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Rating Action:

Moody’s affirms Arch Capital’s mortgage insurance subsidiaries; outlook changed to positive

17 October 2019

New York , October 17, 2019 – Moody's Investors Service ("Moody's") has affirmed the A3 insurance financial strength (IFS) ratings of the principal mortgage insurance subsidiaries of Arch Capital Group Ltd. (Arch Capital, senior Baa1 stable), including United Guaranty Residential Insurance Company (UGRIC), Arch Mortgage Insurance Company (AMI), Arch Mortgage Guaranty Company (AMG) and Arch LMI Pty Ltd (Arch LMI and collectively Arch Mortgage). The outlook for the ratings was changed to positive from stable, reflecting the company's strong capital adequacy and enhanced risk management practices.

RATINGS RATIONALE

The US mortgage insurance sector has reported broad-based improvements to its credit profile over the past several years with strong net income and improved capital adequacy bolstered by organic capital growth and the increased utilization of excess of loss reinsurance through insurance-linked notes (ILNs) issued to investors as well as traditional reinsurance coverage. With more than $8.4 billion of ILNs sponsored by US mortgage insurers since mid-2015, Moody's expects that this significant source of off-balance sheet risk transfer capacity will dampen the earnings and capital volatility that have historically impacted the sector during adverse economic environments, allowing mortgage insurers with comprehensive reinsurance coverage to maintain an adequate capital cushion to the GSEs' Private Mortgage Insurer Eligibility Requirements (PMIERs) in the case of an economic downturn.

Arch Mortgage's positive outlook also reflects the firm's leadership position in the mortgage insurance market and its strong capital adequacy, bolstered by its substantial use of reinsurance to mitigate underwriting volatility in stress scenarios. Arch Mortgage has transferred more than $4.7 billion of risk to the capital markets through 10 Bellemeade Re ILN transactions including its recently announced Bellemeade Re 2019-4 transaction. The group also has additional risk transfer protection through traditional quota-share and excess of loss reinsurance. Through these arrangements, Arch Mortgage has significant off-balance sheet capital resources to absorb losses during periods of elevated mortgage credit losses. As of June 30, 2019, Arch Mortgage reported a PMIERs sufficiency ratio of 163%, which is high relative to most of its peers.

Arch Mortgage has also benefitted from the strong US housing market and economic fundamentals that have been supportive of mortgage credit, including continued (albeit slowing) economic growth, rising home prices and a strong US labor market with low unemployment rates. Through the first six months of 2019, Arch Capital's mortgage segment reported GAAP underwriting income of $502 million and a combined ratio of 26.8%. Moody's expects Arch Mortgage to continue to report strong earnings for the remainder of 2019 and into next year.

The A3 IFS ratings on Arch Capital's mortgage insurance subsidiaries consider implicit and explicit support from Arch Capital and Arch Reinsurance Ltd. (Arch Re Bermuda, IFS rating A2 stable), as well as the firm's leadership position in the US mortgage insurance market, its strong core earnings power and the group's enhanced market presence and capabilities as a key operating unit within the larger Arch Capital Group. The Arch Mortgage platform leverages its strong underwriting and risk management capabilities to innovate in the evolving mortgage credit risk transfer market. These strengths are tempered by the commodity-like nature of the mortgage insurance product and the potential for price competition in the US mortgage insurance market.

RATING DRIVERS – UGRIC and AMI

The following factors could result in an upgrade of the ratings: (1) stronger explicit support from Arch Capital and Arch Re Bermuda; 2) upgrade of Arch Re Bermuda; and 3) continued improvement of the group's stand-alone credit profile.

Conversely, the following factors could lead to a downgrade of the ratings: (1) a downgrade of Arch Re Bermuda or termination of the reinsurance support provided by Arch Re Bermuda; (2) non-compliance with PMIERs; (3) a decline in the Arch US mortgage group's qualified statutory capital by more than 10% over a rolling twelve month period; and (4) significant weakening of underwriting standards or pricing.

RATING DRIVERS – Arch LMI

The following factors could lead to an upgrade of Arch LMI's rating: (1) an upgrade of Arch Re Bermuda and/or upgrades of Arch Capital's principal US mortgage insurance subsidiaries; (2) the establishment of a strong stand-alone franchise in Australian LMI market; and (3) stronger levels of explicit support from Arch Capital and Arch Re Bermuda.

Conversely, Moody's stated that the following factors could lead to a downgrade of the company's rating: (1) termination of the reinsurance agreement with Arch Re Bermuda; (2) a downgrade of Arch Re Bermuda and/or downgrades of Arch Capital's principal US mortgage insurance subsidiaries; and (3) lower levels implicit support from Arch Capital and Arch Re Bermuda.

RATING DRIVERS – Arch Mortgage Guaranty

The rating of AMG is expected to remain closely linked to those of UGRIC and AMI. Consequently, an upgrade or downgrade of these affiliates is likely to result in an upgrade or downgrade of AMG.

The following ratings have been affirmed:

United Guaranty Residential Insurance Company – insurance financial strength at A3;

Arch Mortgage Insurance Company -- insurance financial strength at A3;

Arch Mortgage Guaranty Company - insurance financial strength at A3; and

Arch LMI Pty Ltd – insurance financial strength at A3.

Outlook actions:

..Issuer: United Guaranty Residential Insurance Company

..Issuer: Arch Mortgage Insurance Company

..Issuer: Arch Mortgage Guaranty Company

..Issuer: Arch LMI Pty Ltd

....Outlook, to Positive from Stable

Arch Capital Group Ltd., through its subsidiaries, writes insurance and reinsurance on a worldwide basis through operations in Bermuda, the United States, Canada, Europe, Australia and South Africa, with a focus on specialty lines. The company has three operating platforms: insurance, reinsurance and mortgage. Through the first six months of 2019, Arch Capital reported $897 million of net income available to common shareholders. As of June 30, 2019, total shareholders' equity was approximately $11.6 billion.

The principal methodology used in these ratings was Mortgage Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

James Eck
VP-Sr Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Scott Robinson, CFA
Associate Managing Director
Financial Institutions Group
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

Releasing Office :
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS : 1 212 553 0376
Client Service : 1 212 553 1653

© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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