Arch U.S. MI, the U.S. subsidiary of Arch Capital Group Ltd. (ACGL) intends to foray into the U.S. Mortgage Insurance market. It has announced that it will acquire CMG Mortgage Insurance Company (CMG MI) from PMI Mortgage Insurance Company for $300 million. PMI has been under review of the Arizona Department of Insurance and CMFG Life Insurance Company (CUNA Mutual). It had a 50% equity ownership in CMG Mortgage Insurance Company and CMG Mortgage Assurance Company.

The deal is expected to culminate within a year, pending regulatory approval. Though the purchase consideration is estimated to be $300 million, additional amounts are payable depending on CMG MI's pre-closing portfolio over a pre-decided period. We believe the strong cash position of the company to be sufficient to support the transaction.

Per the transaction, Arch Capital will take over the entire capital stock of CMG MI and its associates and also PMI's mortgage Insurance operating platform and related assets. Moreover, Arch U.S. MI also expects to enter into a contract with CUNA Mutual, under which the latter will continue serving the credit union clients for the company. It is expected to strengthen its credit union market operations.

Additionally, an Arch U.S. MI affiliate would be responsible for reinsuring the run-off of in-force insurance on current, non-delinquent loans within PMI's primary mortgage insurance of 2009-2011 without any risk obligation. According to the deal, it will also provide quota share reinsurance to CMG MI.

Thus the deal will not only entail Arch Capital to penetrate the U.S. mortgage insurance market but also will help it obtain mortgage insurance license throughout the nation, thereby diversifying its business portfolio and providing a global operating platform. The company also expects to employ the competent senior management team of PMI to enhance its operating efficiency.

Management expects the deal to complement its objective to expand and capitalize on new specialty lines of business. The company is optimistic about the incorporation of PMI's staff strength as this will entail it to serve more clients more efficiently. Last month, another financial services company, Fidelity National Financial (FNF), acquired America's leading employee benefits platform Digital Insurance, Inc. (Digital) to expand its existing employee benefits market rapidly.

Arch Capital group currently carries a Zacks Rank #3 (Hold). Others from the industry, like Cincinnati Financial (CINF), RLI Corp. (RLI) as well as Fidelity National carry a favorable Zacks Rank #1 (Strong Buy) and are worth noting.


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Tickers in this Article: RLI, CINF, FNF, ACGL

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