S&P has revised its outlook on Arch Capital Group Ltd. to “stable” from “negative”. It has also raised long-term issuer credit and financial strength ratings on Arch’s US MI companies, and Arch Insurance (EU) Designated Activity Co. to “A+” from “A”.
S&P also affirmed its “A-” long-term issuer credit rating on Arch Capital Group Ltd. and “A+” financial strength and issuer credit ratings on Arch’s core operating subsidiaries. The outlook on those entities is stable.
Arch’s reinsurance segments underwriting performance has also improved, which enhances diversity of the overall group’s earnings, S&P says, “solidifying its competitive position and mitigating our concerns on Arch’s over reliance on mortgage insurance earnings”.
“The outlook revision reflects our view that the improvement in Arch’s re/insurance segments underwriting performance enhances the diversity of the group’s earnings and further solidifies its strong competitive position in the global reinsurance and MI markets”.
S&P found that over the course of three years, Arch’s underwriting margins have improved as measured by the accident year loss ratios (excluding catastrophe and reserve development), which reflect benefits from compounding rate increases in excess of loss cost trends.
The insurance industry has generally underperformed since 2017, due largely to higher natural catastrophe losses and COVID-19 losses, however S&P believes that the improvement in accident year loss ratios will allow Arch to absorb large losses within its earnings.
However, the rating agency cautioned that if Arch’s severity risk profile increases materially, such that natural catastrophe or large losses cause material earnings volatility, it could revise its view on risk exposure or revise its rating.
