AIG Reaches Deal to Sell Mortgage-Insurance Unit to Arch Capital -- 2d Update
August 15 2016 - 5:30PM
Dow Jones News
By Leslie Scism and Joann S. Lublin
American International Group Inc. struck a deal to sell its
mortgage-guarantee unit for about $3.4 billion, as the insurer
speeds up the return of cash to restive shareholders.
The Wall Street Journal had reported earlier Monday that a deal
between AIG and the buyer, Bermuda-based insurer and reinsurer Arch
Capital Group Ltd., could be reached soon.
AIG had disclosed plans early this year to stage an initial
public offering of the mortgage business, known as United Guaranty,
while retaining a majority stake. Selling the unit outright helps
it more quickly meet a goal of returning $25 billion to
shareholders. Indeed, there have been several instances lately in
which companies have opted for sales instead of initial public
offerings as the new-issue market languishes. The Wall Street
Journal reported in early August that AIG was open to an outright
sale of the mortgage-insurance unit.
According to the terms of the deal, Arch will pay $2.2 billion
in cash plus $975 million in Arch preferred stock and $250 million
in another type of preferred stock, dividends or cash. AIG will
also keep all mortgage-insurance business that is ceded under an
existing sharing agreement between United Guaranty and AIG
subsidiaries for business that was originated from 2014 through
2016.
Home buyers who put down less than 20% of the purchase price are
required to obtain mortgage insurance to protect the lender from
losses. Since the housing-bubble burst, mortgage insurers have
posted better results due to the increasing quality of underlying
loans and fewer defaults as the U.S. economy gradually
improves.
AIG's mortgage-insurance operation, with about 20% market share
in the U.S., has been one of the company's star performers of late.
But it is considerably smaller than AIG's other businesses and has
long operated as a separate entity. That makes it easier to divest
than other parts of the company -- one of the world's biggest
property-casualty businesses with a leading U.S. life-insurance
operation -- as it seeks to slim down and make good on the
ambitious capital-return pledge.
For the six months through June 30, the unit delivered $350
million in pretax operating income out of a companywide total of
$2.57 billion.
In its second-quarter earnings release in early August, AIG said
its year-to-date return of capital to shareholders -- mostly from
share buybacks -- stood at $7.9 billion. The board said then it
would add $3 billion to its stock buyback plan.
Last fall and early this year, AIG was in a public showdown with
billionaire investors Carl Icahn and John Paulson, who called for a
three-way split of the insurance conglomerate and criticized its
performance.
They contended that if AIG split into parts, it could escape
onerous regulations imposed by federal policy makers under its
designation as a "systemically important financial institution."
Federal regulators had tagged AIG with the label after its
near-collapse in 2008, which necessitated one of the biggest
bailouts -- since fully repaid -- of the financial crisis.
AIG Chief Executive Peter Hancock maintained that such a
three-way split wasn't in shareholders' best interests. He instead
updated the company's strategy in January with measures that he
said would better serve investors -- including the plan to return
$25 billion by the end of 2017 and the IPO of United Guaranty,
among other divestitures.
In May, AIG expanded its board to include Mr. Paulson and a
representative of Mr. Icahn's firm.
The company's shares, down considerably from their precrisis
highs, had still fallen nearly 5% this year as of midday
Monday.
For the second quarter, AIG posted a 6.3% increase in net income
as it deliberately shrank the amount of insurance sold to weed out
its exposure to poorly performing business lines. It said it had
made strong progress in boosting profitability in its core
property-casualty unit and improving its overall return on equity,
which investors had been urging.
Arch is big in property-casualty insurance too. The
Bermuda-based company, with a market value of just over $9 billion
Monday morning, has been seeking to expand its mortgage-insurance
business, which currently represents about 11% of its premium
revenue.
Arch traces its roots to 1995, but its development into a major
player in property-casualty began after the 9/11 terrorist attacks.
Then, new executives joined and private-equity firms infused it
with capital to take advantage of then-rapidly rising
property-casualty insurance rates and begin what would be an
expansion into many new specialty areas.
Arch got into the mortgage-insurance after the financial crisis
and the bursting of the housing-bubble, when numerous U.S. mortgage
insurers posted large losses. Arch acquired mortgage-insurance
operations out of receivership proceedings.
In an earnings conference call in July, analysts asked Arch
executives about potential acquisitions to boost its
mortgage-insurance business. Arch Chief Executive Constantine
Iordanou said the company's focus was on "see[ing] if we can build
it organically. We're not excluding anything that might be thrown
our way and is attractive to us."
Write to Leslie Scism at leslie.scism@wsj.com and Joann S.
Lublin at joann.lublin@wsj.com
(END) Dow Jones Newswires
August 15, 2016 17:15 ET (21:15 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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