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Fitch Rates Re-Opening of Arch Capital's Preferred Shares 'BBB'
December 5, 2017 / 6:46 PM / 9 days ago

Fitch Rates Re-Opening of Arch Capital's Preferred Shares 'BBB'

(The following statement was released by the rating agency) CHICAGO, December 05 (Fitch) Fitch Ratings has rated the re-opening of Arch Capital Group Ltd.'s (ACGL) 5.45% series F non-cumulative perpetual preferred shares 'BBB'. The $100 million of series F preferred shares were issued on Dec. 1, 2017 under a re-opening of the securities that were originally issued for $230 million in August 2017. A full list of Fitch's current ratings on ACGL and its subsidiaries follows at the end of this release. KEY RATING DRIVERS ACGL intends to use the net proceeds to redeem all of its outstanding 6.75% series C non-cumulative preferred shares with any remaining amounts to be used for general corporate purposes. Consequently, financial leverage is expected to remain near ACGL's financial leverage ratio (FLR) of 19.4% as of Sept. 30, 2017. Fitch expects ACGL's near-term fixed-charge coverage to be at least a strong 7.0x to 8.0x. Fitch's hybrid securities rating methodology allocates 100% of the preferred shares' principal to equity in evaluating financial leverage due to the perpetual term and non-cumulative dividends of the securities. Fitch used a baseline recovery assumption of Poor and a non-performance risk assessment of Minimal. Notching of two was applied relative to the Issuer Default Rating (IDR), which was based on two for recovery and zero for non-performance risk. RATING SENSITIVITIES ACGL's overall Insurer Financial Strength (IFS) anchor rating could be lowered if more than 40% of ACGL's operating earnings and capital are sourced from U.S. mortgage insurance (USMI), which would result in a downgrade of ACGL's holding company ratings based on standard notching. Key rating sensitivities that could result in a downgrade of both operating and holding company ratings outside of anchor-rating considerations include: difficulties experienced in the USMI operations, including failure to successfully integrate United Guaranty Corporation (UGC), or sizable adverse prior-year reserve development. In addition, increases in underwriting leverage above 1.0x net premiums written-to-equity ratio or an FLR above 25% could generate negative rating pressure. ACGL's hybrid securities ratings could be lowered by one notch to reflect non-performance risk should Fitch view Bermuda's regulatory environment as becoming more controlling in its supervision of (re)insurers. Key rating sensitivities that could result in an upgrade include: continued improvement in ACGL's competitive market position while demonstrating favorable run-rate earnings and low volatility with a non-mortgage combined ratio in the low 90s; and successfully managing the expansion of its USMI operations with the UGC acquisition. In addition, continued growth in equity while maintaining an FLR at or below 20%, fixed-charge coverage of at least 10x, and a net premiums written-to-equity ratio of 0.8x or lower could generate positive rating pressure. FULL LIST OF RATING ACTIONS Fitch currently rates ACGL and its subsidiaries as follows: Arch Capital Group Ltd. --Long-Term Issuer Default Rating 'A-'; --$300 million 7.35% senior unsecured notes due 2034 'BBB+'; --$93 million 6.75% series C non-cumulative preferred shares 'BBB'; --$450 million 5.25% series E non-cumulative preferred shares 'BBB'; --$330 million 5.45% series F non-cumulative preferred shares at 'BBB'. Arch Capital Group (U.S.) Inc. --$500 million 5.144% senior notes due 2043 'BBB+'. Arch Capital Finance LLC --$500 million 4.011% senior unsecured notes due 2026 'BBB+'; --$450 million 5.031% senior unsecured notes due 2046 'BBB+'. Arch Reinsurance Ltd. Arch Reinsurance Company Arch Reinsurance Europe Underwriting Designated Activity Company Arch Insurance Company Arch Excess and Surplus Insurance Company Arch Specialty Insurance Company Arch Indemnity Insurance Company Arch Insurance Company (Europe) Limited --IFS 'A+'. Contact: Primary Analyst Brian C. Schneider, CPA, CPCU, ARe Senior Director +1-312-606-2321 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Martha Butler, CFA Senior Director +1-312-368-3191 Committee Chairperson Douglas Meyer, CFA Managing Director +1-312-368-2061 Date of Relevant Rating Committee: July 25, 2017 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

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