XL buys Catlin for £2.79B. Makes XL more attractive to third-party capital

News broke today that XL Group is buying Catlin for £2.79 billion, creating a much larger insurance and reinsurance group, with additional scale in property catastrophe risks which make it more attractive to third-party capital providers, XL believes.

In an announcement just released this morning XL Group says that it has reached agreement with Catlin on an acquisition that values it at £2.79 billion. The deal will be effected by means of a two-step, integrated process comprising a scheme of arrangement under Section 99 of the Bermuda Companies Act, followed immediately by the merger of Catlin with and into XL Sub such that XL Sub is the surviving company. XL Sub is a wholly owned subsidiary of XL incorporated in Bermuda for the purpose of completing the Acquisition.

Mike McGavick of XL Group will be CEO of the newly enlarged XL post-acquisition, while Stephen Catlin will remain with the company and will sit on the new Board as Executive Deputy Chairman.

Commenting on the successful acquisition of Catlin, Mike McGavick said; “We are delighted to announce this compelling combination which positions us strongly to provide more – and even better – answers for the world’s most complex risks while enhancing our opportunities to create value for shareholders and better serve clients and brokers. We believe the transaction will accelerate each company’s strategy, and address the meaningful structural changes we see shaping the P&C sector. 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.

This is an extraordinary opportunity to bring together two innovators with roots in disciplined underwriting, industry leadership and business vision, and strong cultural alignment. I am especially pleased that Stephen Catlin will continue on with the combined company and, on closing of the Acquisition, is expected to serve on our Board. We will benefit enormously from Stephen’s input in all strategic decisions and through our ability to leverage his vast market network as we implement the strategy of the new combined 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 and meaningful ROE accretion.”

Stephen Catlin added; “XL is a compelling partner for the Catlin business. Both businesses have been built on underwriting excellence and benefit from strong cultural compatibility. Together, the combined entity will be a market leading global specialty and property catastrophe insurer which will be far better positioned to respond to the changing dynamics that are impacting the broader insurance and reinsurance markets.

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. 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.

We believe that this transaction represents an excellent outcome for our shareholders, clients and employees.”

John Barton, Chairman of Catlin, also said; “This transaction makes strong strategic and financial sense for Catlin shareholders. The terms of the transaction represent an attractive premium upfront, whilst also providing our shareholders the opportunity to participate in further up-side by maintaining a shareholding in the combined entity.”

The enlarged XL Group, after is has assumed the Catlin business, will have a combined $17 billion of total capital, and approximately $10 billion of combined net premiums and expects to achieve significant scale within its core competencies of global specialty insurance and reinsurance.

Alternative capital competencies and third-party capital raising is clearly a key consideration in this deal, as both XL and Catlin manage third-party capital already.

McGavick said that the expanded firm “Creates a top 10 reinsurer with expanded alternative capital capabilities.” McGavick also said on a conference call about the announcement that this puts the combined book on the front foot, so they can re-engage with the market as a larger entity in a better state to weather the challenging market environment.

XL has a dedicated insurance-linked securities (ILS) manager, New Ocean Capital Management. Catlin has a number of special purpose syndicates at Lloyd’s of London, where it leverages third-party capital for underwriting Lloyd’s business.

One of the reasons for the acquisition is listed as “the need to harness alternative capital opportunities,” showing the importance of being able to attract capital from institutional investors and having the facilities to put it to work.

In fact, the enlarged XL Group will be a top 3 property catastrophe reinsurance writer among broker market peers, the firm says. XL says that it believes that this will “Significantly increase its attractiveness and flexibility to third party capital providers.”

The combined result of the acquisition is a much larger underwriting platform, with more diversity and also more specialisms. However scale in property catastrophe reinsurance really does matter and this scale will bring more underwriting opportunities that can be shared with investors and third-party capital.

Efficiency is another key reason for the deal. The scale of the larger company will enable XL to capitalise on efficiencies to lower its cost of underwriting capital. That should help it to remain more competitive, efficient and a lower-cost outfit, while the addition of third-party capital opportunities will allow it to reduce the cost of its capital even further.

Greg Hendrick will assume the role of Chief Executive of Reinsurance for the enlarged XL Group, assuming responsibility for the combined reinsurance business and also leading all of its alternative capital strategies.

So another M&A deal is set to be completed successfully. The market expects to see more of these deals over 2015, as re/insurers seek scale, and XL has clearly set out why efficiency of capital and also third-party or alternative capital matters as well.

It is particularly interesting to note that scale matters to XL when it comes to attracting third-party capital, showing that investors are now looking for the best opportunities meaning access to underwriting is absolutely key for anyone managing ILS capital now.

Also read a follow-up article here: Combined XL-Catlin a “perfect partner” for third-party capital: McGavick.