S&P revise Arch Capital outlook to negative
In the wake of Arch Capital Group Ltd agreeing to acquire United Guaranty Corporation from AIG, one of the major rating services has revised its outlook for the group from stable to negative.
It is a cautionary move by S&P Global Ratings, which has also acknowledged that the deal will speed up Arch Capital's push in the US primary mortgage insurance space and provide scale benefits “as well as a means to offset pricing pressure in its traditional re/insurance business”.
Bermudian-based Arch Capital confirmed on Monday that it would buy United Guaranty for $3.4 billion in cash and securities.
Hardeep Manku, credit analyst at S&P Global Ratings, said: “The outlook revision on ACGL reflects execution risks inherent in the proposed acquisition.”
At the same time the company has affirmed its ‘A-' long-term counterparty credit rating on Arch Capital as well as its counterparty credit and financial strength ratings on its operating subsidiaries.
S&P Global Ratings noted that the deal will accelerate Arch Capital's push into the US primary mortgage insurance sector, complementing Arch Mortgage Insurance Company, which started in 2014.
The combination of United Guaranty and Arch Mortgage Insurance will constitute one of the largest players in the sector.
In a statement, S&P Global Ratings said: “While ACGL's strong competitive position will continue to be supported by a diversified re/insurance platform, in our view, the significant change in the business mix pursuant to the acquisition raises concentration risk.
“Such a large exposure, in our view, has implications and could hamper ACGL's ability to manage its business mix, ability to integrate the acquired business within its risk management framework, and execute on its opportunistic approach to cycle management. In addition, we believe there is pressure on capital adequacy as the capital requirements will increase significantly due to the capital-intensive nature of the mortgage insurance business.”
The ratings company said the negative outlook reflected “elevated execution risk” as Arch Capital would need to incorporate risk controls around pricing, concentration and tolerances in the newly acquired book, and added that “a large proportion of mortgage re/insurance business could also hamper its ability to strategically manage its business mix through effective risk-reward analysis taking into account market conditions and in line with its risk appetite”.
Confirming the acquisition agreement on Monday, Constantine “Dinos” Iordanou, CEO of Arch, said: “We are extremely pleased to be able to expand our private mortgage insurance business through the acquisition of United Guaranty. Our mortgage insurance segment expands and complements our strengths in the specialty insurance and reinsurance businesses, which continue to be central to our global, diversified operations.”
He continued: “We are excited about the combination of Arch and United Guaranty because these companies have led the market in innovation through their risk based pricing models and focus on data analytics.
“We believe that the companies' complementary risk management cultures will further accelerate innovation and sound risk management and help us to maximise our best-in-class processes in the specialty insurance space.”
It is Arch Capital's biggest deal on record.
Mr Iordanou said: “We expect to quickly integrate Arch's existing California-based mortgage insurance operations and the North Carolina-based operations of United Guaranty while maintaining a strong presence in both locations, thereby further developing our superior customer service with nationwide and worldwide coverage.
“We believe that the expansion of our mortgage segment creates a better-balanced company that continues our history of creating long-term value for shareholders by producing strong underwriting returns.”
Meanwhile. Peter Hancock, president of AIG, said the deal “further streamlines AIG into a more focused insurer and enhances our capital position, in keeping with commitments AIG made to the market in early 2015 and restated earlier this year”.
He added: “The transaction also maintains AIG's presence in a profitable market through a stake in a market leader that shares our focus on risk-based pricing and analytics as the foundation for our industry's future. We are leaving United Guaranty Corporation in the good hands of a forward looking management team.”
S&P Global Ratings has maintained its positive outlook on Arch Mortgage Insurance.