AIG to sell mortgage unit for $3.4bn

October 2016 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

In a move designed to help streamline its operations, American International Group Inc (AIG) has announced that it is to sell its 100 percent interest in United Guaranty Corporation (UGC) to Arch Capital Group Ltd (ACGL).

The transaction, the total consideration for which is $3.4bn, consists of $2.2bn of cash, $250m of newly issued Arch perpetual preferred stock and $975m of newly issued Arch convertible non-voting common-equivalent preferred stock.

Additionally, AIG will retain all mortgage insurance business ceded under an existing 50 percent quota share agreement between UGC and AIG subsidiaries for business originated from 2014 through 2016. And in lieu of receiving the perpetual preferred stock, AIG has stated that it may decide to receive up to $250m in pre-closing dividends, subject to regulatory approval, or Arch may provide additional cash consideration.

A leading global insurance organisation founded in 1919, AIG provides a wide range of property casualty insurance, life insurance, retirement products, mortgage insurance and other financial services to customers in more than 100 countries and jurisdictions. The company’s diverse offerings include products and services that help businesses and individuals protect their assets, manage risks and provide for retirement security.

“Today we have reached an important milestone in a strategy we committed to in March 2015, when I stated in my first shareholder letter as AIG CEO that we would ‘sculpt the future AIG’ into a more focused company and that selective divestitures would be an important part of reaching that goal,” said Peter Hancock, president and chief executive of AIG. “We restated that objective earlier this year when we made the IPO and eventual sale of UGC a key part of an updated overall strategic framework for AIG.”

A leading private mortgage insurance company in the US and a wholly owned subsidiary of AIG, UGC has active relationships with over 1800 customers and approximately 1050 employees including a national sales force of approximately 100 professionals.

Mr Hancock added: “We believe this transaction maximises UGC’s value while further streamlining our organisation. It puts us in a stronger position to invest in the talent and technology essential to being our clients’ most valued insurer, while we continue to deliver on the promise made by AIG’s Board and management to return $25bn to our shareholders by the end of 2017. The deal also maintains our affiliation with the mortgage insurance market and its leading company, through retention of recent business written by UGC and our stake in Arch.”

ACGL, a Bermuda-based writer of specialty lines of property and casualty insurance and reinsurance, as well as mortgage insurance and reinsurance, on a worldwide basis, has agreed to enter into an investor rights agreement with Arch, which will provide, among other things, customary registration rights following a lock-up period.

“We are excited about the combination of ACGL and United Guaranty because these companies have led the market in innovation through their risk based pricing models and focus on data analytics,” said Dinos Iordanou, chairman and CEO of Arch Capital Group Ltd. “We believe that the companies’ complementary risk management cultures will further accelerate innovation and sound risk management and help us to maximize our best-in-class processes in the specialty insurance space.”

Serving as financial advisers to AIG during the transaction has been J.P. Morgan Securities LLC and Morgan Stanley & Co, while Sullivan & Cromwell LLP has served as legal adviser.

“We believe UGC and the outstanding professionals who work there have gained a strong partner in Arch to continue to grow and facilitate home ownership for consumers and provide valuable and necessary protection to mortgage lenders,” concluded Mr Hancock.

The closing of the transaction is subject to required regulatory approvals.

Fraser Tennant