XL Group is in talks aimed at buying Catlin in a potential $4 billion deal that would create a massive combined insurer and reinsurer.

Catlin is based in Bermuda and XL, which started operations on the Island in the 1980s, has a substantial presence on the Island.

Catlin put out a statement this morning saying that XL would be willing to pay £4.10 in cash and 0.130 shares of XL for each outstanding share of Catlin.

If completed the deal would create a combined company worth about $12 billion.

XL CEO Mike McGavick said in a statement this morning: “Both XL and Catlin — respected, innovative, global P&C firms — are well positioned on their own. However, we both believe that we will be far better positioned and stronger together. We see this transaction as deeply accelerating the strategies of both companies.”

Catlin stated: “Discussions are currently ongoing between both parties and the final terms of any possible offer are subject to the completion of mutual due diligence.

“On the basis of the closing price of an XL share on 16 December of $35.01, an exchange rate of $1.573:£1 and a fully diluted share count of 386 million shares, the possible offer values each Catlin share at 699 pence.

“Under the terms of the possible offer, Catlin shareholders would not receive a final dividend for the year ended 31 December 2014.”

Catlin shares were up 10.8 per cent at 645p in London Stock Exchange trading today, while XL shares fell 3.9 per cent in New York to close on $33.66.

Mr McGavick added: “Specifically, the combined entity would be a leader in the global specialty and property cat markets and would make greater and more efficient use of both companies’ global networks and infrastructure.

“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. 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. The proposed transaction is expected to result in attractive economics starting in the first year and long-term value for shareholders.

“For these reasons, and crucially, for the deep cultural and strategic alignment we see between XL and Catlin, with both built on disciplined underwriting, we see meaningful opportunity in this transaction.”

Meyer Shields, an equity analyst and managing director with investment bank Keefe Bruyette & Woods, was unconvinced that XL would benefit from the deal even though he considered Catlin “a well run company”.

“I’m not a huge believer in the thesis that bigger specialty insurers are necessarily better,“ Mr Shields told The Royal Gazette.

He said a transaction of this nature between specialty insurers would prove a major distraction to their employees.

Mr Shields added: “The history of acquisitions in this sector shows more disappointment than outperformance.”

XL’s efforts to buy Catlin follow last month’s announcement that RenaissanceRe has agreed to acquire fellow Bermuda reinsurer Platinum.

Mr Shields said he expected to see more mergers and acquisitions (M&A) activity in the property and casualty insurance market and cited two Bermuda-based companies — Montpelier Re Holdings Ltd and Argo Group International Holdings Ltd — as potential takeover targets.

According to an article in UK publication The Insurance Insider, Montpelier has effectively put itself up for sale, and has hired Credit Suisse to help with the process.

Montpelier Re has a market capitalisation of just over $1.5 billion and Argo Group, $1.4 billion, which makes them relatively small in terms of the international insurance market.

The copious supply of capital is one factor driving M&A, Mr Shields said, as reinsurance pricing falls thanks to the influx of third-party capital into the industry in the form of insurance-linked securities such as catastrophe bonds.

Another driver is merger deals themselves. If XL were to become larger as a result of the proposed Catlin merger, for example, then rivals may feel the need to grow bigger to compete.

The transaction would require approval by the boards of directors of each company and would be subject to various shareholder and regulatory approvals and completion of diligence.

XL added: “There can be no assurance that a transaction will result from these discussions, nor can there be any certainty as to the terms on which any such transaction might proceed.

“XL does not intend to comment further at this stage and any further statements will be made if and when appropriate.”