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A 9% shareholding in private mortgage insurance is likely to come first. United Guaranty submitted a $100 million NYSE listing later Wednesday, although the transaction could yield more than $500 million and possibly up to $1 billion, on the basis of an estimate of between $3 billion and $5 billion of stockprice.
The AIG has already announced that it is planning to launch the Unity mid-year. Measured in number of new policies and the insurance portfolio, United is the biggest private mortgage insurance company in the USA, expanding its position from position four in the post-crisis years. This specialist insurance company is in competition with six other private mortgage insurance companies, among them Arch Capital, Essent Group, Genworth Financial, MGIC Investment, NMI Holdings and Radian.
The latest flotation of Essent's mortgage insurance business is the company's latest flotation after having borrowed USD 335 million at USD 17 per unit in October 2013. United was founded in 1963 and has been a wholly owned business of AIG since 1981. Last year, United generated a net premium of USD 360 million of USD 1.1 billion in terms of net earned premium and has a net loss and expense of 48.6% as a percent of net earned premium.
In general, respondents are favourably disposed towards the mortgage insurance industry as a late-cycle game for home recoveries, with volume this year profiting from the initial investment of newcomers. KBW in January described the deal as "almost pointless" given the major challenge for AIG and the significant reduction in mortgage insurance ratings over the last two years.
Mortgages insurance companies also deal in relatively low forward P/E multipliers and price/book value relationships, with the average peak group according to Thomson Reuters being 8x and less than 1 x respectively. This low valuation is the outcome of some strong losses in the industry last year under heightened competitive and regulation pressure.
As a further blow to the transaction, Standard & Poor's downgraded United's BBB+ from A to A's A ratings in February in reaction to AIG's intention to sell the group. MetLife's private customer intentions are even less clear and could be split this year, possibly by an initial public offering.
Although MetLife works with consultants, it has not yet committed itself to an initial public offering, say source. MetLife's intentions took another turn last weekend when a U.S. district court decided to contest the insurance company as a Systemic Important Finance Institute (SIFI), a surprise result that led to a 5% rise in MetLife's share prices.
An analyst said the removal of the Financial Stability Oversight Council MetLife's term of " too big to fail affords extra financial liquidity. In January, the term gave some motivation to MetLife's January divestiture of its US retailing operations, despite MetLife's continued efforts to shake off capital-intensive insurance offerings such as life-guaranteed floating annuities. However, the company's commitment to the US retailing market has not been fully confirmed.
While MetLife is considering a Spin or flotation and has consultants on the case, ECM resources see this as a long term transaction as some of the companies to be divested are not currently operating as separate entities. According to an analyst, no business is possible until at least next year.
The MetLife win could motivate AIG and Prudential Financial to combat their use of the same name. In a Thursday memo, UBS analysts said that the verdict could also motivate the insurance sector to combat other changes in regulation, such as the upcoming Labor Ministry trustee regulations.