A.M. Best Upgrades Ratings of Arch Re Ltd. and Its Operating Affiliates

A.M. Best Co. has upgraded the financial strength ratings (FSR) to A+ (Superior) from A (Excellent) and the issuer credit ratings (ICR) to “aa-” from “a+” of Arch Reinsurance Ltd. (Arch) (Bermuda), its strategic affiliates and its separately rated affiliate, Arch Specialty Insurance Company (Omaha, NE). A.M. Best also has upgraded the ICR to “bbb+” from “bbb” of Arch Capital Group (US) Inc. (New York, NY). Concurrently, A.M. Best has upgraded the ICR to “a-” from “bbb+” as well as all debt ratings of the ultimate holding company, Arch Capital Group Ltd (Bermuda) (NASDAQ: ACGL). The outlook for all ratings has been revised to stable from positive. (See below for a detailed listing of the companies and ratings.)

The upgrades reflect Arch’s continued superior operating performance amidst challenging market conditions, consistently excellent capitalization and demonstrated risk management ability. Arch maintains a very strong underwriting culture, which centers on active cycle management and adaptability to varied market conditions. In a market environment where investment yields are hovering at record lows, underwriting profitability needs to be paramount. The company is positioned to write a broad range of property/casualty insurance and reinsurance on a worldwide basis with an emphasis on specialty lines.

Overall operating results since Arch’s inception have been strong and in certain instances have exceeded most peers in the sector. Typically, Arch has had a smaller share of major industry losses, with 2011 reported losses being no exception, which is demonstrative of the company’s superior risk management. As a result, Arch has reported stable and consistent financial results with lower levels of volatility than many of its peers. Furthermore, Arch has a prudent investment portfolio and conservative reserving philosophy, which helps maintain a strong balance sheet.

Partially offsetting these positive rating attributes are the current soft market conditions through which Arch, as well as all industry participants, must navigate.

For Arch, factors that could result in negative rating pressure include unfavorable operating profitability trends, outsized catastrophe or investment losses relative to peers, significant adverse loss reserve development and/or a material decline in risk-adjusted capital. However, factors that could lead to a positive outlook or further rating upgrades would be the continuation of long term, consistently strong operating profitability relative to its peers and maintenance of strong risk-adjusted capital levels.

The FSRs have been upgraded to A+ (Superior) from A (Excellent) and the ICRs to “aa-” from “a+” for Arch Reinsurance Ltd. and its following affiliates:

Arch Reinsurance Company
Arch Insurance Company
Arch Specialty Insurance Company
Arch Excess & Surplus Insurance Company
Arch Insurance Company (Europe) Ltd

The following debt ratings have been upgraded:

Arch Capital Group Ltd—

-- to “a-”from “bbb+” on $300 million 7.35% senior unsecured notes, due 2034

-- to “bbb” from “bbb-” on $200 million 8% non-cumulative preferred shares, Series A

-- to “bbb” from “bbb-” on $125 million 7.875% non-cumulative preferred shares, Series B

The following indicative ratings have been upgraded for debt securities available under the existing shelf registration:

Arch Capital Group Ltd—

-- to “a-” from “bbb+” on senior debt

-- to “bbb+” from “bbb” on subordinated debt

-- to “bbb” from “bbb-” on preferred stock

Arch Capital Group (U.S.) Inc. (guaranteed by Arch Capital Group Ltd)—

-- to “a-” from “bbb+” on senior debt

-- to “bbb+” from “bbb” on subordinated debt

-- to “bbb” from “bbb-” on preferred stock

The principal methodology used in determining these ratings is Best’s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies”; “Understanding BCAR for Property/Casualty Insurers”; “Understanding Universal BCAR”; “Catastrophe Analysis in A.M. Best Ratings”; “Rating Members of Insurance Groups”; and “A.M. Best’s Ratings & the Treatment of Debt.” Methodologies can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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