Best Upgrades/Affirms Arch Re, Arch Europe Ratings

October 9, 2008

A.M. Best Co. has upgraded the issuer credit ratings (ICR) to “a+” from “a” and affirmed the financial strength rating (FSR) of ‘A’ (Excellent) of Bermuda-based Arch Reinsurance Ltd. and its reinsured affiliates. Best also upgraded the ICR to “bbb” from “bbb-” of Arch Capital Group (US) Inc. and the ICR to “bbb+” from “bbb” of Arch Capital Group Ltd. In addition Best upgraded all debt ratings of Arch Capital Group Limited and assigned an FSR of A (Excellent) and ICR of “a+” to Arch Indemnity Insurance Company (Nebraska). The outlook for all ratings is stable.

In a separate bulletin Best announced that it has also affirmed the financial strength rating of ‘A’ (Excellent) and upgraded the issuer credit rating (ICR) to “a+” from “a” of UK-based Arch Insurance Company (Europe) Limited, both with stable outlooks.

“The upgrading of the debt and the ICRs reflect Arch’s strong operating performance, consistently excellent capitalization and proven risk management systems,” said Best. “Arch’s risk management capabilities are evident in its historical operating performance, and although the company’s third quarter 2008 operating performance is expected to be impacted by catastrophe losses, its overall underwriting performance still places Arch among the leaders in the Bermuda market.

“With products offered on a worldwide basis in primary and reinsurance markets for property/casualty lines, Arch’s risk management characteristics, operational controls and diversified business profile have created an organization capable of adeptly responding to changes in the market cycle.” Best added that Arch’s “overall conservative investment portfolio,” is a further reason for upgrading the ratings. As a result, and despite current market turmoil, Best said it “still leaves the company with more than adequate liquidity to respond to policyholder claims.

“Arch’s financial leverage measures remain low as compared to the industry,” Best continued. The rating agency said it expects the company to maintain financial leverage as measured by debt and preferred-to-total capital below 20 percent, while fixed charge coverage is expected to remain in the upper single digit range.”

However, Best noted that “Arch’s ability to maintain its underwriting discipline and competitive position within its chosen markets, given the current soft market conditions, could be considered as offsetting factors. Best added that such “concerns are mitigated by Arch’s multiple product strategy, worldwide distribution system and experienced management team.”

In its analysis of Arch Europe, Best said: “The ratings reflect the financial strength of Arch Reinsurance Ltd. (Bermuda) which continues to provide support to Arch Europe in the form of an 85 percent quota share.” The upgrade in Arch Europe’s ICR also reflects the upgrade for Arch Re.

In addition Best cited “Arch Europe’s good stand-alone risk-adjusted capitalization, supported by positive earnings and stabilization in the company’s underwriting exposure following its initial growth phase (Arch Europe was established in 2004).”

Best said it believes that the company’s combined ratio is likely to be in line with that of 2007 at 102 percent. Arch Europe is expected to achieve a good investment return in 2008, despite turbulent conditions in financial markets, due to its conservative investment portfolio of high quality corporate and government bonds and cash and cash equivalents.

“Arch Europe continues to develop its business profile and in 2007 launched a new terrorism business unit. The company’s underwriting portfolio is focused on energy business (in particular onshore energy) and on business written through underwriting agency Dual International Ltd. (comprising directors’ and officers’ liability and errors and omissions business).

Source: A.M. Best –

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