Arch penalised by Moody's United Guaranty deal with downgrade

The insurance financial strength (IFS) rating of Arch Capital's principal P&C re/insurance operating subsidiaries has been downgraded to A2 from A1 by Moody’s. The outlook for these ratings is stable.

Moody's also downgraded the IFS rating of Arch Mortgage Guaranty Company (AMG) to Baa1 from A3. The outlook for AMG is positive.

Moody's affirmed the Baa1 IFS rating of Arch Mortgage Insurance Company (AMI) with the outlook changed to positive from stable.

These rating actions follow the completion of Arch Capital's previously announced acquisition of United Guaranty Corporation, a holding company for a leading US mortgage insurance group, from American International Group. Arch Capital purchased UGC for approximately $3.3 billion in cash and stock.

Moody’s said the downgrade reflects its view that the acquisition of UGC increases the group's credit risk profile due to the substantial expansion of Arch Capital's mortgage insurance operations and a significant increase in the holding company's financial leverage following the issuance of debt and preferred shares to finance a portion of the UGC acquisition.

On a pro forma basis giving effect to the acquisition, Arch Capital's mortgage operations represent approximately 24 percent of the group's gross premiums written, up from around 8 percent.