(Bloomberg) -- American International Group Inc. agreed to sellmortgage insurer United Guaranty Corp.to Arch Capital GroupLtd. as Chief Executive Officer Peter Hancock works to simplifyhis company and free up capital to return to shareholders.

The deal is valued at $3.4 billion including $2.2 billion incash and the rest in Arch securities, New York-based AIG saidMonday in a statement. AIG will retain a portion ofmortgage-insurance business originated from 2014 through 2016through a previously disclosed intra-company risk transferdeal.

“This transaction maximizes UGC’s value while furtherstreamlining our organization,” Hancock said in the statement. “Thedeal also maintains our affiliation with the mortgage-insurancemarket and its leading company.”

The Arch agreement accelerates AIG’s exit from United Guaranty,which filed in March for an initial public offering in whichHancock’s insurer would have retained a majority stake. AIG soughta valuation of about $4 billion through an IPO, people familiarwith the company’s plans said in May. Hancock has been under pressure from activist investors includingCarl Icahn, and announced a plan in January to return $25billion to shareholders over two years with as much as $7 billioncoming from divestitures.

Hancock’s plan

The CEO is focusing on improving margins in theproperty-casualty operations that are the core of AIG. The NewYork-based company also offers life insurance and retirementproducts.

The non-cash portion of the Arch deal includes $975 million innon-voting preferred equity that is convertible into about 9percent of Arch’s common stock, according to the statement. Also,Arch agreed to turn over $250 million in perpetual preferred stock,though AIG has the option to receive up to that sum in pre-closingdividends instead.

AIG’s mortgage-guaranty business, led by CEO Donna DeMaio,contributed $350 million of pretax operating income this yearthrough June 30, compared with $302 million in the first six monthsof 2015. Separate AIG units accrued commissions of $113 millionlast year from United Guaranty in the risk-transfer deal, accordingto a prospectus.

Iordanou’s view

“AIG will continue to be a participant in the residential realestate market” through direct ownership of mortgage loans, aportfolio of structured securities, the holding of Arch stock andcontinued ties to United Guaranty, Hancock said in a note toemployees Monday, calling the deal a “milestone.” Arch CEO DinosIordanou said in a statement that his company and United Guarantyhave “led the market” with pricing models and data analytics.

Related: AIG chairman: Property & Casualty business fitswith Life unit

“We believe that the companies’ complementary risk-managementcultures will further accelerate innovation and sound riskmanagement and help us to maximize our best-in-class processes inthe specialty insurance space,” Iordanou said.

United Guaranty has about 1,050 employees and is based inGreensboro, North Carolina. Arch will maintain a significantpresence in that state while retaining mortgage-insuranceoperations in California, Iordanou’s company said in a separatestatement. International business will be combined in Europe, HongKong and Australia.

Whitney, JPMorgan

Arch hired former star banking analyst Meredith Whitney lastyear to oversee a group of outside managers who invest in equities.Iordanou, who previously worked at AIG, expanded his Bermuda-basedcommercial insurer by pushing into the business of backing homeloans in 2013 with an agreement to add assets from PMI Group Inc.Mortgage insurers cover losses for lenders when homeowners defaultand foreclosure fails to recoup costs.

Arch also is a reinsurer, which provides coverage for primarycarriers, and is known for a venture it started in 2014 withJPMorgan Chase & Co.’s Highbridge operation. That business isconsidering an eventual IPO, people familiar with the matter saidin April.

Arch advanced 3.1 percent to $77.09 at 4:02 p.m. in New Yorkbefore the announcement, extending its gain this year to 11percent. AIG climbed 0.6 percent, narrowing its decline since Dec.31 to 4.4 percent. The Wall Street Journal reported earlier Mondayon the possibility of a deal with Arch.

JPMorgan and Morgan Stanley were bankers for AIG, which gotlegal advice from Sullivan & Cromwell LLP. Arch used CreditSuisse Group AG and the law firms Cahill Gordon & Reindel LLPand Clyde & Co.

United Guaranty was founded in 1963 and sold to AIG in 1981. Theunit has rebounded from the housing crash, when AIG was required totap a Treasury Department line within its rescue package to helprestructure the operation.