Catlin Group jumped 7% to 706.5 pence at 2:36 p.m. in London, giving the company a market value of about 2.5 billion pounds. XL shares climbed 1% to $35.78 in New York, valuing the company at more than $9 billion.

Analyst ‘Disappointed’

“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 today in a research note.

The deal is a better use of funds than share buybacks, McGavick said today on a conference call with analysts. He said the rate of return from the deal will be “well in excess” of XL’s cost of capital.

The combined company will be among the largest sellers of coverage for artwork, aerospace and political risks, according to a presentation today. McGavick has scaled back from life reinsurance and struck a deal last year to sell a stake in a home insurer to Progressive Corp.

XL plans to issue about $1.8 billion of new shares as part of the acquisition. Catlin shareholders will have to approve the acquisition in the second quarter and the takeover is estimated to be completed by the middle of this year, according to the statement. Morgan Stanley and Goldman Sachs Group Inc. have committed to provide 1.6 billion pounds of bridge financing.

Catlin Group, established at Lloyd’s in 1984 by CEO Stephen Catlin, sells commercial policies as well as reinsurance, or backup coverage for primary carriers. The firm wrote more than $5.3 billion in gross premiums in 2013 and has offices in more than 25 countries in North America, Asia, Latin America and Europe.

Cost Savings

Stephen Catlin will become XL Group’s executive deputy chairman after the combination and intends to hold new XL shares as a long-term investment, according to the statement. McGavick will continue as CEO. The company will start operating under the name XL Catlin, while its legal name will remain XL Group.

XL said in a separate statement today that it expects one- time integration costs of about $250 million and annual savings of at least $200 million, with the deal’s synergies fully achieved by the end of 2017.

“I kind of struggle with whether this is going to be a way for you to accelerate your turnaround,” Josh Stirling, an analyst at Sanford C. Bernstein & Co., said on the call. “Does this mean you’re shifting away from top line growth, for the next three to four years you’re going to be focused on integration, cost cutting, and picking and retaining the best from both books?”

‘On the Offense’

McGavick countered that “This is to me entirely an act on the offense” as insurance buyers and brokers seek larger companies with more offerings.

Morgan Stanley and Goldman Sachs served as financial advisers to XL, and Skadden, Arps, Slate, Meagher & Flom LLP was the legal adviser. JP Morgan Chase & Co., Barclays Plc and Evercore Partners Inc. were bankers for Catlin, and Slaughter & May provided legal advice.

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