Fitch Affirms Arch Capital's Ratings; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed Arch Capital Group Ltd.'s (ACGL) Issuer Default Rating (IDR) at 'A' and the ratings on ACGL's senior unsecured notes and preferred shares at 'A-' and 'BBB+', respectively. Additionally, Fitch has affirmed the Insurer Financial Strength (IFS) ratings of ACGL's various subsidiaries at 'A+'. The Rating Outlook is Stable. A complete list of ratings is provided at the end of this release.

KEY RATING DRIVERS

Fitch's affirmation of ACGL's ratings reflects the company's reasonable financial leverage, very strong fixed charge coverage, diversified market position in both insurance and reinsurance lines, solid capitalization and well-managed reserve risk. These favorable factors are partially offset by exposure to possible adverse reserve development due to the relatively large portion of casualty reserves and potential risks associated with its expanding mortgage operations. The ratings also reflect Fitch's negative sector outlook on global reinsurance.

ACGL has a broad product portfolio of property/casualty primary insurance, reinsurance and mortgage (re)insurance business. Total company 2015 net premiums written ($3.8 billion) segment split was 54% insurance, 27% reinsurance, 7% mortgage and 12% other (Watford Re).

Fitch expects ACGL to continue to maintain a diversified specialty underwriting portfolio, although the composition may change over time. Fitch notes that ACGL has been increasing its premiums in mortgage and accident and health business, where profitability is currently more favorable, and decreasing its property catastrophe, energy and marine (re)insurance exposure, due to the continuing competitive market environment, particularly for property catastrophe excess of loss business.

ACGL's profitability is strong, characterized by low and stable combined ratios and high returns on average common equity, with the most recent five-year averages (2011-2015) at 91.3% and 11.8%, respectfully. These results are in line with or better than peer averages and align with Fitch's median 'AA' IFS (re)insurance sector credit factors. Favorably, ACGL posted an underwriting and overall net income profit in every year of its 14-year operating history, compared with many peers that experienced underwriting and net losses during years in which significant catastrophe events occurred.

Fitch believes that ACGL's financial leverage ratio is conservative for the rating category at 12.5% as of Dec. 31, 2015 (excluding $430 million of revolving credit agreement borrowings by Watford Re). ACGL's capital position improved in 2015, with shareholders' equity available to ACGL of $6.2 billion at Dec. 31, 2015, up 1% from $6.1 billion at Dec. 31, 2014, as net income was partially offset by unrealized investment losses, share repurchases and preferred share dividends. Fixed charge coverage (excluding Watford Re) was a very strong 10.5x in 2015 and 11.3x in 2014.

ACGL continues to expand and diversify into the U.S. mortgage insurance business as overall mortgage market conditions remain favorable. Thus far, ACGL's approach to developing this business has been controlled and prudently managed to the company's conservative underwriting and risk management standards, utilizing an experienced team to operate and manage the business. ACGL's mortgage segment produced net premiums written of $267 million in 2015 and $205 million in 2014, with a combined ratio of 78.4% in 2015, improved from 88.9% in 2014.

ACGL's risk exposure to Watford Re is limited to its direct investment in Watford Re's common and preferred shares and counterparty credit risk (mitigated by collateral) from business ceded to Watford Re. ACGL owns approximately 11% of the common equity of Watford Re. However, Watford Re is consolidated into ACGL's financial results, as ACGL is considered to be the primary beneficiary of Watford Re. Watford Re generated $466 million of net premiums written in 2015, up from $274 million in 2014, with combined ratios of 102% and 103% in 2015 and 2014, respectively.

RATING SENSITIVITIES

Key rating triggers that could result in an upgrade include improvement in ACGL's competitive market position while demonstrating favorable run-rate earnings and low volatility in the challenging (re)insurance environment, with a combined ratio in the low 90s; and successfully managing both the mortgage operations and the Watford Re platform, with exposure growth prudently managed. In addition, continued growth in equity while maintaining a net premiums written-to-equity ratio of 0.8x or lower, a financial leverage ratio at or below 20%, and fixed charge coverage of at least 10x could generate positive rating pressure.

Key rating triggers that could result in a downgrade include sizable adverse prior-year reserve development or difficulties experienced in the mortgage (re)insurance operations or Watford Re platform. In addition, increases in underwriting leverage above 1x net premiums written-to-equity ratio or a financial leverage ratio above 25% could generate negative rating pressure.

Also, if ACGL's capital from foreign subsidiaries outside of the Bermuda group solvency environment increased to 35% or more (34% at year-end 2015), the holding company ratings could be lowered by one notch, reflecting a ring-fencing environment classification.

FULL LIST OF RATING ACTIONS

Fitch affirms the following ratings with a Stable Outlook:

Arch Capital Group, Ltd.

--IDR at 'A';

--$300 million 7.35% senior unsecured notes due 2034 at 'A-';

--$325 million 6.75% series C non-cumulative preferred shares at 'BBB+'.

Arch Capital Group (U.S.) Inc.

--$500 million 5.144% senior notes due 2043 at 'A-'.

Arch Reinsurance Ltd.

Arch Reinsurance Company

Arch Reinsurance Europe Underwriting Designated Activity Company

Arch Insurance Company

Arch Excess and Surplus Insurance Company

Arch Specialty Insurance Company

Arch Indemnity Insurance Company

Arch Insurance Company (Europe) Limited

--IFS at 'A+'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1000619

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1000619

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160308006641/en/

Fitch Ratings
Primary Analyst
Brian C. Schneider, CPA, CPCU, ARe
Senior Director
+1-312-606-2321
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Martha Butler, CFA
Senior Director
+1-312-368-3191
or
Committee Chairperson
Douglas Meyer, CFA
Managing Director
+1-312-368-2061
or
Media Relations:
Hannah James, +1 646-582-4947
[email protected]

Source: Fitch Ratings

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