Fitch Rates Re-Opening of Arch Capital's Preferred Shares 'BBB'.
KEY RATING DRIVERS
ACGL intends to use the net proceeds to redeem all of its outstanding 6.75% series C non-cumulative preferred shares with any remaining amounts to be used for general corporate purposes. Consequently, financial leverage is expected to remain near ACGL's financial leverage ratio (FLR) of 19.4% as of Sept. 30, 2017. Fitch expects ACGL's near-term fixed-charge coverage to be at least a strong 7.0x to 8.0x.
Fitch's hybrid securities rating methodology allocates 100% of the preferred shares' principal to equity in evaluating financial leverage due to the perpetual term and non-cumulative dividends of the securities. Fitch used a baseline recovery assumption of Poor and a non-performance risk assessment of Minimal. Notching of two was applied relative to the Issuer Default Rating (IDR), which was based on two for recovery and zero for non-performance risk.
ACGL's overall Insurer Financial Strength (IFS) anchor rating could be lowered if more than 40% of ACGL's operating earnings and capital are sourced from U.S. mortgage insurance (USMI), which would result in a downgrade of ACGL's holding company ratings based on standard notching.
Key rating sensitivities that could result in a downgrade of both operating and holding company ratings outside of anchor-rating considerations include: difficulties experienced in the USMI operations, including failure to successfully integrate United Guaranty Corporation (UGC), 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.
Key rating 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 a non-mortgage combined ratio in the low 90s; and successfully managing the expansion of its USMI operations with the UGC acquisition. 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.
FULL LIST OF RATING ACTIONS
Fitch currently rates ACGL and its subsidiaries as follows:
Arch Capital Group Ltd.
--Long-Term Issuer Default Rating 'A-';
--$300 million 7.35% senior unsecured notes due 2034 'BBB+';
--$93 million 6.75% series C non-cumulative preferred shares 'BBB';
--$450 million 5.25% series E non-cumulative preferred shares 'BBB';
--$330 million 5.45% series F non-cumulative preferred shares at 'BBB'.
Arch Capital Group (U.S.) Inc.
--$500 million 5.144% senior notes due 2043 'BBB+'.
Arch Capital Finance LLC
--$500 million 4.011% senior unsecured notes due 2026 'BBB+';
--$450 million 5.031% senior unsecured notes due 2046 '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
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Feb 13, 2018|
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