PMI Mortgage Insurance agrees to sell assets to Arch for $90 million

By Caroline Salls

Pittsburgh, Feb. 8 - PMI Mortgage Insurance Co.'s receiver has entered into a $90 million asset purchase agreement with Arch U.S. MI Services Inc. and Arch Capital Group (U.S.) Inc., according to an 8-K filed Friday with the Securities and Exchange Commission by Arch Capital Group Ltd.

Specifically, the Arch entities have agreed to purchase intellectual property owned by, or licensed to, PMI, hardware and other information technology assets and contractual rights that make up PMI's information technology platform and leases, personal property, books and records, data and other assets.

The Arch entities will also purchase all of the outstanding shares of common stock of PMI Mortgage Insurance subsidiary PMI Mortgage Assurance Co.

In addition to the purchase price, the Arch entities will assume specified liabilities.

The Arch entities have deposited $4.25 million with an escrow agent to be held in trust and delivered to the buyer if the Arizona Superior Court, Maricopa County, has not approved the transactions by the earlier of 120 days from the date of the first court hearing to seek approval of the transactions and Aug. 15, 2013 or if the purchase agreement is terminated for any reason other than the buyer's material breach.

If PMI enters into an agreement to complete a superior proposal, it will pay the Arch entities a $3.1 million break-up fee.

According to the 8-K, the buyer expects to hire a "substantial majority" of PMI employees after closing.

Arch said PMI and an affiliate of the buyer will also enter into a quota share reinsurance agreement under which the affiliate will agree to provide 100% quota share indemnity reinsurance to PMI for all certificates of insurance that were issued between and including Jan. 1, 2009 and Dec. 31, 2011 that are not in default as of the closing date and that are not subject to lender captive reinsurance arrangements.

PMI will be paid an upfront $90 million ceding commission at closing, and the purchaser and PMI affiliate PMI Plaza LLC will enter into a lease under which the buyer will lease a portion of PMI's facilities in Walnut Creek, Calif., the 8-K said.

Stock sale agreement

Simultaneously with the execution of the asset purchase agreement, Arch U.S. MI Holdings Inc. has entered into an agreement with the receiver under which it will purchase all of the outstanding shares of the capital stock of CMG Mortgage Insurance Co.

In exchange for the shares, Arch will pay an amount equal to a percentage of the estimated book value of the CMG companies as of the end of the month ending before closing.

The buyer is currently expected to pay $120 million at closing for the CMG shares.

The sellers are also entitled to deferred consideration payments, which will be made in installments over an agreed upon period following the closing and will be determined based on the performance of the CMG companies' portfolio of insurance policies in force as of closing.

The buyer of the CMG shares has deposited $6 million with an escrow agent to be delivered if the share sale does not close by the earlier of the date that is 120 days from the date of the first court hearing to seek approval of the transactions and Aug. 15, 2013 or if the stock purchase agreement is terminated for any reason other than the buyer's breach.

The stock purchaser will also deposit $20 million with the escrow agent to be held to secure related indemnification obligations.

If the stock sellers enter into a superior proposal, the buyer will receive a $4.9 million break-up fee.

PMI Group, Inc. is a Walnut Creek, Calif.-based provider of residential mortgage insurance and credit enhancement products that filed for bankruptcy on Nov. 23, 2011 in the U.S. Bankruptcy Court for the District of Delaware under Chapter 11 case number 11-13730.

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