TEXT - Fitch affirms Arch Capital Group Ltd ratings
Feb 20 - 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 consistently strong run rate profitability, low financial leverage, strong interest and preferred dividend coverage and well managed reserve risk. The ratings also reflect potential volatility from large catastrophe-related events, potential adverse development due to the relatively large proportion of its reserves derived from longer duration casualty lines of business, and anticipated challenges in the overall competitive but generally improving property/casualty market rate environment. ACGL's recent announcement that it expects to enter the U.S. mortgage insurance market through the acquisition of CMG Mortgage Insurance Company and the operating platform of PMI Mortgage Insurance Co. represents an opportunity for an additional diversified source of earnings, as the company currently writes European Union-based mortgage insurance. However, it also represents a challenge in generating favorable profitability in a line of business that experienced severe difficulty during the financial crisis. Nevertheless, Fitch expects that ACGL's approach to developing this business will be controlled and prudently managed to the company's conservative underwriting and risk-management standards. Fitch views ACGL's run-rate profitability as strong, characterized by low combined ratios and high returns on capital in most years. Fitch also believes that the company's earnings are exposed to potential volatility from large catastrophe-related events, although, favorably, ACGL has consistently maintained both underwriting and overall profitability. ACGL posted net income of $568 million in 2012, improved from net income of $411 million for 2011 due to lower catastrophe losses in 2012. ACGL's GAAP combined ratio was 95.4% in 2012, which included 8.8 points for catastrophe losses, primarily from Hurricane Sandy, compared to 98.3% in 2011, which included 15.4 points for catastrophe losses from the Japanese and New Zealand earthquakes, Thailand flooding, U.S. storms, and Hurricane Irene. Excluding the impact of catastrophes and favorable reserve development (7.5 points), ACGL's combined ratio for 2012 was 94.1%, up slightly from 93.7% for full year 2011. ACGL's equity credit adjusted financial leverage ratio was a very modest 7.4% at Dec. 31, 2012, down slightly from 8.2% at year-end 2011. ACGL's operating earnings-based interest and preferred dividend coverage improved to a strong 8.1 times (x) in 2012, following 6.2x in 2011, as earnings increased with reduced catastrophes in 2012. ACGL's coverage averaged a favorable 10.6x from 2008-2012. Fitch believes that ACGL's loss reserves are adequate and well-managed, although the company is exposed to potential adverse development due to the relatively large proportion of its reserves derived from longer duration casualty lines of business. Prior year reserve development has made meaningful contributions to ACGL's profitability, with the company posting favorable loss reserve development in each calendar year from 2003-2012 totaling $1.7 billion, or 6% of net premiums earned. However, Fitch notes that underwriting profitability will be pressured going forward to the extent that future reserve development trends are not as favorable as they have been in recent years. RATING SENSITIVITIES Key rating triggers that could lead to an upgrade include continued growth in equity into a larger market position and size/scale, while maintaining favorable run-rate earnings and low volatility, with continued reasonable operating leverage and modest financial leverage. Key rating triggers that could result in a downgrade include sizable adverse prior year reserve development that caused Fitch to question ACGL's better than peer underwriting results and lower than peer underwriting volatility. In addition, increases in underwriting leverage above 1.0x net written premiums-to-equity ratio or equity-credit adjusted financial leverage above 25% could generate negative rating pressure. 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 Reinsurance Ltd. Arch Reinsurance Company Arch Reinsurance Europe Underwriting Limited 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+'.
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