Arch M.I. to Buy Far Bigger Rival United Guaranty

Aug. 16--With the upcoming acquisition of its much larger rival, Arch Mortgage Insurance Co. will become the biggest mortgage insurance company in the industry.

Arch Capital Group Ltd. said in its second-quarter earnings report that Arch M.I. wrote $6.4 billion in new insurance -- more than doubling from a year earlier.

But even with the stunning growth, that was no match for United Guaranty Corp., which parent AIG reported wrote $13.0 billion during the same period.

Still, size was no obstacle for Arch M.I. to take over its much larger rival.

An announcement late Monday from Arch Capital indicated that an agreement has been reached for American International Group Inc. to sell the Greensboro, North Carolina-based subsidiary to Arch.

The transaction additionally includes the acquisition of AIG United Guaranty Insurance (Asia) Limited.

"The combination of Arch's existing mortgage insurance business with UGC's established business will create the largest private mortgage insurer in the world, based on insurance in-force, with a global footprint," Arch stated.

In the deal, Hamilton, Bermuda-based Arch Capital will pay around $3.4 billion for United Guaranty less a special dividend from United Guaranty to AIG of up to $250 million prior to closing. The purchase price will include $2.2 billion in cash, $0.25 billion in newly issued perpetual preferred stock and $0.975 billion in newly issued Arch convertible non-voting common-equivalent preferred stock.

In addition to the $3.4 billion purchase price, AIG will retain all mortgage insurance business ceded under an existing 50 percent quota-share agreement between United Guaranty and AIG subsidiaries for business originated from 2014 through 2016.

New York-based AIG disclosed in January that it planned to unload United Guaranty through an initial public offering in mid-2016.

There was no discussion by AIG in yesterday's announcement about why it abandoned the IPO plans.

Also absent from AIG's statement was any word on what will happen with United Guaranty President and Chief Executive Officer Donna DeMaio. She originally joined the organization in 2012.

"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," Arch Capital Group Chairman and CEO Constantine Iordanou stated in the announcement.

Arch said it expects to retain a significant presence in North Carolina.

Subject to regulatory and agency approval, the deal is expected to close either in the fourth quarter or during the first quarter of next year.

Credit Suisse is the financial advisor to Arch, while Cahill Gordon & Reindel LLP and Clyde & Co are acting as legal counsel.

At AIG, J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC served as financial advisors, while Sullivan & Cromwell LLP served as legal advisor

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