American International Group Inc. agreed to sell mortgage insurer United Guaranty Corp. to Arch Capital Group Ltd. as Chief Executive Officer Peter Hancock works to simplify his company and free up capital to return to shareholders.
The deal is valued at $3.4 billion including $2.2 billion in cash and the rest in Arch securities, New York-based AIG said Monday in a statement. AIG will keep some mortgage-insurance business originated from 2014 through 2016.
"This transaction maximizes UGC's value while further streamlining our organization," Hancock said in the statement. "The deal also maintains our affiliation with the mortgage-insurance market and its leading company."
The Arch deal accelerates AIG's exit from United Guaranty, which filed in March for an initial public offering in which Hancock's insurer would have retained a majority stake. AIG sought a valuation of about $4 billion through an IPO, people familiar with the company's plans said in May. Hancock has been under pressure from activist investors including Carl Icahn, and announced a plan in January to return $25 billion to shareholders over two years with as much as $7 billion coming from divestitures.
The CEO is focusing on improving margins in the property-casualty operations that are the core of his New York-based business, and has been scaling back in regions where the company doesn't have significant scale.
The mortgage-guaranty business, led by CEO Donna DeMaio, contributed $350 million of pretax operating income this year through June 30, compared with $302 million in the first six months of 2015.
Arch hired former star banking analyst Meredith Whitney last year to oversee a group of outside managers who invest in equities. CEO Dinos Iordanou, who previously worked at AIG, expanded his Bermuda-based commercial insurer by pushing into the business of backing home loans in 2013 with an agreement to add assets from PMI Group Inc. Mortgage insurers cover losses for lenders when homeowners default and foreclosure fails to recoup costs.
Arch also is a reinsurer, which provides coverage for primary carriers, and is known for a venture it started in 2014 with JPMorgan Chase & Co.'s Highbridge operation. That business is considering an eventual IPO, people familiar with the matter said in April.
The Wall Street Journal reported earlier Monday on the possibility of a deal with Arch.
United Guaranty was founded in 1963 and sold to AIG in 1981. The unit has rebounded from the housing crash, when AIG was required to tap a Treasury Department line within its rescue package to help restructure the operation.
Arch advanced 3.1% to $77.09 at 4:02 p.m. in New York before the announcement. AIG climbed 0.6%.
