Jobs cuts and the merging of offices around the world are likely consequences of XL Group’s pending acquisition of Catlin — but it is too early to say exactly how that will affect the Bermuda operations of the two companies, says XL chief executive officer Mike McGavick.

Mr McGavick spoke with The Royal Gazette after Friday’s announcement that XL had agreed to buy Catlin in a $4.1 billion cash-and-shares deal expected to close midway through this year.

Both XL and Catlin are global insurers and reinsurers with operations in numerous countries. Catlin’s global headquarters are in Bermuda, on the top floor of the newest part of the Washington Mall building. Ireland-based XL works out of offices on Bermudiana Road.

Asked about the potential for local job losses, Mr McGavick, who will lead the combined company, said: “It’s very early days. But our job as compassionate leaders of our organisation is to deal with any issues related to redundancies with transparency and fairness.

“Any time two large organisations come together, there will be overlapping activities. Bermuda is mainly, for both companies, for underwriting operations. As stated in our materials related to the proposed transaction, it is our intention to lose as little business as possible.

“Bermuda is a very important marketplace to both companies and will remain so in the future.”

Mr McGavick said it was not all about one firm taking over the other — the combined entity’s operating name of XL Catlin demonstrated that intention — and Catlin executives will take several leadership roles in the combined entity, including founder and CEO Stephen Catlin, who will serve as executive deputy chairman.

On the plans for the companies’ offices, Mr McGavick said about half of the cost savings from synergies would come from reducing infrastructure costs, including real estate and IT systems. The other half is expected to come from the consolidation of business and central support functions. How that would impact Bermuda was yet to be determined, he said.

XL expects the combined company to cut costs by at least $200 million a year, with the full benefits starting to be realised by the end of 2017.

XL and Catlin intend to form an integration planning team, headed by XL’s chief platform officer Myron Hendry and Catlin chief administration officer Adrian Spieler, to work out “how best to draw upon the talents of the broader Catlin and XL organisations”, according to an XL filing with US regulator the Securities and Exchange Commission.

“It is expected that headcount reductions will be required, although XL has not yet developed specific plans as to how such headcount reductions will be implemented or where they will be implemented,” the filing states.

“For the benefit of the combined business, in some instances the Catlin office is likely to be maintained whereas in others the XL office.”

XL has around 4,200 employees based in 60 offices in 22 countries, while Catlin has some 2,400 employees working out of 50 offices in 25 countries.

Integration of one large company into another has historically proven to be difficult. Mr McGavick gave reasons why he believed XL and Catlin could merge effectively.

“First, there is a cultural compatibility — we have similar approaches to doing business,” he said. “Second, we have people in both firms who have been through this before, whether with XL or Catlin or other firms.”

He cited Catlin’s 2006 acquisition of Lloyd’s underwriter Wellington and the restructuring of XL following its problems arising from the global financial crisis.

Mr McGavick added: “Stephen [Catlin] and I have had the opportunity to talk about the integration for some time.” Filings show that confidentiality agreements relating to the proposed merger stretch back to mid-2013.

The deal will make XL a massive player in the Lloyd’s market, where Catlin is now the largest underwriter. XL’s Lloyd’s market share will rise from about two per cent to 9.5 per cent with the acquisition.

“Lloyd’s is one of the major marketplaces of the world and it’s shown itself to be a centre of innovation and a place where the evolving needs of the world tend to be served,” Mr McGavick said.

The combined company will expand XL’s offerings in specialised insurance lines, such as artwork, aerospace and political risks.

Not everyone likes the idea of the acquisition, however.

“We’re disappointed that XL is abandoning its prior clear path toward creating shareholder value by improving its insurance segment and accretively repurchasing shares,” Meyer Shields, an analyst at Keefe, Bruyette & Woods, said in a research note on Friday.

Shareholders benefit when companies buy back their own shares for cancellation, as a reduced number of shares outstanding increases the book value of each share and also bolsters earnings per share.

XL’s SEC filing says the company will stop buying back shares until the acquisition deal is completed and will then re-evaluate its buy-back programme.

Mr McGavick said management and the board had weighed up the pros and cons and had concluded that buying Catlin was a better of use of capital.

“Put simply, we know all about the benefits of share buy-backs — we have used more than $3 billion to buy back millions of shares over the past few years,” he said.

“But as we have said publicly, the internal rate of return on this transaction exceeds our cost of capital. Once the cost synergies are realised, we will have lifted our earnings per share by more than double digits and we also expect to see improvements in our return on equity.”

XL expects to issue approximately $1.8 billion of new shares in connection with the acquisition. The dilutive impact — reducing tangible book value per share — was the one negative financial impact of the transaction, Mr McGavick said. But “on most of the metrics we care about”, the argument in favour of the combination stood up well, he added.