Canadian Underwriter

Moody’s rates Arch’s US$100-million issue

January 24, 2006   by Canadian Underwriter

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Moody’s Investors Service has assigned a Baa3 rating to US$100 million of preferred shares issued by Arch Capital Group Ltd. (“Arch Capital”)(Nasdaq: ACGL).
The offering constitutes a drawdown from Arch Capital’s existing $650 million universal shelf registration rated by Moody’s in July 2005. The ratings agency said it expects net proceeds from the offering will be used for general corporate purposes. The outlook for the ratings is stable.
According to Moody’s, Arch Capital’s ratings are “based on the company’s established operating platform and good spread of risk in international reinsurance and insurance (through subsidiaries located in Bermuda, the United States and the United Kingdom), its strong capitalization and balance sheet unencumbered by legacy exposures, and its moderate financial leverage.
“Other strengths include the company’s efficient operations, its conservative investment profile, and strong liquidity at the holding company.”
Moody’s said “these strengths are tempered by Arch Capital’s limited operating history in the highly cyclical specialty insurance and reinsurance sectors, the underwriting volatility and pricing uncertainty inherent in many of the company’s chosen lines of business – which include catastrophe-exposed property and aviation risks and casualty-based exposures – and rapid premium growth in recent years which can lead to attendant risks.”
Moody’s noted the two-notch spread between the senior unsecured debt rating at the holding company and the insurance financial strength ratings at the operating companies “reflect the fact that the group maintains the bulk of its capital within its flagship Bermuda reinsurance company, Arch Reinsurance Ltd., which has relatively modest regulatory restrictions on the transfer of dividends from operating companies to holding companies, as compared to insurance holding company structures in the United States.”
At the current rating level, Moody’s noted, “Arch Capital will continue to maintain a moderate adjusted financial leverage profile (e.g. less than 20% debt to capital), premium growth over the intermediate term will remain generally in line with its industry peers, operating leverage will remain below 1.5 times, dividend capacity coverage of interest and preferred dividends will remain in excess of 3 times, and that annual net, after tax catastrophe losses will not exceed 10% of equity.”

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