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 has been revised to Stable from Positive.
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
reasonable financial leverage, strong fixed charge coverage,
diversified market position in both insurance and reinsurance
lines, solid capitalization and well-managed reserve risk. These
favorable factors are partially offset by exposure to possible
adverse reserve development due to the relatively large portion of
casualty reserves, potential risks associated with its expanding
mortgage operations and possible volatility from large
catastrophe-related events
The Outlook revision to Stable from Positive reflects the
shifting market landscape in both commercial insurance and
reinsurance business that is pressuring profitability and leading
to consolidation as companies aim to enhance their relative
competitive position. ACGL has favorably achieved steady growth in
capital over time and maintains a medium market position and
size/scale. The company's overall market position, however, trails
several of its' higher rated (re)insurance peers that maintain a
large market presence.
The ratings also reflect Fitch's negative sector outlook on
global reinsurance. The current stressful reinsurance market
conditions, with record capitalization levels of traditional
reinsurers and the growing capacity provided by alternative capital
providers, are promoting weaker pricing and more generous terms and
conditions.
ACGL has a broad product portfolio of property/casualty primary
insurance, reinsurance and mortgage (re)insurance business. Total
company first half 2015 net premiums written ($2.0 billion) segment
split was 52% insurance, 30% reinsurance, 6% mortgage and 12% other
(Watford Re, a multi-line casualty reinsurer approximately 11%
owned, but fully consolidated into ACGL). Fitch views this
diversified source of revenues and earnings favorably as it
provides the company flexibility to deemphasize various products
when market conditions are poor and reduces its dependency on any
single product line.
ACGL's profitability is strong, characterized by low and stable
combined ratios and high returns on average common equity (ROAE).
The most recent five-year averages (2010-2014) of 91.9% and 14%,
respectively, are in line with or better than peer averages and
align with Fitch's median 'AA' and 'AAA' (re)insurance sector
credit factors. Through the first six months of 2015, ACGL reported
a combined ratio of 89.2% and annualized ROAE of 13.4%. ACGL has
posted an underwriting profit and overall net income in every year
of its 13-year operating history.
The company's financial leverage ratio is modest at 12.7% as of
June 30, 2015, down from 12.9% at year-end 2014. This slight
decline reflects flat growth in first half 2015 shareholders'
equity available to ACGL of $6.1 billion at both June 30, 2015 and
year-end 2014 as net earnings were offset by increased share
repurchases and preferred share dividends. Fixed charge coverage
was a strong 12.1x through the first half of 2015, up from 11.5x in
2014.
RATING SENSITIVITIES
Key rating triggers that could result in an upgrade include
improvement in ACGL's competitive market position while
demonstrating favorable run-rate earnings and low volatility in the
challenging (re)insurance environment, with a combined ratio in the
low 90s; successfully managing both the mortgage operations and the
Watford Re platform, with exposure growth prudently managed. In
addition, continued growth in equity while maintaining a net
written premiums-to-equity ratio of 0.8x or lower, a financial
leverage ratio at or below 20%, and fixed charge coverage of at
least 10x could generate positive rating pressure.
Key rating triggers that could result in a downgrade include
sizable adverse prior year reserve development or difficulties
experienced in the mortgage insurance operations or Watford Re
platform. In addition, increases in underwriting leverage above
1.0x net written premiums-to-equity ratio or a financial leverage
ratio above 25% could generate negative rating pressure. Also, if
ACGL's capital from foreign subsidiaries outside of the Bermuda
group solvency environment increased to 35% or more (32% at
year-end 2014), the holding company ratings could be lowered
reflecting a ring-fencing environment classification.
FULL LIST OF RATING ACTIONS
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 Capital Group (U.S.) Inc.
--$500 million 5.144% senior notes due 2043 at 'A-';
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+'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Insurance Rating Methodology (pub. 14 Jul 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868367
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990180
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990180
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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Fitch RatingsPrimary AnalystBrian C. Schneider, CPA, CPCU,
AReSenior Director+1-312-606-2321Fitch Ratings, Inc.70 W. Madison
StreetChicago, IL 60602orSecondary AnalystMartha Butler, CFASenior
Director+1-312-368-3191orCommittee ChairpersonDouglas Meyer,
CFAManaging Director+1-312-368-2061orMedia Relations:Alyssa
Castelli, +1-212-908-0540alyssa.castelli@fitchratings.com