8-KMaterial AgreementsExhibits & Filings

ARCH CAPITAL GROUP LTD. 8-K Report, Material Agreement (Jun 5, 2013)

Filed June 5, 2013For Securities:ACGLACGLNACGLO

Summary

Arch Capital Group Ltd. (ACGL) announced a significant amendment to its previously agreed-upon acquisition of CMG Mortgage Insurance Company and its affiliates (CMG MI) from PMI Mortgage Insurance Co. and CMFG Life Insurance Company. This filing details revised terms that enhance the initial payment structure, setting a new floor for the purchase price and increasing the potential maximum purchase price. These amendments were made following discussions with Fannie Mae and Freddie Mac, key creditors of PMI, and have successfully avoided objections from these government-sponsored enterprises, clearing a critical hurdle for regulatory approval. The revised terms include an increased initial payment at closing, set at 80% of CMG MI's book value compared to the original 60%, with a minimum purchase price of $185 million. Additionally, the maximum potential purchase price has been raised to 150% of the pre-closing portfolio's book value over an earnout period. A new quota share reinsurance agreement is also part of the revised deal, where CMG MI will cede 20% of its new primary flow mortgage insurance business to PMI Insurance Co. for seven years. These modifications appear to facilitate the path towards closing the transaction, expected in late 2013, subject to court and regulatory approvals.

Key Highlights

  • 1Arch Capital Group Ltd. (ACGL) has amended its agreement to acquire CMG Mortgage Insurance Company (CMG MI).
  • 2The initial payment at closing for CMG MI has been increased from 60% to 80% of its closing date book value.
  • 3The Closing Date Payment will be based on the greater of $185 million or CMG MI's actual closing date book value, establishing a minimum purchase price.
  • 4The overall maximum purchase price payable has been increased from 110% to 150% of the closing date book value over the earnout period.
  • 5Discussions with Fannie Mae and Freddie Mac resulted in no objections to the transaction, easing regulatory approval concerns.
  • 6A new quota share reinsurance agreement will be entered into, where CMG MI cedes 20% of new business to PMI Insurance Co. for seven years.
  • 7The transaction is subject to approvals from the Arizona receivership court, regulators, and government-sponsored enterprises, with an expected closing in late 2013.

Frequently Asked Questions

This 8-K filing announces material amendments to the definitive agreements for Arch Capital Group's acquisition of CMG Mortgage Insurance Company (CMG MI). It details revised financial terms and structures, including updated payment schedules and a new reinsurance agreement.

The initial payment at closing is now 80% of CMG MI's book value (up from 60%), with a guaranteed minimum payment of $185 million. The maximum potential purchase price has also been increased to 150% of the closing date book value over the earnout period.

Discussions with Fannie Mae and Freddie Mac, as major creditors of PMI, led to revised terms and importantly, they did not file objections to the transaction. This significantly de-risks the regulatory approval process for the acquisition.

A new agreement will have CMG MI cede 20% of its new primary flow mortgage insurance business to PMI Insurance Co. on a funds-withheld basis for the first $25 billion in original loan amounts. This agreement will last for seven years. This structure likely helps manage risk and capital allocation post-acquisition.