Best Rates Arch Debt Issue ‘bb’

January 30, 2006

A.M. Best Co. announced that it has assigned a debt rating of “bb” to Arch Capital Group Limited’s $200 million 8 percent non-cumulative Series A preferred shares. Arch’s remaining debt ratings and the financial strength rating of “A-” (Excellent) of Bermuda-based Arch Reinsurance Ltd. and its affiliated companies are unchanged. The rating outlook is stable.

Standard & Poor’s Ratings Services announced that it has assigned its “BB+” rating to the preferred issue; Fitch Ratings assigned it a “BBB-” rating (See IJ Website Jan. 25).

“The proceeds from the preferred share offering will be used for general corporate purposes,” said Best, who also noted that it “anticipates that these proceeds will be used to support additional opportunities in lines of business that experience rate increases and meet Arch’s return expectations. Arch may also redeem the Series ‘A’ preferred shares in whole or in part at a redemption price of $25 per share on or after February 1, 2011. Following the transaction, Arch’s debt plus preferred-to-adjusted capital will be approximately 17 percent, and fixed charge coverage is expected to remain in excess of 15 times.”

Best indicated: “The rating reflects Arch’s excellent capitalization, solid operating performance and its well regarded operating franchise in both its primary and reinsurance business. The combination of Arch’s solid historical profits, strong risk management capability and demonstrated financial flexibility has enabled it to withstand the heightened loss activity of the 2005 hurricane season.”

However, Best said, “Arch’s higher underwriting leverage position relative to its peer group, combined with the overall casualty orientation of its reinsurance and insurance lines of business” constitute partially offsetting factors. “Despite Arch’s loss reserve adequacy based on current actuarial studies, approximately 60 percent of its book of business is in long-tail casualty lines,” Best continued.

“Due to the company’s relatively short operating history and long-tail nature of the casualty business, the pricing and reserve adequacy of these lines will not be fully apparent for several years,” Best continued. It also indicated it would “continue to monitor Arch’s loss reserve development, capitalization and operating performance.”

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