Arch preferred stock rated ‘BB+’

Arch Capital Group Ltd.’s (NASDAQ:ACGL) proposed $100 million issuance of Class B, noncumulative preferred shares recently received a ‘BB+’ preferred stock rating from Standard & Poor’s Ratings Services.
In addition, S & P’s also affirmed its ‘BBB’ long-term counterparty credit and senior debt ratings on Arch Capital Group Ltd. and affirmed its ‘A-‘ long-term counterparty credit and financial strength ratings on ACGL’s operating companies: Arch Reinsurance Ltd., Arch Reinsurance Co., Arch Insurance Co., Arch Specialty Insurance Co., and Arch Excess & Surplus Insurance Co.
S & P’s reports that the outlook is stable.
Supporting these ratings, according to S & P’s, is the Arch group of company’s (collectively referred to as Arch) “growing business franchise, strong operating performance, strong capital adequacy, and strong financial flexibility.”
These factors are however partially offset by what S & P’s quotes as “Arch’s relatively short operating history and significant proportion of casualty writings that have not fully matured.”
“We expect the preferred stock issuance to constitute a draw-down on Arch’s existing universal shelf and to be used to support increased writings in the property business throughout 2006,” Standard & Poor’s credit analyst Laline Carvalho says. “The group’s capital adequacy accounting for the issuance and moderate premium growth is expected to remain in the strong range and supportive of the ratings. We also expect financial leverage to remain within the rating level, with pro-forma debt plus preferreds, including the new issuance of Series B preferred shares, at about 20% at March 31, 2006.
Carvalho says S & P’s expects Arch’s 2006 net exposures in property and other short-tail lines of business, particularly its reinsurance division, to grow moderately. This, she continues, will occur if market conditions continue to improve in these lines. “We expect other lines of business to show flat or modest growth for the year,” Carvalho adds.
“Assuming normal catastrophe losses, we expect the group’s 2006 operating results to be very strong, with a combined ratio of 90%-92% and an ROR of 12%-14%,” she reports. “Arch exceeded this expectation in first-quarter 2006 with a combined ratio of 88.3% and ROR of 17%; however, we believe first-quarter results are not necessarily reflective of expected full-year 2006 results given the very low level of catastrophe losses incurred by the industry in the first three months of the year.”
The capital adequacy ratio for Arch, Carvalho continues, is expected to remain strong in 2006 if earnings for the year are as strong as expected. These earnings will however, she adds, be offset by expected increased net exposures in property and other short-tail lines.
“We expect total debt plus preferred leverage to remain supportive of the ratings at about 18%-20% over the medium term, with fixed-charge coverage remaining very strong at more than 8 times,” Carvalho says.