Risk managers brace for consolidation as XL confirms bid for Catlin

In 2013 XL reported gross written premiums of $7.4bn against $7.2bn in 2012. Catlin reported $5.3bn in 2013 against just under $5bn in 2012. The deal looks possible as Catlin also confirmed that positive talks are underway. Its share price leapt 10% as news of the potential acquisition broke. Analysts described the potential deal as a good news Catlin shareholders at about a 20% premium to current share price. Consolidation in the Bermuda and international insurance and reinsurance market has been on the cards for some time as excess capacity continues to drive down insurance prices and make expansion increasingly difficult for carriers.hideThe recent slew of third quarter results saw more reserve releases than additions, decent profits and most of the leading companies returning significant chunks of capital to shareholders. There was little aggressive talk of the need to raise rates. Earlier this year Endurance attempted to buy Aspen in what turned out to be a bloody battle from which Aspen finally emerged the winner. Endurance CEO John Charman said at the time that the deal made sense because corporate customers need bigger and better capitalised international insurers to service their increasingly complex risk transfer needs. At first sight consolidation in the international property & casualty insurance and reinsurance market may not look like good news for risk managers because it would reduce competition and therefore possibly lead to a market hardening. But on the flip side bigger and better capitalised insurers would theoretically be able to deliver broader, deeper and more innovative coverage to help close the so-called 'insurability gap'. This is a subject that XL CEO Mike McGavick has publicly talked about in the past. He has warned that in its current form the insurance and reinsurance market is in danger of becoming increasingly irrelevant to large corporate customers. Mr McGavick said in a statement yesterday that the combined XL and Catlin entity would therefore be more 'relevant' to customers and brokers. The other big plus of a consolidated market for larger corporate risk managers could be that the leading carriers would possess improved international networks and thus be able to more effectively service global programmes. Risk managers can only be pleased that the word innovation was used in the first paragraph of Mr McGavick's statement on the potential Catlin acquisition and networks in the second. "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," he said. "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," continued Mr McGavick. The XL CEO added that in the increasingly competitive reinsurance market the combined company would be a top 10 player. This would increase 'alternative capital opportunities' and 'overall relevance' to clients and brokers, he said. Mr McGavick added that the proposed transaction is expected to result in 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," concluded Mr McGavick. XL's share price was down just under 4% at close of play Wednesday while Catlin's was up just under 10% suggesting that the deal has a sound basis to proceed. Catlin this week responded to media reports about a possible deal and the movement in its share price by confirming it had received an approach from XL. "A combination of XL and Catlin would create a leading player in property and casualty insurance and reinsurance and expand opportunities for the combined underwriting team in the global marketplace," read the Catlin statement. Catlin explained that under the indicative terms of the offer, XL would acquire 100% of Catlin for 410 pence in cash and 0.130 shares of XL for each Catlin common share. It said that, 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 offer values each Catlin share at 699 pence. Analysts at investment bank KBW said that the deal was good for Catlin's shareholders and made sense more generally. "We believe that if an offer materialises then this is very attractive for Catlin's shareholders and represents a 20% premium to where the Lloyd's of London sub-sector is currently trading," stated the bank yesterday. "Consolidation in the wider reinsurance market has been on the agenda for a while and we have seen a number of possible deals in Bermuda more recently. This is primarily driven by excess capacity in the market and declining premium volumes. There is an argument that shrinking reinsurance panels may lead to consolidation of smaller players but this is not applicable in Catlin's case, we think. Following this we would not be surprised if other companies receive approaches," added the analysts.

Risk managers brace for consolidation as XL confirms bid for Catlin

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