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Rating Action:

Moody's rates Arch Capital's senior notes A3; outlook is stable

11 Dec 2013

New York, December 11, 2013 -- Moody's Investors Service has assigned an A3 rating to $500 million of senior notes to be issued by Arch Capital Group (U.S.) Inc. (Arch-US), a wholly-owned subsidiary of Arch Capital Group Ltd. (Arch Capital -- senior debt at A3). The notes, which mature in 2043, are redeemable at the option of the issuer and are fully and unconditionally guaranteed on a senior unsecured basis by Arch Capital. Net proceeds from the offering will be used to finance Arch Capital's acquisition of certain assets from PMI Mortgage Insurance Company (PMI -- not rated) and the purchase of CMG Mortgage Insurance Company (CMG-not rated) from CMFG Life Insurance Company (CMFG -- not rated) and PMI, and to fund anticipated growth in its mortgage insurance and other select businesses. Moody's currently rates Arch Capital's principal operating subsidiaries A1 for insurance financial strength. The outlook for the ratings is stable.

RATINGS RATIONALE

According to Moody's, Arch Capital's ratings reflect its established operating platform and good spread of risk in specialty insurance and reinsurance, its strong equity capitalization and balance sheet unencumbered by legacy exposures, its high quality investment portfolio, strong profitability, its moderate financial leverage and strong liquidity at the holding company. These strengths are tempered by underwriting volatility and pricing uncertainty inherent in many of the company's chosen lines of business, which include catastrophe-exposed property and high excess layer casualty exposures.

The rating agency noted that Arch Capital's 3Q2013 pro-forma adjusted financial leverage following the $500 million issuance of notes will rise to approximately 18.1%, from 11.2%, which Moody's considers to be in-line with similarly-rated peers, but at the high end of the range considered to be supportive of the current rating level. Moody's expects the company's financial leverage to moderate over the next few quarters as retained earnings increase equity capital.

Moody's noted that Arch Capital's entry into the primary U.S. mortgage insurance market through its purchase of CMG and PMI's mortgage insurance operating platform will enhance its business diversification profile and provides an attractive market to deploy capital given the tighter, more conservative mortgage loan underwriting standards since the financial crisis and the current expected profitability on new business. While Arch Capital is assuming some legacy risks from CMG and PMI, CMG's insured portfolio has performed well relative to peers and the assumed PMI policies were originated on loans after the financial crisis under tighter underwriting standards.

Moody's believes that Arch Capital's entry into the mortgage insurance market carries some risks. Profitability metrics could be adversely impacted over the near term as it will take some time for the mortgage insurance business to reach scale. Additional risks include the general uncertainty surrounding the future of the U.S. housing finance market and the role to be played by private mortgage insurance, the amount of new business Arch Capital will be able to write as competition increases among new entrants and incumbents in the mortgage insurance market, as well as the potential for outsized losses under stress scenarios given the high levels of operational leverage inherent in the mortgage insurance business model.

The CMG/PMI purchase agreements remain subject to regulatory and other approvals, including approval by Fannie Mae and Freddie Mac. To the extent the acquisition is terminated or does not close by June 30, 2014, the notes issued by Arch-US would be subject to a special mandatory redemption provision at 101% of par, plus accrued interest.

Going forward, Moody's noted that while there is unlikely to be positive rating pressure at Arch Capital over the near to medium term, the following factors could enhance the firm's credit profile: 1) continued development of the core franchise; 2) reduced catastrophe exposures; 3) maintenance of adjusted financial leverage at levels below 15%; and 4) maintenance of gross underwriting leverage below 2.5x.

Conversely, the following factors could lead to negative ratings pressure: 1) returns on capital significantly below 10% across multiple years; 2) a decline in shareholders' equity (including share repurchases) by more than 10% over a rolling twelve month period; 3) adjusted financial leverage greater than 18%; and 4) gross underwriting leverage above 3x.

The following rating has been assigned with a stable outlook:

Arch Capital Group (U.S.) Inc. -- guaranteed senior notes at A3

Arch Capital Group Ltd., through its subsidiaries, writes commercial and specialty lines of business in the insurance and reinsurance markets primarily through regional, national and global brokers. For the nine months ended September 30, 2013, Arch reported $3.2 billion of gross premiums written and $532 million in net income available to common shareholders. As of September 30, 2013, Arch Capital's shareholders' equity was approximately $5.4 billion.

The principal methodology used in this rating was Moody's Global Rating Methodology for Reinsurers published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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.

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

Stanislas Rouyer
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's rates Arch Capital's senior notes A3; outlook is stable
No Related Data.
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