American International Group Inc. is nearing a deal to sell its mortgage-guaranty unit to Arch Capital Group Ltd. for about $3.4 billion, according to people familiar with the matter, as the insurance giant has been speeding up the return of cash to restive shareholders.

An agreement between the companies could be reached as soon as early this week, some of the people said, cautioning that the talks could still fall apart.

AIG had announced plans early this year to stage an initial public offering of the mortgage business, known as United Guaranty, while retaining a majority stake. Selling the unit outright would help it more quickly meet a goal of returning $25 billion to shareholders. Indeed, there have been a number of instances lately in which companies have opted for sales instead of initial public offerings as the new-issue market languishes. The Wall Street Journal reported in early August that AIG was open to an outright sale of the mortgage-insurance unit.

Home buyers who put down less than 20% of the purchase price are required to obtain mortgage insurance to protect the lender from losses. Since the housing-bubble burst, mortgage insurers have posted better results due to the increasing quality of underlying loans and fewer defaults as the U.S. economy gradually improves.

AIG's mortgage-insurance operation, with about 20% market share in the U.S., has been one of the company's star performers of late. But it is considerably smaller than AIG's other businesses and has long operated as a separate entity. That makes it easier to divest than other parts of the company—one of the world's biggest property-casualty businesses with a leading U.S. life-insurance operation—as it seeks to slim down and make good on the ambitious capital-return pledge.

For the six months through June 30, the unit delivered $350 million in pretax operating income out of a companywide total of $2.57 billion.

In its second-quarter earnings release in early August, AIG said its year-to-date return of capital to shareholders—mostly from share buybacks—stood at $7.9 billion. The board said then it would add $3 billion to its stock buyback plan.

Last fall and early this year, AIG was in a public showdown with billionaire investors Carl Icahn and John Paulson, who called for a three-way split of the insurance conglomerate and criticized its performance.

They contended that if AIG split into parts, it could escape onerous regulations imposed by federal policy makers under its designation as a "systemically important financial institution." Federal regulators had tagged AIG with the label after its near-collapse in 2008, which necessitated one of the biggest bailouts—since fully repaid—of the financial crisis.

AIG Chief Executive Peter Hancock maintained that such a three-way split wasn't in shareholders' best interests. He instead updated the company's strategy in January with measures that he said would better serve investors—including the plan to return $25 billion by the end of 2017 and the IPO of United Guaranty, among other divestitures.

In May, AIG expanded its board to include Mr. Paulson and a representative of Mr. Icahn's firm.

The company's shares, down considerably from their precrisis highs, had still fallen nearly 5% this year as of midday Monday.

For the second quarter, AIG posted a 6.3% increase in net income as it deliberately shrank the amount of insurance sold to weed out its exposure to poorly performing business lines. It said it had made strong progress in boosting profitability in its core property-casualty unit and improving its overall return on equity, which investors had been urging.

Arch is big in property-casualty insurance too. The Bermuda-based company, with a market value of just over $9 billion Monday morning, has been seeking to expand its mortgage-insurance business, which currently represents about 11% of its premium revenue.

Arch traces its roots to 1995, but its development into a major player in property-casualty began after the 9/11 terrorist attacks. Then, new executives joined and private-equity firms infused it with capital to take advantage of then-rapidly rising property-casualty insurance rates and begin what would be an expansion into many new specialty areas.

Arch got into the mortgage-insurance after the financial crisis and the bursting of the housing-bubble, when numerous U.S. mortgage insurers posted large losses. Arch acquired mortgage-insurance operations out of receivership proceedings.

In an earnings conference call in July, analysts asked Arch executives about potential acquisitions to boost its mortgage-insurance business. Arch Chief Executive Constantine Iordanou said the company's focus was on "see[ing] if we can build it organically. We're not excluding anything that might be thrown our way and is attractive to us."

Write to Leslie Scism at leslie.scism@wsj.com and Joann S. Lublin at joann.lublin@wsj.com

 

(END) Dow Jones Newswires

August 15, 2016 13:25 ET (17:25 GMT)

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