A.M. Best Revises Outlooks to Stable for Arch Reinsurance Ltd. and Its Subsidiaries
October 11 2018 - 1:24PM
Business Wire
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 Arch’s 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. Best’s “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 Arch’s 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 Arch’s 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 Arch’s 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, Arch’s 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 company’s 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 Arch’s 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. 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 a global rating agency and information provider
with a unique focus on the insurance industry. Visit
www.ambest.com for more information.
Copyright © 2018 by A.M. Best Rating
Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.
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Steven M. Chirico, CPADirector+1 908 439 2200,
ext. 5087steven.chirico@ambest.comorRobert
DeRoseSenior Director+1 908 439 2200, ext.
5453robert.derose@ambest.comorChristopher
SharkeyManager, Public Relations+1 908 439 2200, ext.
5159christopher.sharkey@ambest.comorJim
PeavyDirector, Public Relations+1 908 439 2200, ext.
5644james.peavy@ambest.com
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