A.M. Best has revised the outlooks to stable from negative and affirmed the Financial Strength Rating (FSR) of A+ (Superior) and the Long-Term Issuer Credit Rating (Long-Term ICR) of aa- of Arch Reinsurance Ltd. (Arch) (Bermuda) and its strategic affiliates. A.M. Best also has revised the outlooks to stable from negative and affirmed the Long-Term ICR of a- and all Long-Term Issue Credit Ratings (Long-Term IRs) of the ultimate holding company, Arch Capital Group Ltd (Arch Capital) (Bermuda) (NASDAQ:ACGL), and Arch Capital Group (US) Inc (Delaware), and Arch Capital Finance LLC (Delaware). (See below for a detailed listing of the companies and ratings.)
The ratings reflect Archs balance sheet strength, which A.M. Best categorizes as strongest, as well as its strong operating performance, favorable business profile and appropriate enterprise risk management. The ratings are based on Arch’s historically strong operating performance compared with its peers, its balance sheet strength, as measured by Best’s Capital Adequacy Ratio, and strong management team. Arch continues to outperform many of its peers on most operating metrics while maintaining a strong risk-adjusted capital position despite the soft pricing environment, significant stressed ultimate loss stress test required by the A.M. Bests Evaluating Mortgage Insurers methodology, and low risk-adjusted investment market returns. In years with large market losses such as Hurricanes Katrina, Rita and Wilma in 2005; the financial crisis in 2008; the string of global catastrophes in 2011; and the natural catastrophe activity experienced in 2017, Arch has performed well compared with almost all of its peers. This robust performance is in part the result of Arch’s strong risk management framework. In addition, Arch has demonstrated that it will actively manage the re/insurance cycle.
Arch has strived to seek opportunities for return over the past several years with its entry into the mortgage insurance business serving as a recent example of this flexibility. Arch has demonstrated an ability to execute its business plan prudently, but remain nimble enough to take advantage of opportunities.
Partially offsetting these positive rating factors are the significant increase in financial leverage as Arch issued senior unsecured notes and preferred shares at the end of 2016, the proceeds of which helped fund the purchase of United Guaranty Corporation (United Guaranty). Interest and preferred dividend coverage remains strong. While both financial leverage and coverage have always remained supportive of the ratings, the outlook revision to stable recognizes the pay down of some financial leverage and the significant increase in capital from retained net income during 2017, which improved Archs financial leverage measures substantially. A.M. Best recognizes the additional risk assumed by the organization, which has improved, but remains higher than historical norms. Additionally, the revised outlook to stable reflects the successful operational integration of United Guaranty, as well as the significant contribution of the United Guaranty business to Archs net income and retained earnings during 2017.
A.M. Best also recognizes that the mortgage insurance business relies heavily on financial models that can vary from actual results. A.M. Best utilized what it believes to be a conservative stress scenario for Arch’s mortgage insurance book of business when calculating stress tested risk-adjusted capitalization. Mortgage insurance products have a relatively long exposure period when compared with most of Arch’s current property casualty insurance and reinsurance products, which can be characterized as medium tail on average. A.M. Best considered long-term sources of liquidity in the evaluation of these potential tail risk events.
Arch’s ratings may be downgraded, or the outlook may revert to negative if the operating performance of the group decays substantially, if financial leverage measures significantly increase, or if risk-adjusted capitalization declines precipitously. It should be noted that Archs operating performance for the natural catastrophe ridden year of 2017, which was also the first full calendar year of United Guaranty mortgage insurance contribution, was significantly better than nearly all of the comparison companies as measured by underwriting performance and return on equity.
Lastly, Archs ratings outlooks were revised to stable in part due to the successful management changes in which the CEO and CFO were replaced by strong, long-tenured Arch executives. Arch was able to avail itself of the companys deep talent pool for these transitions, which occurred during 2018. Also, Arch has been able to retain significant executives from United Guaranty, all of whom have been fully integrated into Archs operations.
The FSR of A+ (Superior) and the Long-Term ICRs of “aa-” have been affirmed with the outlooks revised to stable from negative for Arch Reinsurance Ltd. and its following affiliates:
- Arch Reinsurance Company
- Arch Insurance Company
- Arch Specialty Insurance Company
- Arch Excess & Surplus Insurance Company
- Arch Indemnity Insurance Company
- Arch Insurance Canada Ltd.
- Alwyn Insurance Company Ltd.
- Arch Insurance Company (Europe) Limited
The following Long-Term IRs have been affirmed with the outlooks revised to stable from negative:
Arch Capital Group Ltd— — “a-” on $300 million 7.35% senior unsecured notes, due 2034 — “bbb” on $325 million 6.75% non-cumulative preferred shares, Series C — bbb on $450 million 5.25% non-cumulative preferred shares, Series C
Arch Capital Group (U.S.) Inc. (guaranteed by Arch Capital Group Ltd)— — “a-” on $500 million 5.144% senior unsecured notes, due 2043
Arch Capital Finance LLC (guaranteed by Arch Capital Group Ltd) — “a-” on $500 million 4.011% senior unsecured notes, due 2026 — “a-” on $450 million 5.031% senior unsecured notes, due 2046
The following indicative Long-Term IRs under the existing shelf registration have been affirmed with the outlooks revised to stable from negative:
Arch Capital Group Ltd— — “a-” on senior unsecured debt — “bbb+” on subordinated debt — “bbb” on preferred stock
Arch Capital Group (US) Inc (guaranteed by Arch Capital Group Ltd.) — “a-” on senior unsecured debt — “bbb+” on subordinated debt — “bbb” on preferred stock
This press release relates to Credit Ratings that have been published on A.M. Bests website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see A.M. Bests Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Bests Credit Ratings. For information on the proper media use of Bests Credit Ratings and A.M. Best press releases, please view Guide for Media – Proper Use of Bests Credit Ratings and A.M. Best Rating Action Press Releases.
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