Standard & Poor’s Ratings Services has raised its counterparty credit rating on Arch Capital Group Ltd. to ‘A-‘ from ‘BBB+’. S&P also raised its counterparty credit and financial strength ratings on Arch Capital’s operating insurance and reinsurance companies to ‘A+’ from ‘A’. The outlook on all of these companies is stable.
“The upgrade of Bermuda-based reinsurance holding company Arch Capital and its operating insurance and reinsurance subsidiaries reflects the group’s strong management and well conceived corporate strategy,” explained credit analyst John Iten.
S&P said the senior management team has “executed a consistent strategy based on active cycle management, strong underwriting discipline, and strong enterprise risk management (ERM), which resulted in a large and well-diversified franchise by product, client, and segment. The upgrade is also based on the group’s (collectively referred to as Arch) consistent and strong track record of underwriting and operating results that are better and less volatile than those of some other Bermuda-based reinsurance/insurance companies. Further supporting the rating action is the group’s very strong capital adequacy, moderate financial leverage, and very strong fixed-charge coverage.”
As offsetting factors, S&P noted “potential pricing and reserving risks related to the group’s significant proportion of long-tail casualty writings, given the continued competitive pricing in this segment and the potential negative inflation effects on long-tail lines of businesses. In addition, Arch’s moderately changing business mix could carry additional pricing and reserving risk.”
Explaining the stable outlook, S&P said it expects that Arch will “continue to post strong operating results, as measured by return on revenue (excluding capital gains and losses), which will likely be better than the average of its peer group over the next two to three years. We anticipate that the ROR will exceed 15 percent for 2010 and 2011.
“The ratings could come under pressure if the company’s underwriting performance lags that of its peers (assuming normalized catastrophe losses and excluding the benefits of reserve releases), if earnings volatility increases over a multi-year period, if there is a major change in the risk profile of Arch’s investment portfolio or business mix, or if the company reports major adverse reserve development stemming from the company’s casualty loss reserves. We do not expect to raise our ratings on Arch in the next two years.”
Source: Standard & Poor’s
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