BY Richard Summerfield
American International Group Inc. (AIG), the largest commercial insurer in the United States and Canada, has announced that it has agreed a deal to sell its mortgage-guarantee unit to Arch Capital in a deal worth around $3.4bn, pending customary regulatory approvals. The deal is expected to close in either Q4 2016 or Q1 2017.
Under the terms of the deal, AIG will receive around $2.2bn in cash from the sale, $250m in Arch Capital's perpetual preferred stock and $975m in non-voting common-equivalent preferred stock from the sale of United Guaranty Corp (UGC).
The sale of the mortgage unit comes as AIG increases its efforts to return cash to its increasingly agitated shareholders. The company has come under considerable pressure from activist shareholder Carl Icahn, and as a result had agreed to pursue the sale of the mortgage unit, cut a number of jobs and sell its broker-dealer network. Mr Icahn had proposed splitting AIG into three distinct smaller companies.
According to a statement announcing the sale, the combination of Arch’s existing mortgage insurance business with UGC’s established business will create the largest private mortgage insurer in the world, based on insurance in-force, with a global footprint.
Constantine Iordanou, chairman and chief executive of Arch, noted: “We are extremely pleased to be able to expand our private mortgage insurance business through the acquisition of United Guaranty. Our mortgage insurance segment expands and complements our strengths in the specialty insurance and reinsurance businesses, which continue to be central to our global, diversified operations.”
The company will retain some aspects of its mortgage-insurance business under an existing agreement between UGC and AIG subsidiaries covering 2014 to 2016, and will therefore retain some of the earnings from the unit. UGC had been one of AIG’s most profitable units in recent years, and generated $350m in pretax operating income in the first half of 2016. AIG’s company-wide pretax income was around $2.57bn.
“We are excited about this deal and what it means to AIG and the talented professionals at UGC. It further streamlines AIG into a more focused insurer and enhances our capital position, in keeping with commitments AIG made to the market in early 2015 and restated earlier this year,” said Peter Hancock, president and chief executive of AIG. “The transaction also maintains AIG’s presence in a profitable market through a stake in a market leader that shares our focus on risk-based pricing and analytics as the foundation for our industry’s future. We are leaving UGC in the good hands of a forward looking management team.”