Fitch Ratings has assigned an 'A-' rating to Arch Capital Finance’s issuance of $500 million 4.011 percent senior notes due 2026 and $450 million 5.031 percent senior notes due 2046 and placed the ratings on Negative Watch.
ACF is a wholly owned subsidiary of Arch Capital Group (ACG), which has guaranteed the notes on a senior unsecured basis.
The new issuance is rated equivalent to ACG's existing senior notes. The negative rating watch on ACG's holding company ratings reflects Fitch's anticipated change to a 'ring-fencing' environment classification for ACG from a 'group solvency' approach following the purchase of United Guaranty Corporation (UGC), as the acquisition increases the amount of capital outside of the Bermuda group solvency environment.
Under Fitch's rating criteria, a ring-fencing approach is applied to global groups that have more than 30 percent of capital or earnings from foreign subsidiaries.
At year-end 2015, ACG had 34 percent and 17 percent of capital and earnings, respectively, from foreign subsidiaries.
The negative rating watch also reflects Fitch's potential concerns about the financial strength of UGC and its implications on the overall credit quality of ACG's holding company.
Fitch does not rate UGC. The agency expects to resolve the Negative Watch following a more detailed review UGC's credit quality. This includes gaining an understanding of ACG's operating strategy, business growth expectations and capital management plans for UGC.
Fitch expects to downgrade the holding company ratings by one notch upon the closing of the UGC acquisition to reflect a 'ring fencing' classification. The holding company ratings could be downgraded by an additional notch should Fitch view UGC's credit quality as meaningfully weakening ACG's overall financial strength or debt servicing capabilities.
“Key rating triggers that could result in a downgrade of both the insurer financial strength (IFS) and holding company ratings include difficulties experienced in the mortgage insurance operations, including failure to successfully integrate UGC, or sizable adverse prior-year reserve development,” Fitch said.
“In addition, increases in underwriting leverage above 1.0x net premiums written-to-equity ratio or a financial leverage ratio above 25 percent could generate negative rating pressure.
“ACG'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,” Fitch concluded.
Arch Capital Finance, Arch Capital, Bermuda, Fitch Ratings, North America, Insurance, Reinsurance, Ratings, Funds, M&A, United Guaranty Corporation