Best Affirms Arch ‘A-‘ Ratings

May 2, 2006

A.M. Best Co. announced that it has affirmed the financial strength rating (FSR) of “A-” (Excellent) for Bermuda-based Arch Reinsurance Ltd. and its reinsured affiliates. Best has also affirmed the issuer credit ratings (ICR) of “a-” of Arch and Arch Reinsurance Company (Nebraska), and assigned ICRs of “a-” to the remaining Arch reinsured affiliates.

At the same time Best said it has affirmed the ICR of “bb+” for Arch Capital Group (U.S.) Inc. (headquartered in Greenwich, Conn.), the ICR of “bbb-” of Arch Capital Group Limited (Bermuda) and all related debt ratings. The outlook for all of the ratings is stable.

“These ratings reflect Arch’s excellent capitalization, solid operating performance and well regarded operating franchise in both its primary and reinsurance business,” said Best. “The company’s historical and recent operating performance continue to be profitable with a 2005 combined ratio of 95.8 percent despite net catastrophe losses totaling approximately $330 million for the year.”

Best noted that “Arch, along with its affiliated companies, offers primary and reinsurance coverage on a worldwide basis. The company’s strong risk management characteristics, operational controls and financial flexibility have created an organization capable of responding to changing market conditions.

“Recently, in order to respond to improved property rates, Arch announced the formation of Flatiron Re Ltd., a Bermuda-based company, which will assume a 45 percent quota share in certain lines of property and marine business underwritten by Arch. Flatiron Re, entirely owned by outside investors, will offer fully collateralized property coverage exclusively to Arch.

“Furthermore, the company’s solid financial flexibility provides strong access to both debt and equity markets.” Best said it “expects Arch to maintain financial leverage as measured by debt and preferred-to-total capital below 20 percent, and fixed charge coverage is expected to remain in the upper single-digit range.

“Partially offsetting these strengths is Arch’s historically elevated underwriting leverage position relative to its peer group, combined with the overall long-tail casualty orientation of its reinsurance and insurance books of business. Despite Arch’s reported loss reserve adequacy based on current actuarial studies, approximately 60 percent of its book of business is in casualty lines. Due to the long-tail nature of the casualty business, the pricing and reserve adequacy of these lines have yet to be fully apparent.”

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