Fitch moves Arch to positive; praises diversification

A mixture of good performance and considered strategic diversification have led to Fitch moving the financial strength rating of Arch Capital Group to positive from stable. The rating agency rates Arch A+.

Fitch said the revision reflects Arch’s consistently strong and stable profitability, measured progression into a larger and more favourable market position in both insurance and reinsurance lines and steady growth in capital to a sizable level of shareholders' equity. It said the ratings also reflect the company's reasonable financial leverage, strong interest and preferred dividend coverage, solid capitalisation and well managed reserve risk.

But these factors are partially offset by potential volatility from large catastrophe-related events and integration risk associated with its recent acquisition of CMG Mortgage Insurance Company (CMG) and the continuing challenging reinsurance market conditions, Fitch said.

Commenting on the CMG deal, Fitch said that despite some risks, it welcomed the diversification it would bring. It described the move as an opportunity for an additional diversified source of earnings under current, generally favourable, market conditions, adding to the company's European Union-based mortgage insurance business.

“However, it also represents a challenge in generating favourable profitability in a line of business that experienced severe difficulty during the financial crisis,” it noted.