TEXT - Fitch affirms Arch Capital Group Ltd ratings

Wed Feb 20, 2013 11:43am EST

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+'.