Arch Mortgage Insurance’s Risk Index Forecasts Low Probability of Home Price Declines in the Next Two Years

Enhanced Arch MI Risk Index^SM Model Indicates Probability of Home Price Remains Unchanged at 13 Percent

WALNUT CREEK, Calif.--(BUSINESS WIRE)--Arch Mortgage Insurance Company (“Arch MI”), a leading provider of private mortgage insurance and a wholly owned subsidiary of Arch Capital Group Ltd., today released the Fall 2014 Edition of its Housing and Mortgage Market Review and the latest Arch MI Risk Index^SM. The state- and city-level risk indices analyze the likelihood of home prices in a state or Metropolitan Statistical Area (“MSA”) being lower in two years, based on recent economic and housing market data.

“We are pleased to release the Fall Edition of our Housing and Mortgage Market Review,” said Ralph DeFranco, Arch MI’s Senior Director of Risk Analytics and Pricing. “Our findings in this edition suggest the overall chance of home price decline in two years remains low, at around 13 percent. This is near the historical average of 11 percent of MSAs experiencing price declines in the pre-crisis era between 1980 and 1999.”

Three states remain in the moderate risk category: Florida, New Jersey and New York. These states are of the greatest concern due to higher-than-average mortgage delinquencies and generally weak economic conditions.

The riskiest of all 384 MSAs was Atlantic City, NJ, with a probability of home price decline in the next two years of 84 percent. This is due to high unemployment and already falling home prices over the past year. Only four of the 50 most populous MSAs fall within the moderate risk category; two MSAs in California, one in Michigan and one in New York. Detroit is highly affordable and has seen a rebound in home prices over the past two years, but these positive factors are outweighed by a weak economy. New York, San Francisco, and Santa Ana only make the list because they are highly overvalued compared to historical norms.

Arch MI Risk Index Model Enhancements

The findings in our Fall Edition are even more predictive than in prior editions due to significant enhancements we have made to the Arch MI Risk Index^SM. Risk Index scores now include more, and more predictive, inputs to better capture how current market conditions influence the likelihood home prices will be lower in two years. Key model changes include:

• Adding the difference between estimated “fundamental” and current home values
• Replacing foreclosure rates with 60-days delinquent rates, to get a clearer early warning signal
• Replacing a housing boom indicator with advanced home price momentum measures

All told, the enhancements result in a Arch MI Risk Index^SM with higher predictive power.

Fall 2014 Arch MI Risk Index

10 Riskiest States and 10 Riskiest MSAs

10 Riskiest States				10 Riskiest MSAs
Risk Rank	State	Risk Index	Affordability Index*	Risk Rank	MSA	Risk Index	Affordability Index*
Moderate	Florida	35	144	Moderate	Detroit-Livonia-Dearborn; MI	45	252
Moderate	New Jersey	28	148	Moderate	New York-White Plains-Wayne; NY-NJ	42	100
Moderate	New York	36	146	Moderate	San Francisco-San Mateo-Redwood City; CA	37	85
Low	Arizona	12	139	Moderate	Santa Ana-Anaheim-Irvine; CA	32	75
Low	California	18	124	Low	Fort Worth-Arlington; TX	29	129
Low	Connecticut	17	168	Low	Houston-Sugar Land-Baytown; TX	23	97
Low	District of Columbia	16	126	Low	Phoenix-Mesa-Glendale; AZ	22	105
Low	Maryland	18	153	Low	Los Angeles-Long Beach-Glendale; CA	18	96
Low	Nevada	18	162	Low	Riverside-San Bernardino-Ontario; CA	18	104
Low	Rhode Island	14	161	Low	Newark-Union; NJ-PA	17	132

More details are available in the Housing & Mortgage Market Review – Fall 2014 edition, available at www.archmi.com. *The affordability index comes from the National Association of Realtors^(R).

About Arch MI’s Housing & Mortgage Market Review and Risk Index^SM

The Housing & Mortgage Market Review, which presents Arch MI Risk Index^SM results, is published seasonally by Arch Mortgage Insurance Company. The Risk Index is a proprietary statistical model that measures home price risk by estimating the probability that home prices in a state or one of the nation’s 384 largest metropolitan statistical areas (MSAs) will be lower in two years, times 100 (for example, a score of 25 indicates a 25 percent chance that home prices will be lower in two years.) The Arch MI Risk Index^SM weights various local economic and housing market factors, such as affordability, unemployment rates, economic growth rates, net migration, housing starts, etc. based on a statistical model built on data going back to the early 1980s. It is updated after each quarterly release of the FHFA All-Transactions Regional Housing Price Index (HPI).

ABOUT ARCH MORTGAGE INSURANCE COMPANY

Arch MI is a leading provider of private insurance against mortgage credit risk. Headquartered in Walnut Creek, CA, Arch MI's mission is to protect lenders against credit risk, while extending the possibility of responsible homeownership to qualified borrowers. Arch MI was formed when Arch Capital acquired CMG Mortgage Insurance Company (CMG MI) and the mortgage insurance operating platform of PMI Mortgage Insurance Co. on January 30, 2014, creating a state-of-the-art mortgage insurance operation. Arch MI is licensed to write mortgage insurance in all 50 states, the District of Columbia and Puerto Rico. For more information, please visit www.archmi.com.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward−looking statements. This release or any other written or oral statements made by or on behalf of Arch Capital Group Ltd. and its subsidiaries may include forward−looking statements, which reflect our current views with respect to future events and financial performance. All statements other than statements of historical fact included in or incorporated by reference in this release are forward−looking statements.

Forward−looking statements can generally be identified by the use of forward−looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe" or "continue" or their negative or variations or similar terminology. Forward−looking statements involve our current assessment of risks and uncertainties. Actual events and results may differ materially from those expressed or implied in these statements. A non-exclusive list of the important factors that could cause actual results to differ materially from those in such forward-looking statements includes the following: adverse general economic and market conditions; increased competition; pricing and policy term trends; fluctuations in the actions of rating agencies and our ability to maintain and improve our ratings; investment performance; the loss of key personnel; the adequacy of our loss reserves, severity and/or frequency of losses, greater than expected loss ratios and adverse development on claim and/or claim expense liabilities; greater frequency or severity of unpredictable natural and man-made catastrophic events; the impact of acts of terrorism and acts of war; changes in regulations and/or tax laws in the United States or elsewhere; our ability to successfully integrate, establish and maintain operating procedures as well as integrate the businesses we have acquired or may acquire into the existing operations; changes in accounting principles or policies; material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements; availability and cost to us of reinsurance to manage our gross and net exposures; the failure of others to meet their obligations to us; and other factors identified in our filings with the U.S. Securities and Exchange Commission.

The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included herein or elsewhere. All subsequent written and oral forward−looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We undertake no obligation to publicly update or revise any forward−looking statement, whether as a result of new information, future events or otherwise.