Rating Action on Arch Capital

Recently, A.M. Best Co. affirmed the issuer credit rating (ICR) of Arch Capital Group Ltd. (ACGL - Snapshot Report) at “a-” as well as its debt ratings with a stable outlook. The rating agency also affirmed the financial strength rating (FSR) at “A+” and ICR at “aa-” of the company’s subsidiary – Arch Reinsurance Ltd. and its strategic affiliates – Arch Reinsurance Company, Arch Insurance Company, Arch Specialty Insurance Company, Arch Excess & Surplus Insurance Company and Arch Insurance Company (Europe) Ltd.

Further, A. M. Best conferred an FSR of “A+” and an ICR of “aa-” on Arch Capital’s operating subsidiary, Arch Insurance Canada Ltd., which was earlier a branch company. The rating agency also affirmed the ICR of Arch Capital Group (US) Inc. at “bbb+”. All the above-mentioned ratings carry a stable outlook.

The rating affirmations were based on Arch Capital’s strong operating performance despite the difficult operating environment, along with continued strong capitalization levels and a well established enterprise risk management system. The company also follows impressive underwriting practices and easily adapts itself to various market conditions through active management of the underwriting cycle. This is important considering the historically low underwriting yields being witnessed in the industry at present.

Further, Arch Capital has a track record of generating strong operating results since inception and it usually outperforms peers in certain operating metrics. The company usually incurs only a small portion of the total industry loss in case of catastrophic events such as Hurricane Sandy. This helps the company maintain stability in financial results.

Arch Capital also has a sensible investment portfolio and a conservative approach toward reserve creation, leading to a sturdy balance sheet. However, the adverse market conditions partially offset these positives.

A. M. Best can change the outlook to negative in case the operating performance starts deteriorating consistently, the company suffers high catastrophe or investment losses compared with its peers or its risk-adjusted capital declines significantly. On the other hand, if Arch Capital continues to outperform its peers in terms of operating profits and maintains impressive risk-adjusted capital levels, then a revision of the outlook to positive and a rating upgrade are possible.

Arch Capital carries a Zacks Rank #3 (Hold). Other property and casualty insurers such as Cincinnati Financial Corp. (CINF - Analyst Report), Fidelity National Financial, Inc. (FNF - Snapshot Report) and RLI Corp. (RLI - Analyst Report) are worth considering. All these stocks carry a Zacks Rank #1 (Strong Buy).