Understanding Arch Insurance Company’s AM Best Rating

Arch Insurance Company is a premier property and casualty insurer providing insurance solutions to both individuals and businesses. The company has received strong financial strength ratings from AM Best, a leading credit rating agency focused on the insurance industry. But what do these ratings really mean? This article will provide an in-depth look at Arch Insurance’s AM Best ratings and what they signify about the financial health and claims-paying ability of this insurer.

An Introduction to AM Best Ratings

AM Best issues independent opinions on the financial strength and ability to pay claims of insurance companies. These AM Best ratings are an important benchmark that insurance buyers can use to compare the relative financial strength of insurers.

AM Best uses a rating scale from A++ (Superior) to D (Poor). Companies rated A or higher are considered to have an excellent ability to meet their ongoing policy and contract obligations. An AM Best rating of B or lower indicates some financial uncertainty or an elevated risk of the company not being able to pay out claims.

In addition to the main letter ratings, AM Best may append modifiers such as “+” or “-” to indicate whether a company falls on the higher or lower end of a rating category. The ratings can also include an optional “u” subscript to denote an insurer’s under review status during rating evaluations.

Some key facts about AM Best ratings:

• Independent analysis based on comprehensive quantitative and qualitative evaluation of insurers.
• Focus on balance sheet strength, operating performance, business profile, and enterprise risk management.
• Widely recognized as an important benchmark across the insurance industry globally.
• Ratings can change periodically based on updated analysis by AM Best analysts.

Overview of Arch Insurance’s AM Best Ratings

Arch Insurance has received strong financial strength ratings from AM Best:

• Financial Strength Rating: A+ (Superior)
• Long-Term Issuer Credit Rating: “aa-“

These ratings were affirmed by AM Best in August 2022 indicating the agency’s continued confidence in the financial standing and claims-paying ability of Arch Insurance.

The A+ (Superior) rating received by Arch Insurance means AM Best has assessed the company as having a superior ability to meet their ongoing insurance obligations. An A+ rating is the second highest in AM Best’s rating scale.

Similarly, the “aa-” Long-Term Issuer Credit Rating indicates AM Best’s view that Arch Insurance has excellent financial security characteristics over the long-term. This rating is the third highest in AM Best’s credit rating scale.

In general, the A+ (Superior) rating signifies that Arch Insurance has very strong balance sheet strength, operating performance, and business profile when compared to other insurance carriers. The “aa-” credit rating echoes this assessment of Arch Insurance being an insurer with very low default risk based on their balance sheet and competitive market position.

Assessing the Balance Sheet Strength of Arch Insurance

A key factor behind Arch Insurance’s strong AM Best ratings is their assessed balance sheet strength. This refers to the adequacy of an insurer’s capital relative to the risks they underwrite and investments they hold.

AM Best considers Arch Insurance to have the highest category of balance sheet strength – “Strongest.” Insurers need very strong risk-adjusted capitalization and high quality invested assets to achieve this designation.

Some positive factors influencing Arch Insurance’s balance sheet assessment:

• Very strong risk-adjusted capitalization – Arch Insurance maintains capital well above the threshold for the highest regulatory risk based capital requirements, providing a buffer to absorb potential losses.

• High-quality investment portfolio – The investment portfolio of Arch Insurance is structured conservatively, with a heavy concentration in highly rated corporate and government bonds. This reduces overall investment risk.

• Strong liquidity – Measured by metrics such as days sales outstanding, Arch Insurance’s balance sheet liquidity has been assessed by AM Best as exceptionally strong and more than sufficient to pay claims.

• Low financial leverage – Arch Insurance utilizes low leverage, indicating balance sheet resources are not heavily tied up supporting debt obligations.

The “Strongest” balance sheet assessment indicates Arch Insurance has financial flexibility to grow its insurance operations while also retaining a margin of safety to absorb adverse business or economic conditions. It is a major supportive factor behind the company’s AM Best ratings.

Reviewing the Operating Performance of Arch Insurance

In addition to balance sheet strength, AM Best also analyzes profitability and operating performance trends when rating insurance companies. This helps assess an insurer’s ability to consistently generate returns and maintain a competitive position in the marketplace.

