S&P warns on inherent risks of Arch’s $3.4bn push into mortgage insurance

S&P Global Ratings has warned of the execution risks inherent in Arch Capital Group’s $3.4 billion acquisition of American International Group’s (AIG) mortgage insurer, United Guaranty Corporation (UGC) and placed Arch’s ratings on negative outlook as a result.

The rating agency affirmed its A- long-term counterparty credit rating on Arch Capital Group as well as its counterparty credit and financial strength ratings on its operating subsidiaries. But it also revised its outlook to negative from stable on all ratings on ACGL and its subsidiaries except for Arch Mortgage Insurance, which continues to carry a positive outlook.

"The outlook revision on ACGL reflects execution risks inherent in the proposed acquisition," said S&P Global Ratings credit analyst Hardeep Manku.

The rating agency said that the acquisition of UGC accelerates ACGL's push into the US primary mortgage insurance (MI) sector, complementing its own initiative started in 2014 through Arch MI. MI would become the largest single business line both from a premium and capital perspective, it said.

“But 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,” S&P said.

“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 MI business.”