KEY RATING DRIVERS
Fitch's affirmation of ACGL's ratings reflect 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 potential adverse reserve development due to the relatively large portion of casualty reserves, integration risk associated with the recent acquisition of
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's first half 2014 net premiums written (
Fitch views ACGL's profitability as strong, characterized by low and stable combined ratios and high returns on average common equity (ROAE), with the most recent five-year averages (2009-2013) at 92% and 15.9%, respectfully. These results are in line with or better than peer averages and align with Fitch's median 'AA' and 'AAA' (re)insurance sector credit factors, respectfully. Through the first six months of 2014, ACGL reported a combined ratio of 85.7% and annualized ROAE of 13.5%. ACGL has posted an underwriting profit and overall net income in every year of its 12-year operating history.
ACGL's financial leverage ratio is modest at 12.8% as of
Operating earnings-based interest and preferred dividend coverage was a strong 9.4x through the first half of 2014, down from 14.3x in 2013. This drop reflects additional interest expense on
ACGL cosponsored a new
Watford Re provides ACGL an alternative capital, more permanent sidecar vehicle that generates an additional diversified source of revenue through fee income for performing the underwriting services for the reinsurer or through premiums by participating on Watford Re's business, which is primarily multi-line casualty risk. Fitch does not believe that Watford Re's operations present meaningful additional risk or volatility to ACGL's overall profile.
ACGL's entrance into the U.S. mortgage insurance market through the
Key rating triggers that could result in an upgrade include continued growth in equity into a larger market position and size/scale, while maintaining favorable run-rate earnings and low volatility, with a combined ratio in the low 90s. Successfully integrating both the U.S. mortgage insurance operations and the Watford Re platform, with exposure growth prudently managed, would be viewed favorably by Fitch. Other upgrade triggers include maintaining a net written premiums-to-equity ratio of 0.8x or lower; a financial leverage ratio at or below 20%; and operating earnings-based interest and preferred dividend coverage of at least 10x.
Fitch's evolving view of negative fundamental trends in the reinsurance sector could result in an affirmation and return to a Stable Outlook.
Key rating triggers that could result in a downgrade include sizable adverse prior-year reserve development that causes Fitch to question ACGL's better than peer underwriting results and lower than peer underwriting volatility. In addition, increases in underwriting leverage above 1.0x net written premiums-to-equity ratio or a financial leverage ratio above 25% could generate negative rating pressure.
Fitch affirms the following ratings with a Positive Outlook:
Arch Capital Group, Ltd.
--IDR at 'A';
Arch Insurance Company (
--IFS at 'A+'.
Additional information is available at 'www.fitchratings.com'.
--'Insurance Rating Methodology' (
Insurance Rating Methodology
Source: Fitch Ratings
Most Popular Stories
- U.S. Families 'Extraordinarily Vulnerable': Yellen
- Hillary Clinton to Address CHCI Conference
- Larry Ellison Steps Down as Oracle CEO
- Apple Locks Itself Out of Devices
- Alibaba Prices IPO at $68 a Share
- Veterans to Get Training as Solar Panel Installers
- Hispanics Doubt Marco Rubio's Chances
- Wildfires Rage in California
- John Cantlie Delivers ISIS Message to Save Life
- Alibaba: Today China, Tomorrow the World