XL Group plc (XL) aims a premier position in global specialty insurance and reinsurance markets. In this regard, the property and casualty insurer inked a deal to buy Catlin Group Limited (CLNGF) for about $4.1 billion. The transaction is expected to see light in mid 2015 pending approval from Catlin shareholders, the Supreme Court of Bermuda, customary regulatory approvals, anti-trust clearances, and other customary closing conditions.
With optimism surrounding the takeover, shares of XL Group gained 1.3% in the last trading session to close at $35.88.
The companies entered into discussion about a potential merger in mid-December 2014.
The Purchase Consideration
The deal, valued at $4.1 billion, consists of 38.8 cents in cash and 0.130 share of XL Group for each Catlin common share. Based on XL Group’s share price of $35.42 on Jan 8, the consideration takes into account Catlin at 69.3 cents per share.
Moreover, a final dividend of 22 cents per share will be paid to Catlin shareholders in this quarter.
Financing the Deal
To fund the transaction, XL Group will issue $1.8 billion in common shares. It has also put in place a bridge facility to backstop the funding of the cash elements of the purchase price. Though the total number of shares will increase following the issuance, synergies from the acquisition will mitigate the dilutive effect.
Takeover Rationale
XL Group has been eyeing a leadership position in specialty insurance and reinsurance markets. In addition, the combined entity would also rank among the top 10 players in the competitive reinsurance market with increasing alternative capital opportunities.
Hamilton, Bermuda-based Catlin Group is a provider of diversified specialty property and casualty insurance, and reinsurance products across the globe, having a leadership presence at Lloyd's.
With a solid product and service portfolio, underwriting standards and capabilities of both companies, the acquisition will immediately add scale to the operations of XL Group – providing economies of scale, adding to diversification and strengthening franchises in each of its markets.
With about $17 billion of total capital and $10 billion of net premium (based on the Dec 31, 2013 financials), XL Group will significantly increase its business in Lloyd's platform, where Catlin boasts a leading presence. While net premiums written will increase twofold to over $3 billion, about $2.8 billion of ceded reinsurance will allow increased purchasing power and further optimization.
The transaction will straightaway widen quite a few lines of business of XL Group in which it has lately made investments. XL will be placed in the top tier in many of the specialty insurance products including Political Risk and Crisis Management, aside from having leading positions in Aerospace, Fine Art & Specie, and a superior hold in Aviation, Marine and Energy Platform.
Following the closure of the deal, the new entity will be marketed as XL Catlin. The parent company will, however, continue to operate as XL Group plc.
XL Group estimates earnings per share and return on equity accretion in 2016 and double-digit earnings per share accretion in 2017. The combined entity will also realize annual cost synergies of at least $200 million, with the full level of these recurring synergies being achieved by the end of 2017. However, the company will incur one-time integration costs of about $250 million expectedly by the end of 2017.
The Inorganic Story
XL Group has always capitalized on the opportunities that strategically fit the best, and acquisitions are one of them. Last February, XL Reinsurance America Inc. acquired crop insurance provider, Global Ag Insurance Services to capitalize on the expertise of Global Ag in western U.S. Acquisitions in turn have also enhanced its premium writings.
Zacks Rank
XL Group carries a Zacks Rank #3 (Hold). With the Catlin acquisition expected to be accretive to XL Group, we expect analysts to pull up their estimates, exerting upward pressure on the Zacks Rank.
Insurers Following Suit
Following the organic route, to ramp up the operational profile seems a well-accepted strategy among insurers as acquisitions rage the insurance space.
Early this month, HCC Insurance Holdings Inc. (HCC) closed the buyout of Producers Ag Insurance Group, Inc. or ProAg from CUNA Mutual Group for $105 million in cash. The acquisition marks HCC Insurance’s debut in the crop insurance business.
The Progressive Corporation (PGR) inked a deal last month to buy the majority stake in ARX Holding Corp., the parent company of American Strategic Insurance (ASI) and its affiliates, for a cash consideration $875 million. Progressive’s acquisition of ARX Holding is in sync with its strategy to cater to customers opting for a combination of home and auto insurance.
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