A.M. Best has removed from under review with developing
implications and affirmed the Financial Strength Rating (FSR) of A+
(Superior) and the Long-Term Issuer Credit Ratings (Long-Term ICRs)
of “aa-” of Arch Reinsurance Ltd. (Arch) (Bermuda) and its
strategic affiliates. A.M. Best also has removed from under review
with developing implications 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). Additionally, A.M. Best has assigned a
Long-Term ICR of “a-” to Arch Capital Finance LLC
(Delaware). The outlook assigned to these Credit Ratings (ratings)
is negative. (See below for a detailed listing of the companies and
ratings.)
The assigned negative outlooks primarily reflect a significant
increase in financial leverage, as Arch issued $950 million of
senior unsecured notes and $450 million of 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 financial
leverage and coverage remain supportive of the ratings, the
outlooks reflect the additional risk assumed by the organization,
which may manifest itself in lost opportunity costs as Arch has
made a significant commitment to the mortgage insurance industry.
Additionally, the assigned negative outlooks reflect the
significant mortgage insurance risk assumed by Arch upon the
purchase of United Guaranty and the integration risk of this large
acquisition. Arch’s ratings may be downgraded if mortgage insurance
model results vary materially compared with underlying actual
results, or if there is a degradation in underwriting standards in
the mortgage insurance market or any other early warning sign of
increasing unexpected risk. Additionally, loss or expense issues
caused by an unsuccessful integration of United Guaranty and the
mortgage risk written may result in additional rating pressure. The
outlooks may be revised to stable if financial leverage measures
decrease, and mortgage insurance risk continues to be relatively
benign. Additionally, successful integration of United Guaranty and
assumption of mortgage risk written may stabilize the ratings. The
mortgage insurance business relies heavily on financial models that
can have significant model result volatility based on model inputs
and assumptions. A.M. Best contemplated 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 and reinsurance products have a
relatively long tail as does most of Arch’s current
property/casualty insurance and reinsurance products. These facts
result in the ability to pay claims over time at the potential cost
of losses manifesting themselves throughout the remaining tail of
each respective product. A.M. Best considered long-term sources of
liquidity in the evaluation of these potential tail risk
events.
The ratings are based on Arch’s historically strong operating
performance compared with its peers, strong balance sheet strength,
as measured by Best's Capital Adequacy Ratio (BCAR), 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 and anemic
investment returns presented by the market. In years where there
have been large market losses such as KRW in 2005, the financial
crisis in 2008, and the string of global catastrophes in 2011, Arch
has performed well compared with most of its peers. This robust
performance is in part attributable to the result of Arch’s strong
risk management framework. In addition, Arch has demonstrated that
it will actively manage the re/insurance cycle, and over the past
several years, Arch has strived to seek opportunities for return
wherever they present themselves. Arch’s foray into the mortgage
insurance business is a recent example of this flexibility. Arch
has demonstrated that it prudently executes its business plan but
remains nimble enough to take advantage of opportunities.
Partially offsetting these positive rating attributes, in
addition to the aforementioned increase in financial leverage and
mortgage insurance risk, is the soft market conditions in insurance
and reinsurance that Arch must contend with on a daily basis, and
the integration risk of assuming a large acquisition. These market
conditions will continue to challenge Arch to retain and find
profitable business, as well as retain talented professionals.
Despite the adversarial market conditions, Arch’s operating
performance has held steady, and return-on-revenue and
return-on-equity (compared with peer companies) measures indicate
successful soft market navigation thus far.
Factors that could lead to the rating outlooks being revised to
stable or rating upgrades include decreased financial leverage,
mortgage insurance actual results that confirm modeled results,
continued long-term favorable operating profitability relative to
its peers and maintenance of strong risk-adjusted capital levels,
and the successful integration of United Guaranty.
Factors that could cause rating downgrades include mortgage
model results that differ materially from actual experience,
unfavorable operating profitability trends compared with peers,
outsized mortgage, catastrophe or investment losses relative to
peers, significant adverse loss reserve development or a material
decline in risk-adjusted capitalization, and loss and expense
issues resulting from unsuccessful integration of United
Guaranty.
The FSR of A+ (Superior) and the Long-Term ICRs of “aa-” have
been removed from under review with developing implications,
affirmed and assigned negative outlooks 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
Limited
- Arch Insurance Company (Europe)
Limited
The following Long-Term IRs have been assigned with negative
outlooks:
Arch Capital Group Ltd.—-- “bbb” on $450 million 5.25%
non-cumulative preferred shares, Series C
Arch Capital Group (US) 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 Long-Term IRs have been removed from under review
with developing implications, affirmed and assigned negative
outlooks:
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
The following indicative Long-Term IRs under the existing shelf
registration have been removed from under review with developing
implications, affirmed and assigned negative outlooks:
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. Best’s 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.
Best’s Recent Rating Activity web page. For
additional information regarding the use and limitations of Credit
Rating opinions, please view Understanding Best’s Credit
Ratings. For information on the proper media use of Best’s
Credit Ratings and A.M. Best press releases, please view
Guide for Media - Proper Use of Best’s Credit Ratings and A.M.
Best Rating Action Press Releases.
A.M. Best is the world’s oldest and most authoritative
insurance rating and information source. For more information,
visit www.ambest.com.
Copyright © 2017 by A.M. Best Rating
Services, Inc. and/or its subsidiaries. ALL RIGHTS
RESERVED.
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version on businesswire.com: http://www.businesswire.com/news/home/20170830006150/en/
A.M. BestSteven M. Chirico CPA, +1-908-439-2200, ext.
5087Directorsteven.chirico@ambest.comorRobert B.
DeRose, +1-908-439-2200, ext. 5453Senior
Directorrobert.derose@ambest.comorChristopher Sharkey,
+1-908-439-2200, ext. 5159Manager, Public
Relationschristopher.sharkey@ambest.comorJim Peavy,
+1-908-439-2200, ext. 5644Director, Public
Relationsjames.peavy@ambest.com
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