AIG has sold mortgage insurance arm United Guaranty Corporation (UGC) to Arch Capital Group for $US3.4 billion ($4.4 billion) under a strategic plan to focus on its core business, yielding to shareholders’ pressure for a more efficient operation.

The transaction consists of $US2.2 billion ($2.9 billion) in cash, $US250 million ($325 million) of newly issued Arch perpetual preferred stock and $US975 million ($1.27 billion) of newly issued Arch convertible non-voting common-equivalent preferred stock.

AIG will retain all mortgage insurance business ceded under an existing 50% quota share agreement between UGC and AIG subsidiaries from last year to this year.

CEO Peter Hancock says the sale supports AIG’s promise to return $US25 billion ($32.5 billion) to shareholders by the end of next year.

“We believe this transaction maximises UGC’s value while further streamlining our organisation,” he said.

“We have reached an important milestone in a strategy we committed to [in March last year].”

The UGC sale is in line with the objective to “sculpt the future AIG into a more focused company”, and “selective divestitures would be an important part of reaching that goal”.

AIG in January announced the plan to create a leaner, more profitable and focused insurer following intense pressure from activist shareholder Carl Icahn, who called for a break-up of the insurance giant to improve its value.

The group, which previously needed a US government bailout to avert collapse, posted a 6% rise in net profit to $US1.9 billion ($2.47 billion) for the second quarter to June 30, after chalking up losses in the three previous quarters.

Ratings agencies AM Best and Fitch have put Bermuda-based Arch Capital Group “under review” and on “negative watch” respectively in light of the UGC acquisition.

“The negative watch on [Arch Capital Group] reflects increased financial leverage to finance the deal,” Fitch said. “Fitch views the transaction as a slight credit negative… in the near term, given the execution and integration risk inherent in an acquisition, as well as the increased financial leverage post-merger.”