XL Group plc has confirmed that it is in preliminary discussions focused on potentially acquiring rival Catlin. If an M&A agreement comes together, it would be a major consolidation move in the global specialty and reinsurance arenas.

Catlin initially revealed that talks were underway. Media outlets including the New York Times reported such a deal would be worth about $3.97 billion.

XL CEO Mike McGavick touted the benefits of both companies joining forces particularly on the reinsurance front, which is becoming increasingly brutal as new sources of capital continue to flood the market.

“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,” McGavick said in prepared remarks. “The proposed transaction is expected to result in attractive economics starting in the first year and long-term value for shareholders.”

Beyond, that, however, McGavick said that the combined company “would be a leader in the global specialty and property cat markets” that better uses both companies global networks.

He argued that both companies – global property/casualty carriers in their own right – do well on their own. At the same time, a merger would help accelerate growth strategies for both firms, McGavick noted.

“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,” McGavick said.

Of course, an official M&A offer isn’t yet in place. XL Group pointed out that once a deal is on the table, both companies’ boards of directors must approve it, along with shareholders and various regulatory agencies.

XL cautioned, as well, that a final agreement isn’t guaranteed. It declined to offer further details.

An XL/Catlin merger would likely be sizeable in deal value, and would follow RenaissanceRe Holdings Ltd.’s $1.9 billion cash-stock offer for Platinum Underwriting Holdings. In the wake of that merger agreement, Fitch Ratings predicted that more merger and acquisition activity among insurers could follow, and said that consolidation would be a positive development for the insurance sector.

The Renaissance/Platinum deal “may provoke a shift in market attitude to embrace more consolidation as a strategic option to combat the stress in the reinsurance market,” Fitch said at the time.

Source: XL Group