Moody’s places Arch under review for downgrade after AIG deal

Moody's Investors Service (Moody's) has placed Arch Capital’s A1 insurance financial strength rating on review for downgrade after its agreement to acquire United Guaranty Corporation (UGC) from American International Group (AIG) for $3.4 billion.

Moody’s said the action reflects its view that the acquisition of UGC would materially increase Arch’s credit risk profile by substantially expanding the group's mortgage insurance operations and meaningfully raise the group's financial leverage.

On a proforma basis, Moody’s expects the mortgage operation to represent 24 percent of the company’s gross written premiums, up from 8 percent today.

However, Moody’s suggest the acquisition provides some diversification benefits to Arch as its traditional property/casualty reinsurance business faces challenging competitive dynamics.

In contrast, Moody’s suggests mortgage insurance conditions are quite sound, with strong mortgage insurance profitability supported by high quality origination and benign housing market conditions.