Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Like an archer at the Olympics, Arch Capital has landed its target: AIG's mortgage insurance business.

The Bermuda-based insurer said late Monday that it would buy United Guaranty for $3.4 billion in cash and stock. The deal is set to be more than 35 percent accretive to both its earnings per share on a run-rate basis and will also immediately lift the company's book value per share. Investors applauded Arch's biggest deal on record -- the shares climbed as much as 5 percent on Tuesday to the highest level since its initial pubic offering some 21 years ago. 

New Heights
Arch Capital shares ascended to their highest level since its 1995 initial public offering as shareholders cheered its United Guaranty deal
Source: Bloomberg

The transaction isn't a complete surprise. Arch has been scaling back its property-and-casualty operations and recently made a notable stride in mortgage insurance. In the second quarter, that culminated in the latter posting an 81 percent jump in new premiums written, a figure that was driven by its reinsurance of Australian mortgages. 

Head of the Home
With its acquisition of United Guaranty, Arch Capital becomes the top player in U.S. mortgage insurance
Source: Arch Capital investor presentation
*Figures based on new insurance written over 12 months to June 30, 2016 for all companies except United Guaranty, which was based on 12 months to March 31.

For AIG, the price tag is lower than the $4 billion United Guaranty was said to be valued at in a planned IPO, but the sale allows for a cleaner exit. The insurance giant will receive at least $2.2 billion up front, and can begin selling its Arch Capital shares after an initial six month lock-up.

The proceeds will come in handy for AIG, considering it hopes to return $25 billion to shareholders by the end of next year through dividends and buybacks. On that basis, one can assume AIG's newest board members -- John Paulson and Samuel Merksamer of Icahn Capital -- were quick to give this deal the green light. Every dollar counts. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net