S&P Assigns Arch Capital ‘BBB-‘ Rating

February 24, 2004

Standard & Poor’s Ratings Services assigned its announced that it has assigned a “BBB-” counterparty credit rating to the Bermuda-based Arch Capital Group Ltd., with a stable outlook.

“The rating is based on Arch and its operating companies’ very strong operating performance over the past two years; good capital adequacy, with a robust stock price; and low debt leverage, with debt to capital of 10.5 percent at year-end 2003,” said S&P. “Offsetting these positive factors are the risks of capital strain and a potential misstep from the aggressive growth strategy.”

The report indicated that “In the next two to three years, Arch is expected to benefit from its good market position and the absence of legacy problems. Debt leverage and coverage are expected to be at or better than that of the rating range. The company is expected to generate positive underwriting results and good return on business written.”

S&P said it had considered the following “Major Rating Factors:”
— Very strong business volume. Arch has successfully established itself as a competitor in insurance and reinsurance, building a large and diversified business franchise in the past two years.
— Conservative investment portfolio. Arch is invested conservatively, principally in high-quality, short-duration fixed-income assets. Although low yielding in the current interest rate environment, Arch has minimal credit risk in its investment portfolio.
— Strong capital adequacy. Arch’s capital is strong, with a capital adequacy ratio, based on Standard & Poor’s property/casualty capital model.
— Aggressive growth strategy. Arch has grown aggressively since its relaunch in 2001 and 2002, with gross and net premium written up 117 percent from year-end 2002 to year-end 2003. Growth has stressed capital adequacy considerably, but Arch has been profitable through year-end 2003
— Short track record. As an opportunistic company in both insurance and reinsurance business, management will need to chose its markets carefully, especially as the industry returns to less-strong cyclical periods. Arch’s management’s ability to make the profitable strategic choices with these operations is yet unproven and untested.
— Lower quality of capital. Arch recapitalized in 2001, principally with mandatory convertible preferred shares rather than common shares, with debt plus mandatory convertible preferred shares constituting 55 percent of the group’s capital base as of Sept. 30, 2003, down from 58 percent at year-end 2003.

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