AIG building in New York. (Photo: AP)

— Editor’s note: This story was originally published on our partner site GlobeSt.com.

American International Group Inc. said late Monday afternoon that it had reached an agreement to sell its mortgage insurance unit, United Guaranty Corp., to Bermuda-based Arch Capital Group for about $3.4 billion in cash and stock. The deal will create the world’s largest private mortgage insurer, while also advancing AIG’s goal of returning $25 billion to shareholders by the end of 2017.

Peter Hancock, AIG’s president and CEO, says the UGC sale represents “an important milestone” in a strategy the company committed to in March 2015. In his first shareholder letter as CEO, Hancock wrote of plans to “ ‘sculpt the future AIG’ into a more focused company,” with selective divestitures “an important part of reaching that goal. We restated that objective earlier this year when we made the IPO and eventual sale of UGC a key part of an updated overall strategic framework for AIG.” Headquartered in Greensboro, NC, UGC is a wholly owned subsidiary of AIG.

The transaction consists of $2.2 billion of cash, $250 million of newly issued Arch perpetual preferred stock and $975 million of newly issued Arch convertible non-voting common-equivalent preferred stock. Additionally, AIG will retain all mortgage insurance business ceded under an existing 50% quota share agreement between UGC and AIG subsidiaries for business originated from 2014 through 2016.

At Arch, chairman and CEO Constantine Iordanou notes that the UGC acquisition will expand his company’s mortgage insurance business. “Our mortgage insurance segment expands and complements our strengths in the specialty insurance and reinsurance businesses, which continue to be central to our global, diversified operations,” he says.

Iordanou says UGC and Arch “have led the market in innovation through their risk based pricing models and focus on data analytics.” He adds, “We believe that the companies’ complementary risk management cultures will further accelerate innovation and sound risk management and help us to maximize our best-in-class processes in the specialty insurance space.”

The Wall Street Journal reported Monday that although the UGC unit, with $186.4 billion of first-lien primary mortgage insurance in force as of June 30, commands about a 20% domestic market share, it’s considerably smaller than AIG’s other businesses and therefore easier to divest. For the first six months of this year, UGC delivered $350 million in pretax operating income out of a companywide total of $2.57 billion. AIG’s property & casualty insurance business is among the world’s largest, and the company also is a leader in the life insurance sector domestically.

J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC served as financial advisors to AIG, and Sullivan & Cromwell LLP served as its legal advisor on the transaction. Credit Suisse is acting as sole financial advisor to Arch, and Cahill Gordon & Reindel LLP and Clyde & Co are acting as legal counsel. The sale is expected to close in the fourth quarter of this year or Q1 of ’17, pending approvals from regulators including the North Carolina Department of Insurance as well as from Fannie Mae and Freddie Mac.