AIG Agrees to Sell United Guaranty For $3.4B

August 16, 2016

American International Group, Inc. [AIG] has entered into an agreement to sell its 100 percent interest in United Guaranty Corporation [UGC] to Arch Capital Group Ltd. [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.

Total consideration for the transaction is $3.4 billion, consisting of $2.2 billion of cash, $250 million of newly issued Arch perpetual preferred stock, and $975 million of newly issued Arch convertible non-voting common-equivalent preferred stock.

In lieu of receiving the perpetual preferred stock, AIG may elect to receive up to $250 million in pre-closing dividends, subject to regulatory approval, or Arch may provide additional cash consideration.

In addition to the $3.4 billion of total consideration, AIG will retain all mortgage insurance business ceded under an existing 50% quota share agreement between UGC and AIG subsidiaries for business originated from 2014 through 2016.

“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 Officer 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.”

“We believe this transaction maximizes UGC’s value while further streamlining our organization. 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 $25 billion 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.”

Closing of this transaction is subject to required regulatory approvals.

Each share of convertible non-voting common-equivalent preferred stock automatically converts to ten Arch common shares upon transfer to a third-party in a widely dispersed offering or certain other transfers.

Based on the closing stock price of Arch on August 12, 2016, the convertible non-voting common-equivalent preferred stock would convert into approximately 9% of the Arch common stock [based on the number of shares outstanding that day].

AIG 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.”

Mr. Hancock added, “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.”

J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC served as financial advisors to AIG, and Sullivan & Cromwell LLP served as legal advisor to AIG on the transaction.

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