Moody’s has upgraded the insurance financial strength (IFS) ratings of Arch Capital’s P&C re/insurance operating subsidiaries to A1 from A2 and the senior unsecured debt rating of the Group to A3 from Baa1.

The rating outlook for these entities has been revised to stable from positive. Additionally, Moody’s has affirmed the A2 IFS ratings for Arch Capital’s U.S. mortgage insurance subsidiaries, maintaining a positive outlook for these ratings.

The ratings upgrade for Arch Capital and its P&C re/insurance operating companies reportedly reflect the firm’s robust profitability metrics and solid risk-adjusted capitalisation.

As per the rating agency, these strengths are underpinned by its improved market position and scale, which are driven by a significant increase in premium volume over the past several years.

Moody’s continued, “Arch Capital benefits from diversified earnings from its P&C re/insurance and mortgage insurance businesses, allowing the firm to actively manage the underwriting cycle.

“The firm has posted strong profitability in its mortgage insurance segment and has benefitted from higher pricing and tighter terms and conditions in its P&C insurance and reinsurance businesses with improved underwriting results. The company has also significantly deleveraged its balance sheet through organic growth in equity capital.”

According to the rating agency, these strengths are partly tempered by Arch Capital’s exposure to underwriting volatility and the pricing uncertainties associated with its chosen lines of business, such as catastrophe-exposed property coverages and long-tail casualty insurance.

Additionally, the firm’s mortgage insurance segment is said to introduce systemic risk, as it is vulnerable to significant mortgage default activity during periods of widespread economic downturn and elevated unemployment.

The Bermuda-based insurer and reinsurer reported premium growth across its insurance and reinsurance segments in the third quarter of 2024, although the underwriting result dipped year-on-year amid elevated losses from natural catastrophes.

Group-wide, gross premiums written rose more than 20% year-on-year to $5.4 billion in Q3 2024, as net premiums written rose 21% to over $4 billion, and net premiums earned increased 22% to just under $4 billion.

Moody’s observed that this new A1 IFS rating is unlikely to be upgraded in the next 12-18 months due to Arch Capital’s exposure to catastrophes, claims inflation, and the cyclicality of the mortgage business.

However, factors such as improved diversification, lower financial leverage, controlled natural catastrophe exposure, and strong reinsurance coverage could enhance the firm’s credit profile.

Conversely, Moody’s said a downgrade could result from sustained low returns on capital, higher financial or underwriting leverage, or a significant decline in shareholders’ equity.