OREANDA-NEWS. Fitch Ratings has affirmed Arch Capital Group Ltd.'s (ACGL) Issuer Default Rating (IDR) at 'A' and the ratings on ACGL's senior unsecured notes and preferred shares at 'A-' and 'BBB', respectively. Additionally, Fitch has affirmed the Insurer Financial Strength (IFS) ratings of ACGL's various subsidiaries at 'A+'. The Rating Outlook remains Positive. A complete list of ratings is provided at the end of this release.

KEY RATING DRIVERS

Fitch's affirmation of ACGL's ratings reflects the company's reasonable financial leverage, strong interest and preferred dividend coverage, solid capitalization and well-managed reserve risk. These favorable factors are partially offset by potential volatility from large catastrophe-related events, exposure to possible adverse reserve development due to the relatively large portion of casualty reserves and integration risk associated with the acquisition of CMG Mortgage Insurance Company (CMG).

In addition, the ratings reflect Fitch's negative sector outlook on global reinsurance. The current stressful reinsurance market conditions, with record capitalization levels of traditional reinsurers and the growing capacity provided by alternative capital providers, are promoting weaker pricing and more generous terms and conditions. This is leading to consolidation in the reinsurance sector as companies aim to enhance their relative competitive position.

The Positive Outlook reflects ACGL's consistently strong and stable profitability, measured progression into a larger and more favorable market position in both insurance and reinsurance lines, and steady growth in capital to a sizable level of shareholders' equity.

ACGL has a broad product portfolio of both property/casualty primary insurance and reinsurance, including the recently added U.S. mortgage insurance business. Total company 2014 net premiums written (\$3.9 billion) by segment was 55% insurance, 33% reinsurance, 5% mortgage and 7% other (Watford), providing diversified sources of revenues and earnings. Fitch views this favorably as it provides the company flexibility to deemphasize various products when market conditions are poor and reduces its dependency on any single product line. Fitch expects that ACGL will continue to successfully manage through various market conditions and cycles.

ACGL's profitability is strong, characterized by low and stable combined ratios and high returns on average common equity (ROAE). The most recent five-year averages (2010-2014) of 91.9% and 14%, respectively, are in line with or better than peer averages and align with Fitch's median 'AA' and 'AAA' (re)insurance sector credit factors. In 2014 ACGL reported a combined ratio of 87.2% and annualized ROAE of 14.6%. ACGL has posted an underwriting profit and overall net income in every year of its 13-year operating history.

The company's financial leverage ratio is modest at 12.9% as of Dec. 31, 2014, down from 13.8% at year-end 2013. This decline reflects 9% growth in 2014 shareholders' equity available to ACGL to \$6.1 billion at Dec. 31, 2014 from net earnings and unrealized investment gains, partially offset by share repurchases and preferred share dividends.

Fixed charge coverage was a strong 10.9x in 2014, down from 14.3x in 2013. This drop reflects additional interest expense on \$500 million of senior notes issued by Arch Capital Group (U.S.) Inc. in December 2013 for the purchase of CMG Mortgage Insurance Company (CMG) and for funding growth opportunities in mortgage and other select businesses.

ACGL co-sponsored Watford Re Ltd. in March 2014, a new Class 4 Bermuda-domiciled property/casualty reinsurer whose business is primarily multi-line casualty risk. ACGL owns approximately 11% of Watford Holdings Ltd.'s (parent of Watford Re) common equity, but consolidates the company into its financial results as under accounting guidelines ACGL is considered to be the primary beneficiary of Watford Re. Watford Re provides ACGL with an alternative vehicle to utilize its underwriting expertise as a sidecar vehicle that generates an additional revenue diversification through fee income. Fitch does not believe Watford Re's operations present meaningful additional risk or volatility to ACGL's overall profile. Watford Re generated \$274 million of net premiums written in 2014 with a combined ratio of 103%.

ACGL's entrance into the U.S. mortgage insurance market via the January 2014 acquisition of CMG (renamed Arch Mortgage Insurance Company) and the operating platform of PMI Mortgage Insurance Co. provides an opportunity for an additional diversified source of earnings. Fitch expects that ACGL's approach to developing this business will be controlled and prudently managed to the company's conservative underwriting and risk-management standards, using an experienced team to operate and manage the business. In 2014, ACGL's mortgage segment produced \$205 million of net premiums written with a combined ratio of 88.9%.

RATING SENSITIVITIES

Key rating triggers that could result in an upgrade include:

--Maintenance of ACGL's relative competitive position and operating performance in the challenging reinsurance environment;
--Successfully integrating both the U.S. mortgage insurance operations and the Watford Re platform, with exposure growth prudently managed;
--Continued growth in equity, while maintaining favorable run-rate earnings and low volatility, with a combined ratio in the low 90s.

Other upgrade triggers include maintaining a net written premiums-to-equity ratio of 0.8x or lower; financial leverage ratio at or below 20%; and fixed charge coverage of at least 10x.

Key rating triggers that could result in an affirmation and return to a Stable Outlook include:

--Deterioration in reinsurance sector fundamentals or consolidation in the reinsurance landscape that Fitch viewed as weakening ACGL's competitive position, operating profile or overall profitability;
--Difficulties experienced in the mortgage insurance operations or Watford Re platform;
--Inability to achieve/maintain operating metrics listed in upgrade triggers.

Fitch affirms the following ratings with a Positive Outlook:

Arch Capital Group, Ltd.
--IDR at 'A';
--\$300 million 7.35% senior unsecured notes due 2034 at 'A-';
--\$325 million 6.75% series C non-cumulative preferred shares at 'BBB'.

Arch Capital Group (U.S.) Inc.
--\$500 million 5.144% senior notes due 2043 at 'A-';

Arch Reinsurance Ltd.
Arch Reinsurance Company
Arch Reinsurance Europe Underwriting Limited
Arch Insurance Company
Arch Excess and Surplus Insurance Company
Arch Specialty Insurance Company
Arch Indemnity Insurance Company
Arch Insurance Company (Europe) Limited
--IFS at 'A+'.