Business Context and Reporting Period
Company: American International Group, Inc. (AIG)
Filing Type: Form 8-K (Current Report)
Date of Report: August 15, 2016
Event: Entry into a Material Definitive Agreement to sell its 100% interest in United Guaranty Corporation (UGC) to Arch Capital Group Ltd. (Arch).
Key Financial Metrics and Transaction Details
Total Consideration: $3.4 billion
Payment Structure:
- $2.2 billion in cash.
- $250 million in newly issued Arch perpetual preferred stock (terms similar to Arch Series C).
- $975 million in newly issued Arch convertible non-voting common-equivalent preferred stock.
Alternative Consideration: AIG may elect to receive up to $250 million in pre-closing dividends from UGC in lieu of the perpetual preferred stock, subject to regulatory approval, or Arch may provide additional cash.
Retained Interest: AIG retains all mortgage insurance business ceded under an existing 50% quota share agreement for business originated from 2014 through 2016.
Equity Exposure: Based on August 12, 2016, closing prices, the convertible preferred stock would convert into approximately 9% of Arch common stock.
Material Changes and Conditions
Conditions to Closing: The transaction is subject to requisite regulatory approvals or non-disapprovals, antitrust clearance, and other customary conditions.
Termination Provisions:
- Outside Date: March 31, 2017 (extendable to June 30, 2017 if regulatory approvals are pending).
- Breach: Termination allowed for material breach of representations, warranties, or covenants if uncured within 60 days.
- Governmental Order: Termination allowed if a governmental order restrains or prohibits the transaction.
Termination Fee: If terminated due to lack of regulatory approval by Arch or a governmental order, Arch must pay AIG a fee of $150 million.
Outlook, Management Commentary, and Lock-Up Provisions
Investor Rights Agreement: Simultaneous with closing, AIG and Arch will enter an Investor Rights Agreement governing the sale of the convertible preferred stock.
Lock-Up Schedule:
- 6 months after closing: AIG may sell up to one-third of the convertible preferred stock.
- 12 months after closing: AIG may sell up to two-thirds of the convertible preferred stock.
- 18 months after closing: All convertible preferred stock is freely transferable.
Registration Rights: AIG receives shelf registration and demand registration rights for the preferred stock, subject to the lock-up, as well as customary piggyback rights. AIG also has the right to require Arch to purchase the convertible preferred stock if Arch redeems or makes open-market purchases of its common shares.
Important Facts for Investor Verification
- Verify the status of required regulatory approvals and antitrust clearance, as these are conditions precedent to closing.
- Confirm the final election regarding the $250 million perpetual preferred stock versus pre-closing dividends.
- Monitor the "Outside Date" of March 31, 2017, and potential extensions to June 30, 2017, for transaction completion.
- Review the specific terms of the 50% quota share agreement AIG is retaining for 2014-2016 originated business.
- Assess the impact of the $150 million termination fee provision on potential deal failure scenarios.