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Talent retention will be a key challenge in XL, Catlin merger

Merger of rivals creates $10 billion firm

Talent retention will be a key challenge in XL, Catlin merger

The need to retain key staff members and the business they generate will be a key challenge in the merger of XL Group P.L.C. and Catlin Group Ltd.

The tie-up of the two companies will result in a specialty insurer and reinsurer with significant scale to boost profitability in the future, but sources said the risk of losing key underwriters and staffers who make the Catlin franchise such a valued one will be one of the biggest threats to the deal's success.

The roughly $4.3 billion cash-and-stock acquisition of Hamilton, Bermuda-based Catlin by Dublin-based XL was announced earlier this month and is expected to close at midyear. It would result in an insurer with about $10 billion in net premiums written and will boost the size of syndicate 2003 — currently operated by Catlin and the largest at Lloyd's of London — which is expected to have about a 10% share of Lloyd's premium volume once it is combined with XL's syndicate 1209.

The combined entity, known as XL Catlin, would be the world's third-largest broker-market catastrophe reinsurer, said Mike McGavick, CEO of XL, who will continue as CEO of the combined group.

XL has offices in 22 countries and about 4,000 employees. Catlin has offices in more than 50 cities and more than 2,300 employees.

Mr. McGavick said Stephen Catlin, CEO of the company he founded in 1984, is expected to join the XL Catlin board as executive deputy chairman. XL was formed in 1986.

Having a blended management team will be key to success, Mr. McGavick said.

“These are people businesses,” said Eamonn Flanagan, head of the Liverpool, England, office of investment adviser Shore Capital Group Ltd. The loss of key personnel is “the single biggest risk” in this type of deal.

“There could be real fallout if the synergy at the top doesn't work out,” Mr. Flanagan said.

Mr. McGavick said there would be some job losses when the companies combine, but said he believed XL Catlin would be able to “retain the best of the best.”

Sources said about 10% of Catlin's current staff are likely to lose their jobs as part of anticipated cost synergies of $200 million annually, with one-time integration costs of about $250 million.

Integrating two global organizations makes this a complex transaction, said Anvar Gabidullin, London-based associate director of insurance at Standard & Poor's Corp. in London.

After the deal was announced, S&P affirmed its A rating of Catlin with a stable outlook.

Catlin is well-known as a leading Lloyd's platform, which is one of XL's drivers for the deal, which Mr. Gabidullin said makes it”very important” to keep key staff.

A risk, said one source who asked not to be named, is that the most talented underwriters — who effectively make up the value of the company XL is buying —-would be poached by rivals.

Moody's Investors Service Inc. said “the inability to successfully integrate Catlin and retain the majority of its personnel and business” is a risk it will monitor.

While Messrs. McGavick and Catlin both believe the cultural fit will be quite good, “it will be interesting to see how ... two strong personalities interact post-merger,” said James Eck, senior credit analyst at Moody's.

Fitch Ratings Ltd. affirmed its A+ ratings of XL's core companies, but said “integration risk (is) inherent in the acquisition.”

“Fitch would view negatively the departure of key senior management members or the inability of the combined organization to retain clients that results in a significant loss of business,” Brian Schneider, Chicago-based lead analyst of XL at Fitch, said in a note to investors.

Mr. McGavick said he and Mr. Catlin had been working closely for more than 18 months to put the deal together.

Sources say much of integration's success may hinge on how well the two work alongside each other once the deal is completed.

According to one source, who asked not to be named, Mr. Catlin has been extremely close to the business and is unlikely to find it easy to relinquish control.

Another source, who also asked not to be named, said Mr. Catlin likely will retain a key role in the day-to-day business once the two entities are combined.

Mr. Catlin could not be reached for comment.

While reinsurance rates for many lines of business continue to fall, boosting its reinsurance presence likely makes sense for XL in the longer term, sources said.

The deal will make the combined entity a top 10 global reinsurer. The need for scale in the current soft reinsurance market, particularly property catastrophe business, was one rationale for the deal that Mr. McGavick cited.

XL is targeting scale and diversity with the deal, and buyers tend to look for those qualities in reinsurance partners, S&P's Mr. Gabidullin said.

“Exposing oneself to a less profitable reinsurance sector will not be immediately beneficial,” but the deal makes sense from a “critical mass perspective,” said a reinsurance broker source, who asked not to be named. “With the reinsurance sector going the way it is, in five years, only the large and strong will survive,” he said.

Catlin's focus on speciality primary insurance “is the diversifying segment that is accretive to XL and where XL will be targeting growth,” Mr. Gabidullin said.

Many companies operating in the Lloyd's market also are keen to diversify their business mix and gain scale, so more M&A activity at Lloyd's is likely, he said.

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