S&P Rates Arch Pref. Shares ‘BB+’; Affirms Operating Co.’s ‘A-‘ Rating

May 17, 2006

Standard & Poor’s Ratings Services announced that it has assigned its “BB+” preferred stock rating to Arch Capital Group Ltd.’s proposed $100 million issuance of Class B, noncumulative preferred shares. S&P also affirmed its ‘BBB’ long-term counterparty credit and senior debt ratings on the Company and its “A-” long-term counterparty credit and financial strength ratings on Arch’s operating companies: Arch Reinsurance Ltd., Arch Reinsurance Co., Arch Insurance Co., Arch Specialty Insurance Co., and Arch Excess & Surplus Insurance Co. The outlook on all of the ratings is stable.

“The ratings are supported by the group’s growing business franchise, strong operating performance, strong capital adequacy, and strong financial flexibility,” said S&P. “These factors are partially offset by 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,” indicated S&P credit analyst Laline Carvalho.

S&P said: “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 percent at March 31, 2006.

“We expect Arch’s net exposures in property and other short-tail lines of business in 2006 (particularly in Arch’s reinsurance division) to grow moderately, reflecting the expectation of substantially improved market conditions in these lines. We expect other lines of business to show flat or modest growth for the year. Assuming normal catastrophe losses, we expect the group’s 2006 operating results to be very strong, with a combined ratio of 90 percent-92 percent and an ROR of 12 percent-14 percent.

“Arch exceeded this expectation in first-quarter 2006 with a combined ratio of 88.3 percent and ROR of 17 percent; 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. We expect the capital adequacy ratio to remain in the strong range in 2006, reflecting anticipated strong earnings for the year, partially 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 percent-20 percent over the medium term, with fixed-charge coverage remaining very strong at more than 8x.”

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