Rating Action on Arch Capital - Analyst Blog

Recently, Fitch Ratings affirmed the issuer default rating (IDR) of Arch Capital Group Ltd. (ACGL) at “A”. The rating agency also affirmed the ratings on the company’s senior unsecured notes at “A-” and preferred shares at “BBB.”

Further, Fitch affirmed the insurer financial strength (IFS) rating of Arch capital’s subsidiaries – 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 and Arch Insurance Company (Europe) Limited – at “A+.” All the above-mentioned ratings carry a stable outlook.

The rating affirmation was based on the company’s strong fundamentals including run rate profitability, financial leverage, interest coverage, preferred dividend coverage and risk reserve. However, the ratings also take into account negatives such as catastrophe risks, possibility of an unfavorable impact due to high concentration of longer duration casualty insurance in the business mix and a challenging market-rate environment in the property and casualty business.

While the stable outlook indicates low possibility of a revision in the ratings, steady increase in the size and market position of Arch Capital’s equity along with continued strong run rate profits, stability in earnings, and moderate operating and financial leverage can lead to a rating upgrade.

Alternatively, a significant unfavorable movement in the prior-year reserve development that raises concerns about the company’s underwriting profitability and volatility could lead to a downgrade. Additionally, a surge in the underwriting leverage above 1.0x or net written premiums-to-equity ratio and equity-credit adjusted financial leverage beyond 25% can lead to a downward revision in ratings.

Arch Capital carries a Zacks Rank #2 (Buy). Other property and casualty insurers worth considering are Cincinnati Financial Corp. (CINF), Navigators Group Inc. (NAVG) and Maiden Holdings, Ltd. (MHLD). All these companies carry a Zacks Rank #1 (Strong Buy).