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
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
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.
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+'.