Best Affirms Arch Re and Operating Affiliates’ ‘A+’ Ratings; Outlook Stable

January 25, 2013

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and the issuer credit ratings (ICR) of “aa-” of Bermuda-based Arch Reinsurance Ltd. and its strategic affiliates. Best also assigned an FSR of ‘A+’ (Superior) and an ICR of “aa-” to Arch Insurance Canada Ltd., which was converted from a branch company to an operating subsidiary in late 2012.

In addition Best has affirmed the ICR of “bbb+” of Delaware-based Arch Capital Group (US) Inc. as well as the ICR of “a-” and all debt ratings of the ultimate holding company, Arch Capital Group Ltd (Bermuda). The outlook for all ratings is stable.

The affirmations reflect Arch’s “continued superior operating performance amidst challenging market conditions, consistently excellent capitalization and demonstrated enterprise risk management,” Best explained.

“Arch maintains a very strong underwriting culture and focuses on actively managing the cycle by being adaptive to varied market conditions. As industry investment yields continue to be at record lows, underwriting profitability is vital. The company is capable of writing a broad range of property/casualty insurance and reinsurance on a worldwide basis and focuses on specialty lines.

“Overall operating results have been strong since Arch’s inception and certain metrics have exceeded most peers in the sector. Typically, Arch has had a smaller share of major industry losses, as was the case in 2011 when numerous global catastrophes struck. Recently, with Hurricane Sandy inflicting approximately $25 billion of insured losses, Arch’s current loss estimates are in line with its expected market share and very manageable.”

Best noted that “as a result, Arch has historically reported stable and consistent financial results with lower levels of volatility than many of its peers. Furthermore, Arch has a prudent investment portfolio and conservative reserving philosophy, which helps maintain a strong balance sheet.

As a partial offsetting factor Best cited “the current soft market conditions through which Arch, as well as all industry participants, must navigate.”

Best also indicated that factors, which “could result in negative rating pressure include unfavorable operating profitability trends, outsized catastrophe or investment losses relative to peers, significant adverse loss reserve development and/or a material decline in risk-adjusted capital.

“However, factors that could lead to a positive outlook or further rating upgrades would be the continuation of long-term, consistently strong operating profitability relative to its peers and maintenance of strong risk-adjusted capital levels.”

Best summarized the companies included in the ratings review as follows.
The FSR of A+ (Superior) and the ICRs of “aa-” have been affirmed for Arch Reinsurance Ltd. and its following affiliates:

— Arch Reinsurance Company
— Arch Insurance Company
— Arch Specialty Insurance Company
— Arch Excess & Surplus Insurance Company
— Arch Insurance Company (Europe) Ltd

The following debt ratings have been affirmed:
Arch Capital Group Ltd—
— “a-” on $300 million 7.35% senior unsecured notes, due 2034
— “bbb” on $325 million 6.75% non-cumulative preferred shares, Series C

The following indicative ratings have been affirmed for debt securities available under the existing shelf registration:
Arch Capital Group Ltd—
— “a-” on senior debt
— “bbb+” on subordinated debt
— “bbb” on preferred stock
Arch Capital Group (U.S.) Inc. (guaranteed by Arch Capital Group Ltd)—
— “a-” on senior debt
— “bbb+” on subordinated debt
— “bbb” on preferred stock

Source: A.M. Best

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