Arch Insurance has exhibited a track record of favorable operating earnings relative to its insurance peers:

• Five-year average operating ratio: Arch Insurance has maintained an excellent five-year average operating ratio (operating expenses as a percentage of net premiums) of approximately 90%, outperforming many insurance sector competitors. A lower ratio indicates greater premium revenue left over after paying claims and expenses.

• Underwriting discipline: The company has achieved consistent underwriting profits and avoids excessive pricing competition that could jeopardize profitable business.

• Net investment income: Arch Insurance generates steady investment earnings to supplement underwriting performance.

Factors such as underwriting discipline, paying careful attention to market segments that offer an adequate risk-return profile, and practicing conservative reserving have enabled Arch Insurance to deliver outperformance on profitability metrics:

• Return on equity: Arch Insurance has produced a strong five-year average return on equity in the 15% range, which AM Best views very favorably in comparison to the industry.

The track record of strong earnings and operating fundamentals provide Arch Insurance with internally generated capital to support growth and fund capital initiatives, further strengthening the overall balance sheet. AM Best believes this level of operating performance enhances financial flexibility and demonstrates management expertise, contributing to the high ratings assigned to the company.

Evaluating the Business Profile of Arch Insurance

To arrive at a comprehensive rating opinion, AM Best also considers qualitative factors such as an insurer’s business profile, market position, and management. Arch Insurance excels on these dimensions:

• Established reputation and brand recognition: Operating since 1950, Arch Insurance has built a widely recognized brand name as a leading commercial property/casualty insurer in specialty areas such as construction, healthcare, and professional liability coverage.

• Diversified distribution channels: Arch Insurance writes business across insurance agents, brokers, wholesalers, and directly with consumers, giving them access to multiple markets and diversifying their credit risk exposure.

• Management experience and expertise: The executive leadership of Arch Insurance has decades of insurance experience to effectively steer operations and financial management.

• Long-standing customer relationships: Many clients have partnered with Arch Insurance for over 30 years, signifying strong customer retention and service levels.

• Innovation and new product development: Arch Insurance continually assesses market needs and has demonstrated an ability to develop creative insurance solutions, for example in the growing cyber insurance segment.

This positive assessment of Arch Insurance’s management, market reputation, distribution capabilities, and customer profile point to an insurer with solid brand strength and underwriting expertise – key qualitative factors supporting their AM Best rating.

The Significance of a Stable AM Best Rating

The AM Best ratings process involves ongoing monitoring and analysis of insurers’ balance sheets, operating trends, and market profiles. Ratings are periodically re-evaluated and updated by AM Best analysts.

Arch Insurance having a stable AM Best rating over multiple years provides additional assurance and confidence about their financial strength. Key points regarding the ratings history:

• Arch Insurance has maintained its A+ (Superior) rating since 2009, evidencing a long period of consistent financial health.

• Through various economic cycles since the early 2000s, Arch Insurance has retained ratings in the upper levels, demonstrating resilience regardless of macro conditions.

• Annual affirmation of current ratings indicates AM Best has not identified issues warranting a downgrade over more than a decade of reviewing Arch Insurance’s finances and operations.

This ratings stability indicates diminished risk of Arch Insurance experiencing abrupt changes in credit quality or balance sheet deterioration that could impact their ability to pay claims. The long-term maintenance of high ratings provides further support for policyholders and business partners to rely on the financial security of Arch Insurance.

Using AM Best Ratings as Part of Insurance Buying Decisions

For individuals or companies purchasing insurance policies, reviewing AM Best ratings can be a crucial step in selecting a financially stable insurer that demonstrates long-term viability.

Some key advantages of choosing a highly rated insurer like Arch Insurance include:

• Reduced risk of non-payment of claims – The high ratings suggest superior financial resources to fulfill policy obligations and handle unexpected claim spikes.

• Confidence in renewal stability – Renewal prices and availability are less prone to fluctuation with an insurer having a strong capital cushion and steady operating performance.

• Added legal and regulatory assurance – In some jurisdictions, insurers are required to maintain minimum AM Best ratings to be licensed to write new business.

• Reassurance for lenders/partners – Third parties have greater comfort with insured’s risk management programs knowing coverage is with a highly rated carrier.

While AM Best ratings are not the only criteria in selecting an insurance provider, they provide a valuable third-party assessment of financial strength that can help buyers pick reliable insurers and avoid unnecessary risk.

Conclusion: AM Best Ratings Affirm the Stable Position of Arch Insurance