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Fitch Affirms Arch Capital's Ratings; Outlook Stable.

Chicago: 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 'BBB+' and 'BBB', respectively. Additionally, Fitch has affirmed the Insurer Financial Strength (IFS) ratings of ACGL's various primary insurance and reinsurance operating subsidiaries at 'A+'. The Rating Outlook is Stable. A complete list of ratings is provided at the end of this release.


Fitch's affirmation of ACGL's ratings reflects the company's strong and diversified business profile, reasonable financial leverage, strong fixed-charge coverage and very strong profitability. These favorable factors are partially offset by potential risks associated with the U.S. mortgage insurance (USMI) operations, which Fitch views as having a lower IFS credit profile. The ratings also reflect Fitch's negative sector outlooks on U.S. property/casualty (P/C) insurance and global reinsurance.

Fitch believes that ACGL has a strong business profile in P/C insurance, reinsurance and mortgage lines with a broad product portfolio that provides diversified sources of revenues and earnings. Fitch views this favorably as it allows the company flexibility to emphasize various products when market conditions are favorable and reduces the company's dependency on any single product line.

Gross premiums written (GPW) for 2017 was 51% insurance, 27% reinsurance and 22% mortgage. This mix compares with a GPW split of 60%, 30% and 10%, respectively, in 2016, as the company further expanded and diversified into the USMI business with the acquisition of United Guaranty Corporation (UGC) from American International Group, Inc. (AIG) on Dec. 31, 2016, creating the leading provider of USMI.

ACGL's financial leverage ratio (FLR) is reasonable at 18.6% as of March 31, 2018 (excluding $380 million of revolving credit agreement borrowings by Watford Re), down slightly from 18.7% at year-end 2017 but up from 12.6% at Dec. 31, 2015, prior to the UGC acquisition. The FLR is expected to decline back down to near 15% over the next several years as debt is reduced from earnings generated by its mortgage segment, as overall mortgage market conditions remain favorable.

The company's GAAP fixed-charge coverage averaged a very strong 9.9x from 2013 to 2017. Fitch expects ACGL's near-term fixed-charge coverage to be at least a strong 7.0x-8.0x as the company services the added debt and preferred stock issued to fund the UGC acquisition.

ACGL's profitability is very strong, characterized by favorable combined ratios and high ROAE, with the most recent five-year averages (2013-2017) at 88.7% and 10.8%, respectfully. ACGL's earnings are exposed to potential volatility and can decline in response to large, catastrophe events. However, ACGL posted an underwriting and overall net income profit in every year of its 16-year operating history.

ACGL's combined ratio increased slightly to 91.4% in 2017 from 89.3% in 2016 as higher catastrophe losses were partially offset by continued favorable mortgage results. Excluding the mortgage and other (Watford Re) segments, the insurance/reinsurance segments combined ratio was 105.9% in 2017, up from 90.9% in 2016. This rise reflects catastrophe losses (primarily from Hurricanes Harvey, Irma and Maria and the California wildfires) of 8.9 points in 2017, which was above the 2.5 points in 2016, but was lower than most peers. The mortgage segment's combined ratio improved to 36.0% in 2017 from 51.4% in 2016 due to a higher level of earned premiums and integration expense savings from the UGC acquisition.

Excluding the effect of catastrophes and favorable reserve development, ACGL's combined ratio for 2017 declined to 87.4% from 93.7% in 2016. This underlying improvement reflects increased mortgage segment business, which generates lower combined ratios than the insurance and reinsurance businesses. The lower combined ratios primarily reflect accounting rules that only allow for the establishment of loss reserves for a loan that is delinquent.

While Fitch does not formally rate ACGL's mortgage operations, which includes UGC and Arch Mortgage Insurance Company, Fitch views the stand-alone IFS credit profile at 'A-', which is at the upper end of Fitch's typical IFS for USMI companies. Per its criteria for holding company notching, Fitch establishes an IFS anchor rating for ACGL. Fitch developed an ACGL combined primary insurance, reinsurance and mortgage operations group credit profile of an 'A+' IFS to serve as the "anchor" rating for notching to the holding company ratings.


Key sensitivities that could result in an upgrade include continued improvement in ACGL's competitive market position, while demonstrating favorable run-rate earnings and low volatility with an insurance/reinsurance segments combined ratio in the low 90% range and successfully managing the USMI operations. In addition, continued growth in equity while maintaining an FLR at or below 20%, fixed-charge coverage of at least 10x, and a net premiums written-to-equity ratio of 0.8x or lower, could generate positive rating pressure.

ACGL's holding company ratings could be lowered if Fitch views the company's combined primary insurance, reinsurance and mortgage operations group credit profile as below an 'A+' IFS. Fitch could also downgrade the primary insurance and reinsurance 'A+' IFS ratings if the group credit profile IFS is lowered by more than one notch.

Key rating sensitivities that could result in a downgrade of both operating and holding company ratings include difficulties experienced in the USMI operations, or sizable adverse prior-year reserve development. In addition, increases in underwriting leverage above 1.0x net premiums written-to-equity ratio or an FLR above 25% could generate negative rating pressure.

ACGL's hybrid securities ratings could be lowered by one notch to reflect non-performance risk should Fitch view Bermuda's regulatory environment as becoming more controlling in its supervision of (re)insurers.


Fitch affirms the following ratings with a Stable Outlook:

Arch Capital Group, Ltd.

--Long-Term IDR at 'A-';

--$300 million 7.35% senior unsecured notes due 2034 at 'BBB+';

--$450 million 5.25% series E non-cumulative preferred shares at 'BBB';

--$330 million 5.45% series F non-cumulative preferred shares at 'BBB'.

Arch Capital Group (U.S.) Inc.

--$500 million 5.144% senior unsecured notes due 2043 at 'BBB+'.

Arch Capital Finance LLC

--$500 million 4.011% senior unsecured notes due 2026 at 'BBB+';

--$450 million 5.031% senior unsecured notes due 2046 at 'BBB+'.

Arch Reinsurance Ltd.

Arch Reinsurance Company

Arch Reinsurance Europe Underwriting Designated Activity Company

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+'.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Oct 17, 2018
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