Proposed XL Acquisition of Catlin Gets Review From Rating Agencies

January 12, 2015

A.M. Best and Standard & Poor’s have weighed in with their comments about XL Group’s announced agreement to acquire Catlin Group Ltd. for $4.1 billion in cash and stock.

A.M. Best placed the financial strength rating of XL Group and its subsidiaries under review with negative implications.

The under review status reflects A.M. Best’s concern about the complexity of an acquisition of this size and scope.

“Furthermore, in order to achieve the greatest efficiencies and long-term gains, a successful integration must be achieved within a reasonable time period, which includes retention of key management teams, optimization of capital structure, operation and systems infrastructure, in addition to company cultures.” A.M. Best said in a statement. “There is execution risk while this transition is taking place, which is partially mitigated by the collaborative nature of this transaction.”

During the integration period, A.M. Best also believes there is greater inherent risk to the ongoing operations of the combined company. During this heightened risk period, debt leverage for the consolidated organization is anticipated to increase toward the higher end of A.M. Best’s acceptable range.

“Looking beyond the aforementioned risk factors, the proposed transaction has favorable attributes which include combining two quality companies with solid management teams, global capabilities and strong risk-adjusted capital positions,” the rating agency said. “The combined organization would have greater scale, a broader product offering, and it would be expected to have increased influence in the market.”

A.M. Best said the under review status will be removed once the transaction has closed and A.M. Best reviews the final integration plan.

Regarding the outlook for XL’s proposed acquisition partner, Catlin Group, Standard & Poor’s affirmed its “A” insurer financial strength ratings on the core subsidiaries of Catlin Group Ltd.: Bermuda-based Catlin Insurance Co. Ltd., Catlin Insurance Co. (U.K.) Ltd., Switzerland-based Catlin Re Switzerland, U.S.-based Catlin Insurance Co. Inc., and Catlin Specialty Insurance Co.

“The affirmation of our ratings on Catlin’s core operating entities reflects the group’s stand-alone characteristics — mainly, our view of the group’s strong business risk profile and lower adequate financial risk profile, enhanced by very strong enterprise risk management (ERM) and the group’s management and governance,” S&P said in a statement.

“Once the transaction is completed in mid-2015, we’re likely to view Catlin as highly strategic to the consolidated group owing to its strategic fit and anticipated operational, business, and financial integration within the rest of the group. The substantial size of Catlin’s business and capital base relative to the rest of the consolidated group will likely support our view,” said S&P.

S&P expects Catlin’s competitive position to remain strong, as it continues to display effective cycle management and implements its international growth and diversification strategy.

S&P said it could lower Catlin’s ratings if capital adequacy deteriorates further following:

  • An increase in catastrophe exposure or losses from catastrophe events; or
  • Retained earnings falling substantially short of supporting increased capital requirements from business growth.

Source: A.M. Best and Standard & Poor’s

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