Best Rates Arch Preferred Share Offering “bb”; Affirms ‘A-‘ Rating

A.M. Best Co. has assigned a debt rating of “bb” to Bermuda-based Arch Capital Group Limited’s $125 million 7.875 percent non-cumulative Series B preferred shares with a stable outlook. Arch’s remaining debt ratings and the financial strength rating of “A-” (Excellent) of Arch Reinsurance Ltd. and its affiliated companies remain unchanged.

Standard & Poor’s rated the debt issue “BB+” (See IJ Website May 17); while Fitch Ratings assigned it a “BBB-” rating (See IJ Website May 16).

“The proceeds from the preferred share offering will be used for general corporate purposes. A.M. Best anticipates that these proceeds will be used to support additional opportunities in lines of business that experience rate increases and meet Arch’s return expectations,” said Best. “Arch may also redeem the Series B preferred shares in whole or in part at a redemption price of $25 per share on or after May 15, 2011. Following the transaction, Arch’s debt-to-adjusted capital will be approximately 19 percent, and fixed charge coverage is expected to be in the high single-digit range.

“The rating reflects Arch’s excellent capitalization, solid operating performance and its well regarded operating franchise in both its primary and reinsurance business. The combination of Arch’s solid historical profits, strong risk management capability and demonstrated financial flexibility has enabled it to withstand the heightened loss activity of the 2005 hurricane season.”

Best noted: “Arch’s higher underwriting leverage position relative to its peer group, combined with the overall casualty orientation of its reinsurance and insurance lines of business,” constitute partially offsetting factors. “Despite Arch’s loss reserve adequacy based on current actuarial studies, approximately 60 percent of its book of business is in long-tail casualty lines,” Best explained. “Due to the company’s relatively short operating history and long-tail nature of the casualty business, the pricing and reserve adequacy of these lines will not be fully apparent for several years. A.M. Best will continue to monitor Arch’s loss reserve development, capitalization and operating performance.”