American International Group has reached a deal to spin off its mortgage-insurance unit and sell it to Bermuda-based Arch Capital Group for around $3.4 billion.
Arch will pay $2.2 billion in cash plus stock for the business, United Guaranty, according to the Wall Street Journal. AIG will also retain some portions of the business through 2016.
The deal is a variation on AIG’s initial plan to launch an initial public offering of United Guaranty and retain a majority stake in the unit, which has about one-fifth market share in the United States.
The mortgage-insurance business makes money off of homebuyers who put down less than 20 percent of the purchase price, and are required to obtain mortgage insurance to protect banks from losses.
Although it United Guaranty is one of AIG’s strongest units — it generated income of $350 million during the first half of the year — it is a small division that’s easy to sell as company executives look to deliver cash to shareholders.
Billionaire investors Carl Icahn and John Paulson have criticized AIG’s performance and called for the company to be split into three parts. CEO Peter Hancock instead devised a plan to return $25 billion to shareholders by 2017. On Monday, Icahn bought an additional 1.2 million shares of the company, according to regulatory filings.
Arch, which has a market value of $9 billion, has been expanding its mortgage-insurance business, which currently has 3 percent of the U.S. market. The deal with AIG will immediately boost its standing, resulting in Arch “leapfrogging everybody and becoming the largest mortgage insurer out there,” according to CreditSights analyst Rob Haines. [WSJ] — E.B. Solomont