Fitch Ratings has assigned an 'AA-' (Very Strong) Insurer Financial Strength (IFS) rating to Arch Group Reinsurance Ltd. (AGRL).

The Rating Outlook is Stable.

Key Rating Drivers

Group IFS Rating Approach: The 'AA-' IFS rating assigned to AGRL reflects its status as a 'very important' operating company within the Arch Capital Group Limited (ACGL; 'A-' Long-Term Issuer Default Rating) organization and is rated based on a group rating methodology within Fitch's Insurance Rating Criteria. As a result, Fitch assigns the 'AA-' IFS rating of ACGL's primary insurance and reinsurance operating subsidiaries to AGRL.

Very Important to ACGL: AGRL's strategic importance is viewed as a 'Very Important' entity of ACGL based on shared board members and senior management, resources, common branding and reinsurance with the other ACGL operating entities. ACGL has the willingness and ability to provide support to AGRL. AGRL falls short of 'Core' strategic importance to ACGL due to its newness (established in 2022) and relatively small size ($255 million of statutory capital and surplus at Dec. 31, 2022). However, management's intent is to grow AGRL over time.

Affiliated Bermuda Internal Reinsurer: AGRL was established to provide internal reinsurance covering certain U.S. lines of business of ACGL, commencing operations on Dec. 16, 2022. AGRL is a Bermuda-domiciled, wholly-owned reinsurance operating company subsidiary of ACGL. ACGL owns AGRL through Arch Reinsurance Ltd. ('AA-' IFS) and directly by Arch Capital Group (U.S.) Inc. ('BBB+' senior debt). AGRL is licensed as an affiliated Class 3A Bermuda reinsurer and was funded by ACGL with $250 million of capital. AGRL elected to be a U.S. taxpayer through an IRS section 953(d) election.

AGRL has thus far only completed its initial transaction, a loss portfolio transfer reinsurance agreement in 2022 for $390.1 million of risk written by Arch Insurance Company ('AA-' IFS) in 2018, 2019 and 2020 in its executive assurance, professional liability, E&S casualty and high excess workers compensation products. ACGL expects increased use of AGRL for internal reinsurance in 2024 once Certified Reinsurer status is granted by Missouri, which will reduce collateral requirements and improve ACGL's capital efficiencies.

RATING SENSITIVITIES

As a 'Very Important' subsidiary of ACGL, AGRL's rating sensitivities are consistent with ACGL's sensitivities below. However, if Fitch views AGRL's strategic importance to ACGL's primary insurance/reinsurance business as weakening to below 'Very Important', the group IFS rating methodology may no longer apply and could lead to a negative rating action/downgrade and/or rating withdrawal.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Improvement to a more favorable company profile, while producing very strong run-rate earnings with an insurance/reinsurance segments combined ratio in the high 80% range; successfully managing the USMI operations; and maintaining a Fitch Prism factor-based capital model score of 'Extremely Strong';

ACGL's holding company ratings could be upgraded if Fitch raised the company's combined primary insurance, reinsurance and mortgage operations 'a+' IFS group assessment; or if Fitch applied compressed IDR notching based on FLR maintained at or below 15% or fixed-charge coverage of over 12x.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Weakening in the overall assessment of capitalization and leverage, including net premiums written-to-equity ratio above 0.8x or an FLR above 20%, sizable adverse prior-year reserve development or fixed-charge coverage of below 10x; difficulties experienced in the USMI operations, such as reporting sustained GAAP underwriting losses;

The primary insurance and reinsurance 'AA-' IFS ratings could be downgraded if the group assessment IFS is lowered by one or more notches;

ACGL's holding company ratings could be downgraded if Fitch lowered the company's combined primary insurance, reinsurance and mortgage operations 'a+' IFS group assessment.

Date of Relevant Committee

21 December 2023

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information see www.fitchratings.com/esg.

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