The deal is expected to net the underwriter's 60-year-old chief executive, Stephen Catlin, almost 50m pounds because he owns 1.7 per cent of the business, having set it up in the 1980s and grown it into the largest syndicate in Lloyd's. He said he plans to keep a stake in the combined business.
Catlin's shareholders will receive 388p in cash and 0.13 new XL shares for every share they currently own, as well as a final dividend of 22p. This means the deal is worth about 715.3p a share, which is more than Catlin's 700p share price last night.
A "mix & match" facility will allow investors to change the proportion of cash and shares they receive.
"XL is a compelling partner for the Catlin business," said Mr Catlin, who began his Lloyd's career as a tea boy in bright blue flared trousers and wing collars. "Both businesses have been built on underwriting excellence and benefit from strong cultural compatibility.
"Together, the combined entity will be a market-leading global specialty and property- catastrophe insurer [and] far better positioned to respond to the changing dynamics that are impacting the broader insurance and reinsurance markets."
Mike McGavick, XL's chief executive, said:
"An XL-Catlin combination would lead to around $200m (132m pounds) in cost savings" although he would not specify how many jobs may be cut. He will lead the enlarged company with Mr Catlin becoming executive deputy chairman.
He added: "This is an extraordinary opportunity to bring together two innovators with roots in disciplined underwriting, industry leadership and business vision, and strong cultural alignment.
Experts have predicted that a number of Lloyd's of London insurers could be snapped up by foreign suitors this year, with new capital rules on the horizon and floods of capital from investors such as hedge funds keeping down premiums. Other potential targets include Lancashire Holdings and Novae, according to market sources.
Eamonn Flanagan, an analyst at Shore Capital, said:
"We do not envisage a counter-bid emerging for Catlin. It is clearly Stephen Catlin's preferred option and comes strongly recommended by him and the board.
"Hostile bids in this industry are as rare as hen's teeth," he added. "Indeed, we commend management for seeking out such an exit."
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