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AIG looking to sell mortgage unit to Arch

Deal-making: AIG is said to be in talks to sell United Guaranty Corp to Arch Capital Group for about $3.4 billion (Photograph by Michael Nagle/Bloomberg)

NEW YORK (Bloomberg) — American International Group is in talks to sell its mortgage insurer, United Guaranty Corp, to Arch Capital Group as chief executive officer Peter Hancock works to simplify his company and free up capital to return to shareholders, according to a person familiar with the matter.

The insurers are discussing a possible sale price of about $3.4 billion, said the person, who asked not to be identified discussing confidential talks.

A deal with Arch would accelerate New York-based AIG’s exit from United Guaranty, which filed in March for an initial public offering. Hancock’s company would have initially retained a majority stake under that plan. AIG was seeking a valuation of about $4 billion through an IPO, people familiar with the company’s plans said in May.

Hancock, under pressure from activist investors including Carl Icahn, announced an initiative in January to return $25 billion to shareholders over two years, with as much as $7 billion coming from divestitures. The CEO is focusing on improving margins in the property-casualty operations that are the core of his business, and has been scaling back in regions where the company doesn’t have significant scale.

The mortgage guaranty business, led by CEO Donna DeMaio, contributed $350 million of pretax operating income this year through June 30, compared with $302 million in the first six months of 2015.

A representative for Arch and AIG’s Matt Gallagher didn’t immediately respond to messages seeking comment. The Wall Street Journal reported earlier yesterday on the possibility of a deal with Arch.

Arch, the provider of commercial insurance, pushed into the business of backing home loans in 2013 with an agreement to add assets from PMI Group, which had been battered by losses tied to the real estate crisis. Mortgage insurers cover losses for lenders when homeowners default and foreclosure fails to recoup costs. Dinos Iordanou, the CEO of Bermudian-based Arch, previously worked at AIG.

United Guaranty was founded in 1963 and sold to AIG in 1981. The unit has rebounded from the housing crash, when AIG was required to tap a Treasury Department line within its rescue package to help restructure the operation.