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Arch Capital (ACGL) Set to Take Over WLMI With Westpac Group

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Arch Capital Group Ltd. (ACGL - Free Report) inked a deal with the Westpac Group (Westpac) to buy Westpac Lenders Mortgage Insurance Limited (WLMI).
WLMI is an Australian Prudential Regulation Authority (APRA) authorized captive lenders mortgage insurance (LMI) provider to Westpac and it had shareholders’ equity of $AUD 285.7 million as of Sep 30, 2020.

Per the deal, Westpac will enter into a 10-year exclusive supply agreement for Arch Capital to provide Lenders Mortgage Insurance (LMI) to the bank’s customers. The transaction also includes small, fixed annual payments to Westpac over the next 10 years.

Westpac is Australia’s oldest bank and one of four major banking organisations in the country as well as one of the largest in New Zealand. It provides a wide array of banking and financial services in these markets including consumer, business, institutional banking and wealth management services. It grew up as a company and expanded both in Australia and throughout Asia, the United Kingdom and the United States.

Once the buyout is completed, Arch Capital aims to merge the operations of WLMI and its existing Australian LMI company, Arch LMI Pty Ltd.
Arch LMI, the wholly owned subsidiary of Arch Capital Group, brings innovation along with experience and financial strength to the Australian lending market.

In January 2019, Arch LMI was authorized by APRA to write lenders’ mortgage insurance on a direct basis in Australia. Arch LMI is headquartered in Sydney, Australia and focuses on providing direct lenders’ mortgage insurance and reinsurance to the Australian market. APRA is an independent statutory authority responsible for prudential supervision of institutions across banking, insurance and superannuation, and promotes financial stability in the island nation.

The new agreement further cements the Westpac bank’s existing relationship with Arch Capital, which has provided reinsurance services to the LMI unit since 2011.

This acquisition of WLMI is expected to fortify Arch Capital’s Australian LMI flow of business from Westpac Bank. It will further boost the insurance provider’s position as the only globally diversified insurer of mortgage credit risk.

The creation of the mortgage group provides Arch Capital with a more diverse revenue stream. In addition to Australia, Arch Capital has mortgage insurance and reinsurance operations in Bermuda, Europe and the United States.

With the 2016 acquisition of United Guaranty Corporation (UGC), which is a leading provider of mortgage insurance products and services to national and regional banks and mortgage originators, the company became a principal provider of U.S. mortgage insurance. The recent buyout of WLMI is likely to bolster Arch Capital’s position as a leading provider of LMI in Australia.

Growth in Australian single premium mortgage insurance, higher level of U.S. primary mortgage insurance in force on monthly premium policies and an increase in government sponsored enterprise (GSE) credit risk-sharing transactions contribute to the premium income of this segment, which in turn, drives the revenues of Arch Capital.

Shares of Arch Capital, currently carrying a Zacks Rank #3 (Hold), have gained 39% in the past year compared with the industry’s increase of 39.5%.

Stocks to Consider

Some better-ranked players in the property and casualty industry may look at Fidelity National Financial (FNF - Free Report) , Cincinnati Financial (CINF - Free Report) and Alleghany (Y - Free Report) , each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Fidelity National’s bottom line surpassed estimates in each of the last four quarters, the average being 41.36%.

The bottom line of Cincinnati Financial surpassed earnings estimates in two of the last four quarters, the average surprise being 4.10%.

Alleghany’s bottom line surpassed estimates in two of the last four quarters (missed the mark in the other two), the average beat being 34.08%.

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