Business Context and Reporting Period
Company: Arch Capital Group Ltd. (ACGL)
Filing Type: Form 8-K (Current Report)
Date of Report: February 7, 2013
Event: Entry into Material Definitive Agreements involving the acquisition of assets and subsidiaries from PMI Mortgage Insurance Co. (PMI) and CMG Mortgage Insurance Company (CMG MI).
Key Financial Metrics and Transaction Values
This filing details two concurrent acquisition agreements rather than standard periodic financial results. Key monetary values include:
- PMI Asset Purchase Agreement Consideration: $90.0 million aggregate consideration (assumption of liabilities plus cash payment).
- PMI APA Deposit: $4.25 million deposited in escrow.
- PMI Indemnification Escrow: $10.0 million to be held at closing.
- PMI Break-up Fee: $3.1 million payable by PMI if terminated for a superior proposal.
- CMG Stock Purchase Agreement Consideration: Estimated $120 million closing payment (based on estimated book value), subject to adjustment and deferred payments based on portfolio performance.
- CMG SPA Deposit: $6.0 million deposited in escrow.
- CMG Indemnification Escrow: $20.0 million to be held at closing.
- CMG Break-up Fee: $4.9 million payable by CMG MI if terminated for a superior proposal.
Note: The filing does not provide ACGL's current revenue, profit, cash flow, or debt levels.
Material Changes and Transaction Structure
ACGL subsidiaries entered into definitive agreements to acquire mortgage insurance operations from two entities in rehabilitation or restructuring:
- PMI Acquisition: Arch U.S. MI Services Inc. will purchase specific assets (IT platform, intellectual property, data) and all shares of PMI Mortgage Assurance Co. from the Receiver of PMI. This includes a 100% quota share reinsurance agreement for PMI policies issued between 2009 and 2011, with PMI receiving a $90 million ceding commission.
- CMG Acquisition: Arch U.S. MI Holdings Inc. will purchase all capital stock of CMG MI and CMG Mortgage Assurance Company from CMG Sellers (CUNA Mutual and PMI). The purchase price is performance-based with deferred consideration.
Outlook, Risks, and Conditions
Closing Conditions: Both transactions are expected to close in 2013 but are subject to:
- Expiration of the Hart-Scott-Rodino (HSR) waiting period.
- Approval by the Arizona Superior Court (Maricopa County).
- Receipt of regulatory and government-sponsored entity consents.
- For the PMI deal: At least 70% of specified business employees accepting employment offers.
- Interdependency: The CMG deal is conditioned on the closing of the PMI deal, and vice versa.
Risks and Contingencies:
- Termination: Agreements may be terminated for material breach, failure to close within 12 months, or receipt of a superior proposal.
- Regulatory Capital: The CMG Purchaser may be required to make financial commitments to the CMG Companies based on regulatory discussions.
- Escrow Forfeiture: Deposits ($4.25M and $6.0M) are at risk if the agreements are terminated due to the Purchaser's material breach.
Investor Verification Checklist
- Verify the status of Arizona Superior Court approval for the PMI rehabilitation sale.
- Confirm the outcome of the HSR Act antitrust review for both transactions.
- Monitor the percentage of PMI employees accepting employment offers (70% threshold).
- Review the final determination of the CMG Companies' book value to confirm the $120 million estimated closing payment.
- Assess any additional capital requirements imposed by regulators on the CMG Companies prior to closing.