Arch further diversifies into mortgage insurance with $3.4bn deal

Arch Capital Group is to further expand its footprint in the mortgage insurance market by acquiring two businesses from American International Group (AIG) for around $3.4 billion.

The deal offers Arch further diversification in a sector that has served it during a period of soft rates in other parts of its business. It also further streamlines AIG and makes it more focused in line with that company’s strategy.

Arch will acquire United Guaranty Corporation (UGC), a provider of mortgage insurance, and AIG United Guaranty Insurance (Asia).

Arch will pay AIG approximately $3.4 billion, and will assume AIG’s quota share of UGC’s mortgage insurance on a prospective basis, upon the closing of the deal.

The transaction is anticipated to close in the late fourth quarter of 2016 or the early first quarter of 2017. In this time, the purchase price could be reduced by a special dividend of up to $250 million from UGC to AIG prior to closing.

Constantine Iordanou, chairman and chief executive officer (CEO) of Arch, said: “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.

“We are excited about the combination of Arch and United Guaranty because these companies have led the market in innovation through their risk based pricing models and focus on data analytics. 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.”

Following the deal, Arch expects to retain a significant presence in North Carolina while maintaining its existing mortgage insurance operations based in California, and to combine the companies’ global operations in Europe, Hong Kong and Australia.

Peter Hancock, president and CEO of AIG, said: “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.

“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.”

Iordanou added: “We expect to quickly integrate Arch’s existing California-based mortgage insurance operations and the North Carolina-based operations of United Guaranty while maintaining a strong presence in both locations, thereby further developing our superior customer service with nationwide and worldwide coverage.

“We believe that the expansion of our Mortgage Segment creates a better balanced company that continues our history of creating long term value for shareholders by producing strong underwriting returns.”