Arch Capital Group Ltd. has been affirmed an Issuer Default Rating (IDR) at A, while its subsidiary Arch Reinsurance Ltd. has been affirmed an Insurer Financial Strength (IFS) rating of A+ by Fitch Ratings. The rating outlooks are stable.

The ratings agency said that the affirmations reflect Arch's solid capitalisation, high-quality investment portfolio, and consistently good underwriting results. But partially offsetting these positive factors is the effect of lower underwriting margins and very difficult investment environment that adversely affected profitability in 2008.

Arch's 2008 earnings suffered from comparatively high catastrophe and investment related losses. For the year, the company's net income declined 68 percent to $265 million and included $350 million (pretax) of losses from Hurricanes Ike and Gustav and $185 million (pretax) of realised investment losses, primarily on fixed maturities investments. Fitch views the decline in earnings as significant, but generally views Arch's 2008 operating performance as comparable to those of its peers.

The ratings agency said that Arch utilised a reasonable amount of operating and asset leverage and a modest amount of financial leverage, while maintaining a high-quality and liquid investment portfolio.

At year-end 2008 the company's invested assets totalled $10 billion, 94 percent of which were fixed income or short-term investments, and the fixed income portfolio's weighted average credit rating was AA+. Arch's investment portfolio included $980 million of non-agency residential and commercial mortgage backed securities (MBS) at year-end 2008. Fitch generally considers investments in non-agency MBS securities as being highly exposed to the current poor real estate market conditions. In Arch's case, the vast majority of these MBS securities were rated AAA at year-end 2008 and Fitch views the company's ultimate credit exposure from these securities to be "manageable".