Fitch Affirms Arch’s Ratings, Outlook Positive
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 remains Positive. A complete list of ratings is provided at the end of this release.
The ratings agency said, “Fitch’s affirmation of ACGL’s ratings reflects the company’s reasonable financial leverage, strong interest and preferred dividend coverage, solid capitalization and well-managed reserve risk.
“These favorable factors are partially offset by potential volatility from large catastrophe-related events, exposure to possible adverse reserve development due to the relatively large portion of casualty reserves and integration risk associated with the acquisition of CMG Mortgage Insurance Company [CMG].
“In addition, the ratings 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. This is leading to consolidation in the reinsurance sector as companies aim to enhance their relative competitive position.
“The Positive Outlook reflects ACGL’s consistently strong and stable profitability, measured progression into a larger and more favorable market position in both insurance and reinsurance lines, and steady growth in capital to a sizable level of shareholders’ equity.
“ACGL has a broad product portfolio of both property/casualty primary insurance and reinsurance, including the recently added U.S. mortgage insurance business. Total company 2014 net premiums written [$3.9 billion] by segment was 55% insurance, 33% reinsurance, 5% mortgage and 7% other [Watford], providing diversified sources of revenues and earnings.
“Fitch views this 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. Fitch expects that ACGL will continue to successfully manage through various market conditions and cycles.”
“ACGL co-sponsored Watford Re Ltd. in March 2014, a new Class 4 Bermuda-domiciled property/casualty reinsurer whose business is primarily multi-line casualty risk. ACGL owns approximately 11% of Watford Holdings Ltd.’s [parent of Watford Re] common equity, but consolidates the company into its financial results as under accounting guidelines ACGL is considered to be the primary beneficiary of Watford Re.
“Watford Re provides ACGL with an alternative vehicle to utilize its underwriting expertise as a sidecar vehicle that generates an additional revenue diversification through fee income. Fitch does not believe Watford Re’s operations present meaningful additional risk or volatility to ACGL’s overall profile. Watford Re generated $274 million of net premiums written in 2014 with a combined ratio of 103%.”
