale and diversification, along with expertise, global outlets and back-office facilities, that can propel them forwards to a new level in the market where marginalisation is less of an issue.
In the case of XL Group, making an offer for what is considered a very attractive company in the market seems like it may be a good move. Catlin is a robust firm, the envy of many in the market, with specialisms and access to business that many would like to acquire. Getting in first with an offer may be a very good move, although we’d imagine that other offers may now come to the fore once it is realised that both XL and Catlin are in play and potentially available.
XL Group CEO Mike McGavick commented on the approach his firm has made; “Both XL and Catlin – respected, innovative, global P&C firms – are well positioned on their own. However, we both believe that we will be far better positioned and stronger together. We see this transaction as deeply accelerating the strategies of both companies.
“Specifically, the combined entity would be a leader in the global specialty and property cat markets and would make greater and more efficient use of both companies’ global networks and infrastructure. As Catlin is the leading presence at Lloyd’s, the combination would immediately expand many of the lines of business in which XL has recently invested. In the increasingly competitive reinsurance market, the combined company would be a top 10 player, thereby increasing alternative capital opportunities and overall relevance to clients and brokers. The proposed transaction is expected to result in attractive economics starting in the first year and long-term value for shareholders.
“For these reasons, and crucially, for the deep cultural and strategic alignment we see between XL and Catlin, with both built on disciplined underwriting, we see meaningful opportunity in this transaction.”
Catlin explained the proposed deal and approach from XL Group:
Under the indicative terms of the Possible Offer, XL would acquire 100% of Catlin for consideration of 410 pence in cash and 0.130 shares of XL for each Catlin common share. On the basis of the closing price of an XL share on 16 December of $35.01, an exchange rate of $1.573:£1 and a fully diluted share count of 386 million shares, the Possible Offer values each Catlin share at 699 pence. Under the terms of the Possible Offer, Catlin shareholders would not receive a final dividend for the year ended 31 December 2014.
Catlin also confirms that it is in advanced negotiations regarding the sale of its interest in Box Innovation Group Limited (trading as ITB). In the event a sale is agreed on terms which generate surplus capital, any distribution of that surplus to Catlin shareholders would be in addition to the indicative terms of the Possible Offer.
There is without a doubt a certain logic that the sum of the two parts can be worth more as a single entity than separately. Also there is logic that mergers take some capital out of the market and reduce competition, to a degree, as well. Both these firms have robust businesses as is, so surely combining the two will make something better?
However, the question remains whether getting into the lower half of the top 10 insurers and reinsurers in the world is sufficient to allow you to avoid the pressures of the market and to ultimately thrive? If recent market trends continue and perhaps accelerate what is to be gained and how will it bolster the bottom-line?
McGavick notes that both firms work with alternative capital and together that becomes a much bigger deal than operating alone, the access to capital will increase and the business they can share with third-party investors will increase too. However, the independence, from the third-party investors point of view, shrinks we would imagine and some may prefer to allow a more dedicated, smaller player to manager their money. We’ll have to wait and see.
Ultimately, can the combined entity compete with the biggest in the market and maintain return on equity that will satisfy its shareholders and maintain returns to third-party capital investors that encourage them to stay? That’s the questions investors will want answering and it will be interesting to see how this latest consolidation attempt in the reinsurance market pans out.
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