A.M. Best Affirms Ratings of Arch Reinsurance Ltd.

OLDWICK, N.J. -- A.M. Best Co. has affirmed the financial strength rating (FSR) of A- (Excellent) for Arch Reinsurance Ltd. (Arch) (Bermuda) and its reinsured affiliates. A.M. Best has also affirmed the issuer credit ratings (ICR) of "a-" of Arch and Arch Reinsurance Company (Nebraska). Additionally, A.M. Best has assigned ICRs of "a-" to the remaining Arch reinsured affiliates.

Concurrently, A.M. Best has affirmed the ICR of "bb+" for Arch Capital Group (U.S.) Inc. (Greenwich, CT), the ICR of "bbb-" of Arch Capital Group Limited (Bermuda) (NASDAQ:ACGL) and all related debt ratings. The outlook for all ratings is stable. (See below for a detailed list of the ratings.)

These ratings reflect Arch's excellent capitalization, solid operating performance and well regarded operating franchise in both its primary and reinsurance business. The company's historical and recent operating performance continue to be profitable with a 2005 combined ratio of 95.8% despite net catastrophe losses totaling approximately $330 million for the year.

Arch, along with its affiliated companies, offers primary and reinsurance coverage on a worldwide basis. The company's strong risk management characteristics, operational controls and financial flexibility have created an organization capable of responding to changing market conditions. Recently, in order to respond to improved property rates, Arch announced the formation of Flatiron Re Ltd.(Flatiron Re), a Bermuda-based company, which will assume a 45% quota share in certain lines of property and marine business underwritten by Arch. Flatiron Re, entirely owned by outside investors, will offer fully collateralized property coverage exclusively to Arch.

Furthermore, the company's solid financial flexibility provides strong access to both debt and equity markets. A.M. Best expects Arch to maintain financial leverage as measured by debt and preferred-to-total capital below 20%, and fixed charge coverage is expected to remain in the upper single-digit range.

Partially offsetting these strengths is Arch's historically elevated underwriting leverage position relative to its peer group, combined with the overall long-tail casualty orientation of its reinsurance and insurance books of business. Despite Arch's reported loss reserve adequacy based on current actuarial studies, approximately 60% of its book of business is in casualty lines. Due to the long-tail nature of the casualty business, the pricing and reserve adequacy of these lines have yet to be fully apparent.

The FSR of A- (Excellent) and ICR of "a-" have been affirmed for Arch Reinsurance Ltd. and Arch Reinsurance Company.

The FSR of A- (Excellent) has been affirmed and ICRs of "a-" have been assigned to the following reinsured affiliates of Arch Reinsurance Ltd.:

--Arch Insurance Company

--Arch Specialty Insurance Company

--Arch Excess & Surplus Insurance Company

The ICR of "bbb-" has been affirmed for Arch Capital Group Limited.

The ICR of "bb+" has been affirmed for Arch Capital Group (U.S.) Inc.

The following debt ratings have been affirmed:

Arch Capital Group Limited--

--"bbb-" on $300 million 7.35% unsecured senior notes, due 2034

--"bb" on $200 million 8% non-cumulative Series A preferred shares 

The following indicative shelf ratings have been affirmed for debt securities available under the existing shelf registrations:

Arch Capital Group Limited--

--"bbb-" on senior debt

--"bb+" on subordinated debt 

--"bb" on preferred stock 

Arch Capital Group (U.S.) Inc.--

(guaranteed by Arch Capital Group Ltd.)

--"bbb-" on senior debt

For Best's Debt Ratings, all other Best's Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.

A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.